COMMISSION STAFF WORKING DOCUMENT In-depth review for Latvia Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Latvia, borrowing, competitiveness, economic policy, energy policy, housing, macroeconomics, manpower needs, property market

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 636 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Latvia Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Latvia 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Latvia  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Latvia is not found to experience imbalances. Vulnerabilities relating to external 
borrowing  and  housing  remain  mild;  risks  to  competitiveness  are  pertinent,  but 
overall  seem  contained  in  the  near  future.  The  recent  widening  of  the  current 
account deficit was significant, but the deficit is expected to narrow substantially 
this year and further in 2024. Latvia’s net international investment position, which 
improved  markedly  in  the  past  decade,  is  expected  to  remain  broadly  stable. 
Nonetheless,  inflation  and  wage  pressures,  if  persistent,  risk  impairing  Latvia’s 
competitiveness, particularly as core inflation is well above the euro area average. 
While  house  price  growth  has  been  elevated  recently,  the  house  price 
overvaluation  does  not  appear  to  be  substantial.  Moreover,  house  price  growth 
slowed down in late 2022, mortgage lending has been weak, and household debt 
is  limited  and  falling  in  terms  of  household  income.  Latvia  faces  key  structural 
economic challenges related to declining labour supply,  which has contributed to 
fast  unit  labour  cost  increases  and  risks  impairing  competitiveness  over  the 
medium  term.  The  policy  setting  is  overall  favourable,  although  some  additional 
efforts could help to address the risks from the identified vulnerabilities. Policies 
to  safeguard  competitiveness,  including  measures  to  increase  the  quality  and 
quantity  of  labour  supply,  would  be  important  in  that  respect.  Shortening  the 
construction permitting process would help supporting housing supply and improve 
the housing market situation. 

 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 

Selected economic and financial indicators (Part 1), Latvia 
Selected economic and financial indicators 

LIST OF GRAPHS 

Graph 2.1:  Housing affordability and housing supply 

Graph 2.2:  NIIP projections 

Graph 2.3:  Productivity and wages 

Graph 2.4:  Employment index, (2000=100) 

Graph 2.5:  Market share and employment 

Graph 2.6:  Components of gross fixed capital formation deflator growth and consumer price inflation 

4 

5 

16 
17 

7 

9 

10 

11 

12 

15 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance  Procedure  (MIP),  Latvia  was  not  subject  to  an  in-depth  review  to  assess  its 
vulnerabilities. (1) The 2023 Alert Mechanism Report published in November 2022 concluded that 
an in-depth review (IDR) should be undertaken for Latvia this year, with a view to examine newly 
emerging vulnerabilities and their implications. (2) The Alert Mechanism Report found that concerns 
related to cost competitiveness and house price developments existed already before the COVID-19 
pandemic and were increasing. Nominal unit labour costs were set to continue increasing driven by 
weakening  productivity  growth.  Nominal  house  price  growth  had  remained  rapid  and  picked  up 
more  recently,  leading  to  a  slight  overvaluation,  although  household  debt  was  low.  The  surge  in 
energy prices had spilled over to core inflation, which had been among the highest in the EU and 
contributed to a weakening of the current account. 

In  2022,  strong  real  growth  at  the  beginning  of  the  year,  driven  by  the  recovery  from 
COVID-19 restrictions, was stopped by surging inflation in the second half of the year. 
Real  GDP  growth  reached  2.8%  in  2022,  down  from  4.3%  in  2021.  The  start  of  the  year  was 
marked by surging private consumption, which had previously struggled to recover from COVID-19 
related restrictions. However, the energy price surge, exacerbated by Russia’s invasion of Ukraine, 
quickly eroded households’ gains in real disposable income, putting a brake on consumption growth. 
Moreover, real investment growth struggled amid rapidly rising construction prices, partially caused 
by disruptions in metal and timber supply from Russia and Belarus. Inflation was initially driven by 
a  surge  in  energy  prices,  but  quickly  spread  to  other  price  components.  It  peaked  in  September 
2022, at 22.0%, averaging 17.2% for the entire 2022, and still standing at 15.0% in April  2023. 
Employment  growth  followed  a  similar  path  to  GDP  –  strong  growth  in  the  first  half  and  a 
slowdown  in  the  second  half  the  year,  averaging  2.7%  in  2022.  Going  forward,  GDP  growth  is 
expected  to  slow  to  1.4%  in  2023,  as  inflation  hampers  consumption.  In  2024,  GDP  growth  is 
expected pick up to some 2.8% growth helped by the resumption of real wage growth and a pick-
up in EU funded investments. (3) The forecast rests on the assumption of energy prices to broadly 
stabilise around their 2023-Q1 levels in 2023 and 2024. Given the exceptional volatility of energy 
prices in recent months, this assumption remains a key risk. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities  for  Latvia.  Vulnerabilities  related  to  housing,  competitiveness,  and  external 
balances  in  Latvia  are  also  discussed  in  horizontal  thematic  notes  that  that  were  recently 
published. (4) The MIP assessment matrix is published in the 2023 Country Report for Latvia. (5) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM (2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 
Economy: Institutional Papers, 197. European Commission (2023), Inflation Differentials in Europe and Implications for 
Competitiveness: Thematic Note to Support In-Depth Reviews, European Economy: Institutional Papers, 198. European 
Commission (2023), External Sustainability Analysis: Thematic Note to Support In-Depth Reviews, European Economy: 
Institutional Papers, 196. 

(5)  European Commission (2023), Country Report Latvia 2023, SWD(2023) 614 final. 

