From a cyclical perspective, the recent rise in economic confidence and industrial production point to a growth pick up in H216, supported by recovering exports. Medium term, the solid business environment should ensure economic growth outperformance in a European context, in spite of the ongoing demographic decline.
Latvia's Short Term Political Risk score of 72.1 out of 100 is likely to remain above the eurozone average of 69.8, supported by strong policy continuity and social stability. The potential for Russian aggression remains the main political risk, as highlighted by the poor showing in the 'security/external threats' subcategory.
Major Forecast Changes
Real GDP growth came in at 2.1% y-o-y in Q116, with private consumption the main contributor to the headline figure. On a quarter on quarter annualised basis the figure came in at 1.6%, recovering from a mild contraction in Q415. Despite this rebound and our expectations for a continued recovery in H216, we have downwardly revised our 2016 growth forecast to 2.3% from 3.0% previously.
Over 50,000 Latvians are estimated to live in the UK and with the UK voting to leave the EU in June 2016, this poses question marks over the future right of these individuals to remain in the country, and could lead to a return of skilled labour to Latvia.
On the political front, relations with Russia will remain the major threat to Latvia's political stability.
|Real GDP growth, % y-o-y||2.4||2.7||2.3||3.2|
|Nominal GDP, EURbn||23.6||24.4||25.0||25.9|
|Consumer price inflation, % y-o-y, eop||0.3||-0.1||1.6||2.9|
|Exchange rate EUR/USD, eop||0.75||0.90||0.93||0.91|
|Budget balance, % of GDP||-1.6||-1.3||-1.3||-0.9|
|Current account balance, % of GDP||-1.6||-1.1||-1.4||-2.0|
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