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
GDP is set to contract by 4.3% in 2020, before growing by 2.4% in 2021 and 4.0% in 2022. Activity rose rapidly in the third quarter of 2020 after containment measures had been withdrawn. However, the recovery has been interrupted by the recent tightening of containment measures in response to a renewed virus outbreak, and is projected to resume at a slow rate when the restraints are relaxed. Private consumption will strengthen as household confidence and net disposable incomes increase. Investment will also gradually regain momentum. The labour market has been quite resilient. However, unemployment will remain elevated in 2021 due to a slow recovery in labour-intensive sectors.
Fiscal policy helped to prevent a more severe downturn, and will continue to support the recovery. The strong fiscal position leaves room for the government to provide further help to households and businesses, if needed. To facilitate the reallocation of workers and capital, training programmes should be enhanced and insolvency procedures should be made more effective.
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.