4 

 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

Latvia has been selected for an in-depth review to assess risks related to deteriorating 
price  competitiveness  linked  to  the  build-up  of  wage  and  price  inflation  differentials 
with its trading partners, strong house price growth as well as widening of the current 
account. House price growth in Latvia picked up significantly in 2021 and accelerated further to 
reach a 14% growth in 2022. While this follows a period of subdued house price growth, the review 
examines  the  reasons  for  the  recent  acceleration.  Furthermore,  while  Latvia’s  net  international 
investment  position  has  constantly  improved  over  the  past  decade,  the  current  account  widened 
significantly in 2021 and 2022 and warrants a closer look at the drivers of the break in pattern. 
Finally,  Latvia  experienced  some  of  the  highest  inflation  among  the  euro  area  member  states, 
peaking at 22% in annual terms and being roughly twice as high as in the euro area. This inflation 
divergence raises concerns about Latvia’s price competitiveness and comes in addition to a longer 
running trend of wage growth exceeding productivity growth. However, recent developments point 
to a slowing price and wage growth. 

On 5 April 2023 the Commission published a horizontal thematic note on housing, which 
also covers Latvia.  It showed  that house prices almost  doubled in nominal terms over the last 
decade, with almost half of this increase taking place over the last three years. However, since the 
global financial crisis, the increase in nominal prices had tracked incomes and although they have 
diverged recently, the price-to-income ratio remains some 40% below its peak reached during the 
height of the bubble  15 years ago. While  the most recent acceleration in growth might have put 
house price growth out of line with income growth, overvaluation is assessed to be only limited. The 
note  recognizes  that  most  recent  data  point  to  a  slowdown  in  house  price  growth  and  forecasts 
that it will continue to do so over the coming quarters due to rising interest rates. Furthermore, it 
accentuates that the recent house price growth in excess of income growth have likely been due to 
delayed  or  inelastic  supply.  Latvia’s  process  for  issuing  building  permits  is  lengthy  and  includes 
excessive red tape around building regulations. It adds that the rental market in Latvia is relatively 
small.  

House  prices  reached  two-digit  growth  over  the  past  two  years,  exceeding  income 
growth in 2022, but most recent data show signs of slowing.  After having dipped during the 
height of the COVID-19 crisis, annual house price growth picked up in the second quarter of 2021. 
House price growth peaked in the first quarter of 2022 at 17.4%, and it has declined since then, 
recording  a  9.1%  annual  growth  in  the  last  quarter  of  2022.  Monthly  bank  lending  data  for 
November  2022  show  that  interest  rates  on  new  mortgages  had  increased  by  1.6  percentage 
points compared to the average prevailing during the first half of 2022, and lending growth slowed 
from around 7% during the first half of the year to 4.7% in November. Demand for housing and 
hence  house  price  growth  is  expected  to  trend  downwards  this  year  and  next  as  interest  rates 
continue rising and real income growth remains subdued.   

Over the past decade, house price growth has been fairly rapid but has remained broadly 
in  line  with  income  growth.  Since  2012  house  prices  have  grown  by  103%  while  income  has 

5 

 
 
2. 

Assessment of macroeconomic vulnerabilities 

grown by 94%. This has led  the price to income ratio to increase by 4.5% over the same period. 
However,  in  a  historical  perspective,  it  has  remained  below  the  average  of  the  early  2000s  and 
some  36%  below  its  peak  reached  in  2007.  The  Commission’s  model  estimates  Latvian  house 
prices to have been 6.6% overvalued in 2022. (6)  At the same time, relative to rent, house prices 
have appreciated more significantly over recent years, implying an overvaluation of 49% in 2022. 
The latter is mostly due to stagnating rent prices, which have significantly lagged income growth. 
Thus, while this may signal a lack of efficiency of the rental market, it is not indicative of a housing 
market bubble.  

Mortgage lending  growth  has  been  weak  over  the  past  decade,  dampening  households’ 
demand for housing, while supply has been restricted by labour shortages and a lengthy 
permitting  process.  Mortgage  lending  in  Latvia  has  been  weak  since  the  global  financial  crisis. 
Lending growth was negative during the first half of the decade and then turned positive for the 
second  half,  while  still  remaining  below  the  rate  of  growth  of  GDP.  As  a  result,  household  debt 
declined  from  50%  of  GDP  in  2009  to  below  20%  of  GDP  in  2021.  This  dynamic  suggests  the 
demand impulse to housing market from credit has more likely been negative than positive. On the 
supply side, housing construction has been rather stable throughout the decade, hovering between 
2 and 2.5% of GDP. However, the most recent house price rally has taken place in the context of 
falling  investment  in  housing,  which  stood  at  1.8%  of  GDP  in  2022  (graph  2.1  b).  Moreover,  it 
remains  considerably  below  Estonia’s  and  Lithuania’s  investment  levels,  which  in  2022  stood  at 
5.2%  and  3.6%  of  GDP,  respectively.  The  construction  sector  appears  to  suffer  from  increasing 
labour shortages – the job vacancy rate in the sector has been consistently above the economy’s 
average. (7)  Moreover,  according  to  the  Doing  Business  rating,  getting  a  construction  permit  in 
Latvia  takes  longer  than  it  does  in  either  of  its  Baltic  neighbours. (8)  In  2020,  Riga  municipality 
introduced an accelerated permitting process for large-scale projects.  

(6)  See “Housing Market Developments, Thematic Note to Support In-Depth Reviews”, European Commission 2023, 

Institutional paper 197 

(7)  In 2022, job vacancy rate in construction was 3.5% compared with 2.7% in the economy on average. Moreover, it has been 
consistently above the economy average since 2018. This is notable because in neighbouring Estonia and Lithuania it has 
been below the economy average.  

