Latvia’s GDP growth is expected to remain weak in 2025. Private consumption is set to slowly accelerate driven by wage growth, whereas government consumption is projected to remain strong. The economy is forecast to pick up in 2026 driven by private consumption and investments, with GDP growth reaching 2%. After a strong decline in 2024, inflation is set to rebound as the deflationary impact from energy prices fades away while services and processed food inflation remains strong. Inflation is expected to increase from 1.4% in 2024 to 3% in 2025, before falling to 1.7% in 2026. After an increase in 2024, unemployment is projected to decrease slightly in 2025 and further in 2026. The general government deficit is forecast to increase to 3.1% of GDP in 2025 driven by weaker revenue growth and increasing current expenditure and remain at 3.1% of GDP in 2026.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,4 | 0,5 | 2,0 |
| Inflation (%, yoy) | 1,3 | 3,0 | 1,7 |
| Unemployment (%) | 6,9 | 6,8 | 6,6 |
| General government balance (% of GDP) | -1,8 | -3,1 | -3,1 |
| Gross public debt (% of GDP) | 46,8 | 48,6 | 49,3 |
| Current account balance (% of GDP) | -3,3 | -3,9 | -3,5 |
Private and public consumption set to drive growth in 2025 and 2026
In 2024, real GDP fell by 0.4%. This was mostly due to the adverse geopolitical context and increasing uncertainty weighing on consumption and especially investment. Supported by strong wage growth, private consumption recovered from its contraction in 2023 but remained weak (0.5%). Private investments were also hampered by high financing costs while public investments, in particular EU co-financed programmes, faced delays. As a result, after solid growth in 2023 (9.9%), investment significantly declined in 2024 (-6.7%). Goods and services export growth was negative in 2024 due to a weak external environment and a deterioration in cost competitiveness. Strong growth of public consumption provided support to the economy.
In 2025, the economy is expected to recover slowly from the 2024 contraction. Real disposable incomes and private consumption are set to benefit from solid wage growth and the expected increase in disposable income due to the tax reform. However, increasing uncertainty amid a challenging geopolitical context is set to encourage precautionary savings. After a sharp increase in 2024, the savings rate is thus projected to remain at 7.5%. Investments are expected to recover due to EU fund inflows and increasing spending on defence. However, due to a strong negative carry-over and persistent uncertainties, investments are set to decrease by 1.2% in 2025 before recovering in 2026 (2.6%). Public consumption is set to remain strong. After two years of decline, exports are set to recover this year, but only gradually due to the adverse impact of US tariffs that weigh on Latvia's main trading partners. Overall, real GDP growth is projected to reach 0.5% in 2025, before picking up further to 2% in 2026.
Labour market expected to remain tight
As the economy slightly contracted in 2024, the unemployment rate increased to 6.9%. With a slow recovery expected in 2025, the unemployment rate is forecast to edge down to 6.8% in 2025 and decrease further in 2026 on the back of increasing labour demand. After having reached 7.7% in 2024 in nominal terms, growth of compensation per employee is set to stay strong in 2025 at 5.5% and in 2026 at 4.5%, supported by increases in the minimum wage and in public wages, and driven by labour market tightness.
Inflation set to increase
In 2024, energy prices declined fast, fuelling a rapid decrease of HICP inflation, which reached 1.4%. However, inflation surged in the last months of the year due to high inflation in the services and food (both processed and unprocessed) component. In the last quarter of 2024, inflation increased to 2.6%. As services’ inflation is expected to remain strong, driven by wage growth, inflation is set to reach 3% in 2025 and 1.7% in 2026. Although services and processed food prices are set to moderate in 2026, headline inflation excluding energy and unprocessed food is expected to remain above HICP inflation in 2025 and 2026.
Deficit to increase over forecast horizon
In 2024, the general government deficit stood at 1.8% of GDP, down from 2.4% of GDP in 2023. The reduction in the deficit was mainly due to the strong growth of tax revenue, which exceeded GDP growth. The introduction of corporate income tax advance payments from the financial sector, increases in several excise duties, and additional dividend payments from state-owned companies contributed to the increase in revenue. The lower growth of general government expenditure in 2024 was driven by the phase-out of measures to mitigate the impact of high energy prices.
In 2025, the government deficit is forecast to increase to 3.1% of GDP. Revenues are expected to be negatively affected by a reduction in income tax revenue, due to the reform of the personal income tax system, and a decline in property income, primarily due to the normalisation of profitability of state-owned companies in the energy and forestry sectors, as a result of lower energy prices. On the expenditure side, growth of compensation of employees, interest payments and social transfers are the main factors behind the increase in deficit.
In 2026, the government deficit is forecast to remain at 3.1% of GDP. Both revenue and expenditure are expected to grow at a rate below that of nominal GDP. Revenue growth is expected to be subdued due to a projected further downward adjustment in property income, as well as lower current transfers. The expected increase of defence investment is offset by a reduction in current expenditure while other capital expenditure provides a slight deficit-reducing contribution. The debt-to-GDP ratio reached 46.8% in 2024 and is forecast to increase to 48.6% in 2025 and further to 49.3% in 2026, as a result of stock-flow adjustments and budget deficits.