The Longer the War in the Middle East, the Higher Prices in Latvia — Economists Warn 0 10

This may contribute to rising inflation, and prices at gas stations have increased immediately. The Bank of Latvia notes that a temporary rise in prices will not have a significant impact on the country's economy, but a more noticeable effect will occur if oil and gas prices remain at their current levels throughout this year and next year.

According to economist Dainis Gašpuitis from SEB banka, the events in the Middle East are not yet forming a long-term impact. U.S. President Donald Trump stated in early March that the U.S. military operation in Iran would last at least 4-5 weeks, while also allowing for a longer duration. Currently, the influence of the conflict can be seen in short-term inflation indicators; however, they are not yet having a significant impact on economic growth. The impact of oil and gas prices on Latvia's economy directly depends on how long the military actions will continue and, consequently, how long high energy prices will persist.

Currently, the price increase compared to the baseline scenario has already exceeded 30%. If they remain at this level for an extended period, according to Citadele Bank's forecasts, this will mean a negative impact on Latvia's gross domestic product of 1.6%, while annual growth will amount to only 0.4%. Maintaining such energy prices for a long time will increase inflation up to 8.5%.

As noted by the chief economist of Citadele Bank, Karlis Purgailis, the negative scenario assumes that energy prices will remain at their current high levels until the end of the year. The sooner the military conflict ends and energy prices stabilize, the less impact there will be on Latvia's economy. If military actions conclude in the next couple of weeks, as initially predicted by U.S. representatives, energy prices should return to pre-war levels. In this case, inflation will increase moderately in the coming months, and the impact on the economy is likely to be insignificant.