(8)  Doing Business 2020, https://archive.doingbusiness.org/content/dam/doingBusiness/country/l/latvia/LVA.pdf 

6 

                                                 
Graph 2.1: Housing affordability and housing supply 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat and European Commission services 

An  underdeveloped  rental  market  drives  people  into  buying,  contributing  somewhat  to 
housing  price  growth.  In  Latvia,  over  80%  of  households  own  their  home  and  the  majority  of 
them  has  no  mortgage.  The  rental  market  is  relatively  small  and  concentrated  in  Riga.  The 
relatively  small  rental  market  limits  housing  options  and  likely  contributes  to  driving  people  into 
buying  a  home  instead  of  renting.  As  a  result,  over  the  past  decade  house  price  growth  has 
exceeded  rent  price  growth  by  some  60%.  Moreover,  until  recently,  poor  protection  of  landlords’ 
interests  in  the  rental  law  meant  little  investment  in  rental  housing,  limiting  rental  options  for 
modern dwellings. A new rental law was passed in 2021 aimed at addressing these issues. Finally, 
while  rental  regulation  exists,  it  is  poorly  enforced  and  large  parts  of  the  rental  market  operate 
informally, adding to instability of living in a rental home, and hence decreasing its attractiveness.  

On  5  April  2023  the  Commission  published  a  horizontal  thematic  note  on  external 
sector’s  sustainability,  which  covered  Latvia.  It  found  that  Latvia’s  current  account  had 
experienced a significant deterioration since 2021. Most of the worsening in the balance of trade 
stemmed from the deteriorating balance of trade in goods, particularly energy. The trade balance 
was  largely  determined  by  the  changes  in  trade  volumes.  Regarding  the  net  lending/borrowing 
position, it declined strongly in 2021 and 2022, as the government increased its deficit and non-
financial corporations turned into net borrowers.  

Since  the  global  financial  crisis,  Latvia’s  current  account  deficit  has  remained  broadly 
balanced,  while  its  net  international  investment  position  (NIIP)  has  substantially 
improved.  However,  EU  fund  inflows  through  the  capital  account  averaging  around  2%  of  GDP 
meant that Latvia was a net lender during this time. From a sectoral perspective, corporations have 
been  net  lenders  throughout  this  period  and  the  government  a  net  borrower,  while  households 
turned from net borrowers during 2012 to 2015 to net lenders from 2016 onwards. (9) As a result, 
Latvia’s  NIIP  improved  from  -83.2%  of  GDP  in  2010  to  -27%  of  GDP  in  2022.  Taking  out  non-
defaultable instruments  from  the NIIP  balance  puts Latvia in  a positive  net position  of  16.3%  of 

(9)  Corporates turned into small net borrowers only in 2019 and 2021, while governments moved to a very small surplus only 

in 2016. 

7 

00.511.522.53-15-10-5051015202010201120122013201420152016201720182019202020212022b) Housing supply and priceAnnual house price growthResidential investment (% of GDP, right axis)709011013015017019020042005200620072008200920102011201220132014201520162017201820192020202120222023*2024*a) Price to income ratioLVEELT      
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

GDP.  The  steady  improvement  in  the  NIIP  has  been  due  to  a  combination  of  steadily  growing 
domestic savings combined with weak credit growth and prudent fiscal policy.  

Over the past two years, Latvia’s current account has markedly deteriorated, driven by 
rising energy prices and government borrowing. After having improved from -0.6% of GDP in 
2019 to a surplus of 2.6% in 2020, the current account moved to a deficit of 4.2% in 2021, which 
deepened to 6.1% in 2022. Energy balance deterioration by 4.4% of GDP explains the lion’s share 
of  the  current  account  worsening  since  2019.  The  rest  is  mainly  due  to  the  deterioration  in  the 
balance  of  services  and  the  decline  in  secondary  income  (composed  primarily  of  expatriates’ 
remittances).  It  should  be  noted  that,  although  energy  prices  exerted  a  strong  negative  partial 
impact on the trade balance, the overall terms of trade movements were limited, as the changes in 
exports and imports deflators largely cancelled out. Thus, the worsening in the trade balance was 
driven  mainly  by  the  changes  in  trade  volumes,  rather  than  prices.  Rising  energy  prices  have 
brought  households’  savings  to  around  zero  and  contributed  to  government  borrowing.  In  2021, 
government borrowing amounted to 7.1% of GDP and corporations’ borrowing added another 2.4% 
of  GDP,  while  households  remained  net  lenders.  In  2021,  elevated  government  borrowing  was 
mainly covid19-related – the measures included income support for households and businesses as 
well  as  an  investment  packaged  aimed  at  fostering  economic  recovery.  In  2022,  government 
borrowing added up to 4.4% of GDP and remained the largest contributor to Latvia’s net borrowing 
position.  For  the  economy  as  a  whole,  net  borrowing  amounted  to  2.9%  of  GDP  in  2021  and  to 
around  4.6%  of  GDP  in  2022,  significantly  lower  than  the  current  account  deficit  thanks  to  a 
sizeable positive balance of the capital account, consisting primarily of EU fund inflows.  

The current account is expected to return to balance once the budget deficit declines. In 
2023 the current account balance is expected to remain at around -3.4% of GDP mainly explained 
by a still-elevated public deficit and increasing EU fund inflows, but also due to reduced household 
savings  caused by  the  inflation  surge.  In  2024,  the current  account  deficit is expected  to  narrow 
further; it is projected to normalise as the public deficit returns to the pre-pandemic level. Given the 
decade-long  trend  of  weak  bank  lending,  both  households  and  corporations  are  expected  to 
continue  deleveraging  or  growing  their liabilities  no  faster  than  the  pace  of  income  growth.  As  a 
result,  the  private  sectors’  net  lending  is  expected  to  normalise  to  pre-pandemic  levels  over  the 
medium term through reduced consumption or investment.  

