Latvia Macro Outlook
This year, the Latvian economy is expected to expand by 3.5%, down from 4.5% in 2017. Although the growth is expected to slow down, it will remain strong and above the medium-term potential of 2.5-3%. Compared to the other Baltics, Latvia will outperform its regional peers this year. Last year, the robust economic growth was the second strongest since the financial crisis, when the Latvian economy dipped by almost 15%. Since then, Latvia has fixed the most pressing issues, quickly rebalancing and recovering, maintaining positive growth dynamics since 2011.
Latvia has been a member of the Eurozone since January 2014; hence, its monetary policy is in the hands of the European Central Bank. In 2017, the inflation rate was not excessive and recent trends show an easing of inflationary pressure, with headline inflation to drop from 2.2% y/y in December to 2.0% y/y in January. As we have seen at the October meeting, the ECB decided to cut monthly asset purchases from EUR 60bn to EUR 30bn starting from January 2018. Such limits on purchases were set until at least September 2018. We expect the ECB to decide in June on how to proceed with lower monthly asset purchases after September. We therefore expect (if any) only minor changes to the ECB Council communication for the next meeting at the end of April. Due to the ongoing strong economy, we see the ECB asset purchases as most likely to end in September. However, a (at least) small increase of inflation still needs to be achieved in EA as a whole.
In September 2017, Latvia’s sovereign credit rating was affirmed at A- and the outlook was revised to positive by S&P. The rating affirmation is supported by the strong economic growth, effective policy making, prudent fiscal policy and moderate and declining net government debt. Moreover, the recent outlook revision reflects expectations that fast economic expansion will be coupled with structural improvements of the labor market.