Latvia's economic recovery will remain broadly on track in 2016 and 2017, as improving labour market conditions feed through into steady private consumption growth.
We forecast real GDP growth to expand by 2.9% in both years, but caution that the economic outlook will sour over the next decade due to the country's dire demographic profile.
Policy continuity and strengthening economic growth will ensure a narrowing of Latvia's fiscal deficit and see a reduction in the general government debt as a share of GDP, despite rising defence spending over the coming years.
Although Latvia's current account deficit will widen, it will remain much smaller than its pre-crisis levels and will pose less of a threat to financial stability in the country.
Inflationary pressures will accelerate with rising global oil prices from Q416, but are unlikely to pose any threats to the country's economic growth outlook.
Major Forecast Changes
We have modestly revised down our real GDP forecasts to 2.9% in both 2016 and 2017, from 3.0% and 3.3% previously.
This reflects even weaker economic growth outlooks in key trading partner Russia and the two other Baltic nations.
Over 50,000 Latvians are estimated to live in the UK. Although not our core view, a UK vote to leave the EU in June 2016 would pose question marks over the right of these individuals to remain in the country.
Some of the Latvians could eventually be forced to return home, reducing an important source of remittance income but also boosting the country's depleted working age population.
|Real GDP growth, % y-o-y||2.4||2.7||2.9||2.9|
|Nominal GDP, EURbn||23.6||24.4||25.6||27.5|
|Consumer price inflation, % y-o-y, eop||0.3||-0.1||1.6||2.9|
|Exchange rate EUR/USD, eop||0.82||0.92||0.91||0.87|
|Budget balance, % of GDP||-1.6||-1.3||-1.3||-0.9|
|Current account balance, % of GDP||-1.5||-1.1||-1.4||-2.0|
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