The  NIIP  is  expected  to  worsen  slightly  going  forward.  Over  the  medium  term,  the  NIIP  is 
projected  to  decline  mildly,  reaching  levels  of  around  -29%  of  GDP  by  2032,  under  the  baseline 
assumptions  (see  graph  2.2). In  order  to  assess  the  sensitivity  of  the  baseline  projections  to 
different energy price assumptions, two alternative scenarios are simulated. Under the alternative 
assumptions  of  scenarios  1  and  2,  the  NIIP  deviates  from  the  baseline  projection  by  around  -16 
pps. by 2032, i.e. comes close to -14% of GDP in the optimistic scenario and to around  -45% of 
GDP in the pessimistic scenario. (10) Overall, as the recent increase in the current account deficit is 
expected to  reverse in  the  following years, in  part  due  to lower  energy  prices,  and  given Latvia’s 
relatively  strong  NIIP,  the  risks  of  a  substantial  deterioration  in  external  sustainability  seem 
contained, even with a moderate current account deficit. 

(10)  The optimistic scenario (scenario 1) illustrates a case of a more positive trade balance evolution amid lower energy prices 
than under the baseline. It assumes higher trade balances after 2024 by 2 pps. of GDP, higher real GDP growth in 2025 by 
2 pps., as well as a lower inflation rate by 1 ppt. in 2025 than in the baseline scenario. The pessimistic scenario (scenario 
2) simulates the impact of a corresponding adverse shock: it assumes the same timing and magnitude of deviations from 
the baseline as in scenario 1, but with the opposite sign. 

8 

                                                 
Graph 2.2: NIIP projections 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission servicews 

On  5  April  2023  the  Commission  published  a  horizontal  thematic  note  on 
competitiveness, which also covers Latvia. It showed that the recent surge in inflation had not 
only  been  driven  by  the  increase  in  commodity  prices,  but  also  domestic-origin  inflation,  which 
contributed to consumer price increases more than in other euro area countries. The contribution of 
domestic-origin  inflation  to  changes  in  export  prices  was  also  relatively  strong  in  Latvia.  From  a 
national  accounts  income  perspective,  the  estimated  domestic  contribution  to  consumer  inflation 
essentially reflects rising compensation of employees (as reflected in unit labour costs) and profit 
margins (as reflected also in the notable rise in operating surplus in national accounts statistics). In 
effect,  the  corporate  sector  on  aggregate  managed  to  raise  its  revenues  above  the  rise  in  input 
costs.  Real  effective  exchange  rates  (REERs)  based  on  core  and  HICP  inflation  likewise  has  been 
appreciating in recent years in Latvia. Nevertheless, recent research found that Latvia’s REER had 
remained  broadly  in  line  with  fundamentals  and  that  non-price  competitiveness  had  likely 
compensated for the loss in price competitiveness. 

Latvia's wage growth has consistently exceeded that of its trade partners, but inflation 
remained  largely  contained  up  until  2022.  Rapid  wage  growth  has  translated  in  high  unit 
labour  cost  growth,  which  has  been  consistently  above  the  EU  average  (7.5%  vs  2.7%  over  the 
2019-2022 period). Moreover, the unit labour cost-based measure of Latvia’s real  exchange rate 
has  appreciated  by  28%  since  2015.  This  is  about  the  same  as  in  Estonia  and  somewhat  lower 
than in Lithuania. However, inflation-based real exchange rate changes have been more contained 
–  from  2015  until  2021,  HICP-based  REER  had  appreciated  only  by  3.4%.  However,  the  recent 
inflation  surge  led  to  a  further  6.6%  appreciation  in  2022  alone.  While  the  wage  and  price 
appreciation  appear  to  be  driven  by  different  phenomena  (wage  growth  driven  by  falling  labour 
supply and prices driven by  energy price shock), the combination of the two increases the risk of 
being  priced  out  of  the  export  markets.  Difficulty  to  increase  exports  would  translate  into  slower 
pace of income convergence and hence risks undermining one of Latvia’s key economic goals. 

Over the past decade, real wage growth in Latvia has consistently exceeded productivity 
In  2022,  the 
growth,  raising  concern  about  the  country’s  cost  competitiveness. 
accumulated  gap  between  real  wage  and  productivity  growth  since  2014 (11)  amounted  to  some 
14%,  which  was  only  slightly less  than the  15%  gap  accumulated  at  the  peak  of  2008  over the 

(11)  2014 is chosen as a benchmark year because, in a long-term comparison, the ratio of real wages to productivity returned 
to its level of the year 2000 following a strong appreciation and depreciation during the 2004–2008 housing boom.  

9 

-50-45-40-35-30-25-20-15-10-502122232425*26*27*28*29*30*31*32*% of GDPScenario 1Scenario 2Baseline  
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

previous eight years (graph 2.3 d). This raises questions about the causes and possible effects of 
this development, as well as about the sustainability of the trend. While real wage growth tends to 
follow productivity growth, it has consistently exceeded it throughout most of the previous decade 
(graph 2.3). Compared to that of its peers, Latvia’s productivity growth has been among the better 
performing (behind only Poland and Romania), but its real wage growth has been even higher. (12) 
Hence,  the  issue  more  likely  lies  with  the  labour  market  rather  than  Latvia’s  productivity 
performance.  

