Output in the Latvian economy is projected to increase by 3.2% in 2021 and 5.6% in 2022. Private consumption will rebound starting from the second half of 2021, fuelled by pent-up demand and by rising
consumer confidence. Exports have been resilient and will remain strong. Investment will rise due to improving economic sentiment and sizeable EU funds. Inflation may increase temporarily as a result of higher food and energy prices and the increase in minimum wages. Still, core inflation should remain subdued, gradually increasing towards 2%. The lagging vaccine rollout risks delaying the recovery.
Bolstering the social safety net should become the top priority. The European Recovery and Resilience Mechanism and low interest rates offer a unique opportunity not only to mitigate the immediate consequences of the pandemic but also to enhance green and digital transition. Such investments should be complemented by measures that improve skills and facilitate the reallocation of labour and capital.
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2021 Structural Reform Priorities
Housing affordability and quality are pressing challenges in Latvia. While Latvian households spend, on average, less on housing than their OECD peers, many are stuck in poor quality housing. Residential investment has stagnated since 2008, and the housing stock has been insufficiently maintained. In the face of these challenges, public support for housing is limited and an underdeveloped rental market further limits affordable housing alternatives. This report provides an in-depth assessment of housing affordability challenges and identifies policy actions to address them. The report is the result of the work of an interdisciplinary team bringing together the Economics Department and the Directorate for Employment, Labour and Social Affairs. The report contributes to the cross-cutting OECD Horizontal Project on Housing.
Economic growth is strong and income convergence continues, even though at a slower pace than before 2008. The labour market is tight, as unemployment fell to its lowest rate in ten years and vacancies are rising fast. Wage growth has been strong supporting household purchasing power. Despite increasing labour costs, Latvian exporters have remained competitive and gained market shares. The macroeconomy appears balanced overall with inflation, public debt and the deficit under control. Financial markets look stable, sustained by sound macroprudential policy.