In the last two quarters the growth of Latvia’s economy was significantly weaker when compared to Lithuania or Estonia. Latvia risks falling behind its neighbours.
Lithuania’s GDP grew 1% when compared to Q1 2020. Estonia’s growth was 5.4%. This means Estonia’s economy is 3% bigger than it was at the end of 2019, before Covid-19 pandemic. Lithuania’s economy has increased 1%, says Citadele Bank economist Mārtiņš Āboliņš.
Latvia’s economy, meanwhile, is 3% behind its previous level. This is initial data – things may still change. For example, Latvia has a high potential of recovery in the aviation sector. Since the start of the pandemic, Latvia’s economy has fallen behind its neighbours 4-6%, says Āboliņš.
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The economist comments: «I believe there is reason to hope economic activity will have increased in the second half of this year and next year.»
«Economic recovery will benefit from the re-opening of the service sector after the end of Covid-19 restrictions, rising industrial cycle in the world, the influx of finances to the construction sector from the state budget and the EU economic recovery fund. This has let us raise economic growth outlooks,» says Āboliņš.
«I believe Latvia’s economy may grow about 3.6% this year and 6% in 2022.»
He stresses: «However, similar factors will also improve economic recovery in other countries. I don’t think the gap created by Covid-19 crisis will go away within a couple of quarters.»
«It may take several years.»
Covid-19 pandemic remains a high risk for the economy. This is why it is important to maintain the current vaccination rate to make sure crowd immunity is formed by autumn. This way there will be no reason to adopt new restrictions. Normalization of the fiscal policy will prove very challenging because the existing state budget deficit level and the speed at which the state debt increases are unsustainable in the long-term perspective, said the economist.
He explains that in the next couple of years it will be necessary to find a balance between state finances and not ceasing economic support activities too quickly before the economy has returned to sustainable growth.