Graph 2.3: Productivity and wages 

Source: Eurostat and European Commission services 

Labour market tightness is due to falling labour supply, skills and regional mismatches. 
In a stark comparison to the period prior to the global financial crisis, a gap between real  wages 
and real productivity growth has opened in the absence of a major demand stimulus – the private 
sector  has  been  considerably  deleveraging,  while  public  debt  has  remained broadly  stable  before 
the one-off increase during the pandemic. Unlike during the 2004–2008 period, when employment 
increased by some 15%, employment has remained broadly unchanged since 2012. The economic 
context  of  the  elevated  wage  growth  suggests  that  it  is  driven  by  supply  rather  than  demand. 

(12)  The choice of the base year may affect the results. However, the same broad picture emerges if the same variables are 

compared over the past 5 or 10 years.  

10 

-6%-4%-2%0%2%4%6%8%a) Productivity and real wage growthlabour productivityreal wages0501001502002503002000200220042006200820102012201420162018202020222024*b) Productivity and real wage (2000=100)labour productivityreal wages-1%0%1%2%3%4%5%6%7%8%9%CZEEHRLVLTHUPLROSISKc) Average growth 2014-2022Real wagesProductivityExport market share1001201401601802014201520162017201820192020202120222023*2024*20002001200220032004200520062007200820092010d) Productivity -wage gapLabour productivity, 2014 - 2024Real wages, 2014 -2024Labour productivity, 2000 - 2010Real wages, 2000 - 2010      
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Latvia’s labour force has declined by 0.8% annually on average over the past decade and the rate 
of decline is expected to accelerate to 1.8% over the coming decade. (13) Moreover, despite the high 
wage growth, the unemployment rate did not fall below 6.1% during the previous decade, which is 
notably higher than for its peers. (14) This points to difficulties in matching willing workers with jobs, 
either due to their inadequate skills or limited internal labour mobility as evidenced by high regional 
disparities in the unemployment rate.  

As wage setting in Latvia is firm level-based and automatic wage indexation rarely used 
suggest that the risk of a wage-price spiral is unlikely. Collective bargaining predominantly 
takes place at the company level, with a low degree of coordination and automatic wage indexation 
is  rare,  thus  structural  linkages  between  inflation  and  wages  are  weak.  In  the  second  and  third 
quarters  of  2022,  annual  wage  growth  was  slowing,  while  inflation  was  climbing.  Wage  growth 
picked up slightly in the last quarter of 2022; however, at 10%, it remained significantly below the 
20% inflation rate.  

Graph 2.4: Employment index, (2000=100) 

Source: Eurostat and European Commission services 

The  energy  price  surge  has  hit  Latvia’s  economy  harder  than  most  other  EU  countries, 
putting  additional  strain  on  its  competitiveness.  The  energy  price  shock  resulting  from 
Russia’s invasion of Ukraine, affected Latvia more severely than most other EU countries. This was 
due  to  Latvia’s  high  reliance  on  natural  gas  for  electricity  generation  and  heating,  as  well  as 
comparatively low prices it paid for natural gas before the price surge. Its energy inflation averaged 
48.8%  in  2022  compared  with  36.9%  in  the  euro  area,  however  the  difference  in  energy  price 
inflation  reached  some  20  pps.  in  the  second  half  of  2022.  The  monthly  energy  price  inflation 
peaked in July 2022 at 70%, significantly above the around 40% energy inflation peak in the EU 
and  euro  area.  Furthermore,  with  energy  products  comprising  a  larger  share  of  Latvia’s 
consumption basket, its impact on consumer price inflation was larger than in other countries (15). 
Finally, a higher energy price inflation meant a higher inflation in other prices as the energy price 

(13)  European Commission, 2021, https://economy-finance.ec.europa.eu/document/download/9acc3a53-b2dc-42e1-94cd-

de5130b07f2c_en?filename=new_country_fiches_ar2021.xlsx 

(14)  Estonia’s unemployment rate dropped to 4.1% in Q3 2019, Lithuania’s to 5.6% in Q2 2019, and Latvia’s to 6.1% in Q4 

2019. 

(15)  In 2022, energy prices constituted 16.2% of the HICP basket in Latvia, the highest weight in the EU and significantly higher 
The overall inflation excluding energy prices in 

than the EU average of 11.3% or the euro area average of 10.9%.(16)  
Latvia increased from 2.0% in 2021 to 11.7% in 2022. Euro area’s respective inflation was 1.5% in 2021 and 5.2% in 
2022. In the first quarter of 2023, the inflation excluding energy was 15.4% in Latvia and 7.7% in euro area. 

11 

85909510010511011512012520002005200620072008200920102011201220132014201520162017201820192020202120222000=100EELVLTSK     
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

increases affected producers of other goods and services. (16) Besides the energy price shock, the 
supply  of  metal  and  timber  products  as  well  as  fertiliser  –  products  previously  imported  from 
Russia and Belarus – was disrupted, leading to a surge in the prices of these products and rising 
costs  in  agriculture  and  manufacturing,  in  particular.  While  finding  new  supply  routes  should 
normalise  the  prices  of  these  materials,  the  loss  of  supply  that  was  closest  to  home  is  likely  to 
leave  Latvia  paying  permanently  higher  prices  for  these  products.  On  the  positive  side,  Latvia’s 
export price growth has kept pace with import prices, leaving terms of trade almost unchanged in 
2022. However, the gains in export  prices are also likely due to cyclical  reasons (e.g. lumber and 
grain prices play a particularly important role in Latvia’s exports) and may prove to be temporary. 
All  in  all,  these  developments  raise  additional  concerns  about  Latvia’s  price  competitiveness 
besides wages.  

Evidence  of  actual  impairment  of  competitiveness  is  mixed,  as  Latvia’s  export  market 
shares  continued  to  grow,  but  not  as  fast  as  those  of  some  of  its  peers.  From  2014  to 
2022,  Latvia’s  export  market  shares  increased  by  17%,  which  is  notably  lower  than  the  best 
performers, whose shares increased by 30% and above, but well above the worst performing who 
saw  their  export  market  shares  stagnate  or  even  decline  (see  graph  2.5.a).  It  is  worth  noting, 
however, that the export market performance cannot be explained solely by the wage-productivity 
gap. Looking at sectoral dynamics reveals that, among Latvia’s key exporting sectors, the share of 
employment of manufacturing, warehousing and financial services has declined. While warehousing 
and financial  services face a secular decline caused by the loss of transit and non-resident bank 
business, respectively, the declining employment share of manufacturing may be indicative of the 
sector’s difficulty to compete in the domestic labour market.  

Graph 2.5: Market share and employment 

Source: Eurostat and European Commission services 

In  the  near  term,  the  wage-productivity  gap  is  set  to  narrow,  but  wage  pressures  are 
expected  to  resume  as  growth  picks  up.  According  to  the  Commission’s  Spring  forecast,  the 
wage-productivity gap narrowed in 2022 and will continue to do so in 2023 as economic growth 
slows and pressure in the labour market abates. However, the underlying problem stemming from 
population ageing is set to shape the labour market over the long term, and hence wage pressures 

(16)  The overall inflation excluding energy prices in Latvia increased from 2.0% in 2021 to 11.7% in 2022. Euro area’s 

respective inflation was 1.5% in 2021 and 5.2% in 2022. In the first quarter of 2023, the inflation excluding energy was 
15.4% in Latvia and 7.7% in euro area. 

12 

-0.100.10.20.30.40.5CZEEHRLVLTHUPLROSISKA) Market share change, 2014-2022-0.015-0.01-0.00500.0050.010.0150.02EELVLTb) Change in employment share, 2012 -2020ForestryManufacturingWarehousingComputer programmingFinancial services  
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

will  return  over  medium  term  The  persistent  labour  market  tightness  risks  hampering  Latvia’s 
potential growth through higher labour costs and skills and labour shortages.  

While  inflation  is  set  to  slow,  it  remains  unclear  whether  the  recent  shock  will  leave 
Latvia with a permanent increase in relative prices. Inflation is forecast to slow to 9.3% in 
2023 and to 1.7% in 2024. Compared with EU and euro area average inflation, projected inflation 
is still higher in Latvia in 2023 and only somewhat lower in 2024 pointing to continued inflation 
differentials. Over 2014 to 2019, Latvia’s inflation exceeded the EU average by 3.8 pp, while over 
2019 to 2024 it is forecast to exceed it by 13.3 pp. With energy prices normalising, it is expected 
that  some  of  the  increase  in  Latvia’s  relative  prices  would  unwound  over  the  coming  years. 
However,  there  is  a  risk  that  the  Europe’s  energy  price  shock  and  the  secondary  shock  on  other 
prices will have permanently increased Latvia price level and thus hurt its price competitiveness vis 
a vis its peers. In that case, the risk for Latvia is lower potential growth and slower convergence.  

Assessment of MIP relevant policies 

The  efficiency  of  the  housing  market  could be  improved  by  facilitating  housing  supply. 
Weak  household  lending  and  only  mild  house  price  overvaluation  do  not  warrant  a  major 
intervention of macroprudential policy. In fact, weak lending is arguably holding back investments, 
including in housing, which is a prerequisite for increased labour mobility, as well as for productive 
capacity more  generally.  The  state  guarantee  programme  for  housing  introduced  in  2014  helped 
boost lending somewhat, however, its impact has been limited as evidenced by still falling private 
debt.  However,  lending  and/or  guarantee  programmes  tailored  for  regions  outside  of  Riga 
metropolitan area, where bank financing both for development and purchase is difficult to come by 
due to poor liquidity of collateral, could  be helpful for boosting both housing demand and supply. 
Moreover, Latvia could improve the efficiency of the housing market by shortening the construction 
permitting  process,  which  is  considerably  longer  than  in  neighbouring  Estonia  and  Lithuania. 
Additionally, it is advisable to monitor the impact on the rental market of a new rental law in 2021, 
which  aims  to  facilitate  investments  in  rental  properties.  Finally,  the  housing  supply  would  likely 
benefit from better access to skilled labour, the lack of which is the key structural problem fuelling 
Latvia’s wage growth.  

Apart from the housing guarantee programme, which supports mortgage lending to some 
extent,  government  policy  has  relatively  little  direct  impact  on  either  savings  or 
investment  of  the  private  sector.  Notwithstanding  the  limitation  to  lending,  Latvia’s 
demographic  prospects  are  likely  another  important  factor  behind  subdued  investments, 
particularly  in  housing.  Given  these  dynamics,  it  is  highly  unlikely  that  the  private  sector  would 
borrow from the rest of the world any time soon. Even if investment rates do pick up, they could 
make  use  of  excess  domestic  savings before turning  to  external  financing.  These  trends  are  also 
visible in the banking sector’s balance sheet with high capitalisation and liquidity ratios and a loan-
to-deposit  ratio  safely  below  one  and  declining.  However,  despite  government’s  limited  role  in 
private sector borrowing, fiscal policy has a direct material impact on the current account through 
EU fund inflows and government borrowing.  

Government  policies  in  response  to  the  energy  price  surge  cushioned  the  impact  on 
consumers, yet preserved the pricing signal, therefore maintaining incentives to cut back 
on  energy  consumption.  The  support  measures  ended  in  April  2023;  should  they  need  to  be 
reinstated for the next heating season in the event of a renewed rise in energy prices, it would be 
important  to  preserve  the  price  signal  in  order  to  limit  the  deterioration  in  the  current  account 
created by the government borrowing.  

13 

2. 

Assessment of macroeconomic vulnerabilities 

Investments  in  skills  and  health  could  help  increase  labour  supply,  which  faces  a 
structural  decline  due  to  ageing.  Declining  labour  supply  is  one  of  the  key  drivers  of  above-
productivity  wage  growth  Therefore,  policies  related  to  labour  and  skills  supply  are  relevant  for 
addressing  the  medium  to  long  term  wage  cost  appreciation.  There  are  limited  policy  options  to 
mitigate the impact of population ageing. Yet, while Latvia will have to contend with stagnant or 
declining labour supply, investments in areas that help increase participation or improve the quality 
of the labour force are of particular importance. With shortages of specialists of both medium and 
high  skill  and  low  participation  rates  in  adult  learning,  there  is  ample  room  for  productive 
investment in skills which would help improve the employment opportunities of the low-skilled and 
alleviate the broader labour supply problem. Equally, the comparatively poor health of the Latvian 
population (see Latvia 2023 Country Report, section 3) contributes to absenteeism and limits the 
potential of the population around retirement age. Finally, since Latvia’s rather restrictive policy has 
largely prohibited significant addition to the labour supply through immigration, it presents another 
avenue that could be explored to address the issue of labour supply.  

Conclusion 

In  Latvia,  vulnerabilities  related  to  housing  and  external  borrowing  remain  mild, 
however  risks  to  competitiveness  remain  pertinent,  albeit  contained  in  the  near  term. 
Whilst Latvia has experienced elevated house price growth recently, the housing price level over a 
longer  perspective  does  not  appear  excessive.  A  negative  impulse  from  lending  suggests  the 
emergence of a price bubble in housing is unlikely. Furthermore, the recent widening of the current 
account  deficit  is  expected  to  be  temporary.  Latvia’s  net  international  investment  position,  which 
improved  markedly  in  the  past  decade,  is  expected  to  remain  broadly  stable  this  year  and  next. 
Overall, given the absence of significant capital inflows to the private sector and hence the lack of 
demand stimulus, it is unlikely that Latvia would face a threat to its external stability. Having said 
that,  its  key  structural  economic  challenges  are  related  to  declining  labour  supply,  which  might 
impair Latvia’s competitiveness over the medium term. If this risk materialises, it would result in 
gradually  falling  behind  its  peers  in  catching  up  with  the  average  EU  income  level  and  hence 
undermining one of its key economic objectives.  

The  policy  setting  is  overall  favourable  considering  the  identified  vulnerabilities, 
although  labour  market  and  skills  policies  could  help  address  wage  cost  appreciation.  
Government policies in response to the energy price surge cushioned the impact on consumers, yet 
preserved the pricing signal,  therefore maintaining incentives to cut back on energy consumption. 
While the risk of a sudden economic disturbance stemming from the domestic market and policy 
developments is low, particular attention to pursuing policies that increase the quality and quantity 
of labour supply is warranted. Since the key driver of wage growth above productivity growth is the 
declining  labour  supply,  policies  that  aim  to  improve  the  quality  and  quantity  of  Latvia’s  labour 
supply  could  help  mitigate  the  challenges  stemming  from  the  population  ageing.  In  particular, 
ramping up spending on skills, healthcare and labour mobility would help address these challenges. 
Moreover,  Latvia  could  take  measures  to  attract  foreign  workers  with  specific  skills.  Supporting 
housing supply, shortening the construction permitting process, and better access to skilled labour 
would improve the efficiency of the labour market.  

14 

 
Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package” sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Latvia, in line with Regulation 1176/2011. (17) 

2. 

Assessment of macroeconomic vulnerabilities 

(17)  European Commission (2023), European Semester Spring Package 2022, COM (2023) 600 final. 

15 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Latvia  and  spill-overs  from  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Latvia 
surged.  Moreover,  wages  and  profits  also  picked  up  across  the  EU,  which  further  added  to  price 
pressures  in  Latvia.  Using  input-output  data,  domestic  inflation  can  be  Broken  down  into 
contributions from key cost factors. Taking into account some data limitations, the framework can 
be  used to attribute consumer and investment price changes to i) extra-EU import price changes, 
which  include  both  directly  imported  inflation  and  inflation  passed  through  from  import  costs  of 
Latvia’s EU partners ii) domestic unit labour cost changes iii) domestic unit profit changes, including 
indirect taxation changes and iv) rest-of-EU value added price changes. (18) 

Data suggests that much of inflation in Latvia in 2022 reflected surging import prices, 
and non-energy imports are projected to keep inflation elevated in 2023. In 2022, energy 
prices  were  a  key  driver  of  consumer  and  investment  inflation  (see  Graph  2.6).  However,  the 
contribution from inflation passed through EU partners was also sizeable, particularly to consumer 
inflation.  The  contribution  from  domestic  value-added  inflation,  which  covers  wages  and  profits, 
was signifiacnt in 2022 and is expected to remain high in 2023. This reflects increases in both, unit 
profits  and  unit  labour  cost.  The impact  of  energy  inflation  is  set  to decrease  consumer inflation 
this  year,  as  prices  of  energy  commodities  have  fallen.  In  addition,  inflation  passed  through  EU 
partners is also projected to slow inflation this year. By contrast, non-energy imports from outside 
the  EU  are  expected  to  keep  both  consumer  and  investment  inflation  elevated.  Spill-overs  from 
value-added inflation in other EU countries are set to remain marginal. 

Graph 2.6: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(18) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, combined with 

Eurostat input-output data. HICP is taken as the measure of the price of private consumption, including non-residents. 
Changes in import prices and value-added deflators are assumed to affect demand prices with a delay of 1 and 5 months 
for consumption and investment inflation, respectively. For further methodological details, see explanations in the 2023 in-
depth review for Czechia, p. 16. 

16 

-20-100102030161718192021222324% change (year-on-year)LV: contribution to domestic GFCF deflator growth-15-10-50510152025161718192021222324% change (year-on-year)LV: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
  
 
                                                 
Table 2.1: Selected economic and financial indicators (Part 1), Latvia 

2. 

Assessment of macroeconomic vulnerabilities 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

17 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 9.9-2.72.92.6-2.34.32.81.42.8Potential growth  (1)7.3-0.32.13.52.63.01.71.92.1Contribution to GDP growth:Domestic demand 13.5-5.02.42.4-2.86.25.42.42.8Inventories 1.0-1.00.40.80.53.5-0.6-1.2-0.1Net exports -4.82.80.1-0.60.0-5.4-2.00.50.4Contribution to potential GDP growth (1):Total Labour (hours) -0.2-1.8-0.50.0-0.50.3-0.20.10.1Capital accumulation 3.51.30.81.10.80.90.80.80.9Total factor productivity 4.00.21.92.42.21.91.01.01.1Output gap (2)4.9-5.21.22.1-2.8-1.6-0.5-1.0-0.3Unemployment rate9.415.39.86.38.17.66.96.86.5Harmonised index of consumer prices (HICP)6.54.61.12.70.13.217.29.31.7GDP deflator 11.02.12.82.61.06.513.18.92.7External positionCurrent account balance (% of GDP), balance of payments-14.6-2.0-0.4-0.62.6-4.2-6.4-3.7-2.9Trade balance (% of GDP), balance of payments-16.1-5.3-1.7-0.71.0-3.4-5.8..Primary income balance (% of GDP)-2.00.8-0.4-1.40.0-1.8-1.7..Secondary income balance (% of GDP)3.52.51.81.51.71.11.1..Current account explained by fundamentals (CA norm, % of GDP) (3)-1.8-0.6-0.7-0.4-0.4-0.5-0.5-0.5-0.6Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-3.6-2.5-3.9-3.9-4.0-3.4-3.1-2.9-2.8Capital account balance (% of GDP)1.22.22.01.51.71.41.1..Net international investment position (% of GDP)-56.1-77.0-57.2-40.3-34.2-27.5-27.0..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-27.1-37.9-10.05.814.119.016.3..Net FDI flows (% of GDP)-4.5-2.6-1.6-3.0-2.1-2.5-3.3..CompetitivenessUnit labour costs (ULC, whole economy)13.40.26.35.04.93.89.09.44.1Nominal compensation per employee 21.81.57.47.85.011.19.010.85.3Labour productivity (real, hours worked)8.02.52.64.63.55.4-2.00.80.6Real effective exchange rate (ULC)7.2-1.84.22.50.72.74.13.10.5Real effective exchange rate (HICP)1.31.90.40.80.40.26.4..Export performance vs. advanced countries (% change over 5 years)102.749.711.31.620.418.5...Private sector debtPrivate sector debt, consolidated (% of GDP)87.7115.879.266.264.858.152.2..Household debt, consolidated (% of GDP)29.242.324.420.220.319.417.7..Household  debt, fundamental benchmark (% of GDP) (6)7.310.713.316.118.218.218.2..Household  debt, prudential threshold (% of GDP) (6)106.791.7103.374.351.645.450.3..Non-financial corporate debt, consolidated (% of GDP)58.573.554.746.044.538.734.6..Corporate debt, fundamental benchmark (% of GDP) (6)37.746.560.063.470.168.967.9..Corporate debt, prudential threshold (% of GDP) (6)132.3110.5127.890.371.665.073.4..Private credit flow, consolidated (% of GDP) 23.8-2.2-0.11.1-1.90.92.7e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-8.45.13.6-0.62.5-2.1-1.92.01.4Households, net lending (+) or net borrowing (-) (% of GDP)-4.30.8-0.92.16.16.31.40.30.6Net savings rate of households (% of net disposable income)-7.7-2.4-6.10.36.35.9...forecast 
    
 
 
 
 
Table 2.2: Selected economic and financial indicators 

2. 

Assessment of macroeconomic vulnerabilities 

(1) (7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2022-04-28, where available; European Commission for forecast figures (Spring forecast 
2022) 

18 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal27.0-8.56.09.03.510.914.0..House price index, deflated16.9-11.34.55.82.77.2-0.2..Overvaluation gap (%) (7)13.20.6-6.43.05.69.611.8..Price-to-income overvaluation gap  (%) (8)24.3-2.5-13.6-11.4-11.3-12.4-7.7..Residential investment (% of GDP)3.92.92.32.72.62.21.9..Government debtGeneral government balance (% of GDP)-0.9-5.6-1.0-0.6-4.4-7.1-4.4-3.8-2.7General government gross debt (% of GDP)11.838.139.236.542.043.740.839.740.5Banking sectorReturn on equity (%).-15.310.97.01.09.1...Common Equity Tier 1 ratio.10.214.419.921.518.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).9.95.53.53.61.7...Gross non-performing loans (% of gross loans) (9)..6.73.94.62.11.6..Cost of borrowing for corporations (%)..3.13.43.23.05.0..Cost of borrowing for households for house purchase (%)..2.82.62.52.34.3..forecast