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Economy and Finance

Economic forecast for Latvia

The latest macroeconomic forecast for Latvia. 

In 2023, GDP is expected to decrease by 0.2%, hampered by high inflation weighing on private consumption and weak export performance. Growth is forecast to reach 2.4% next year and 3% in 2025 driven by private consumption and public expenditure. Inflation is expected to take some time to moderate, staying close to double-digit levels in 2023. A decline in energy prices and a broad-based slowdown in other price categories are set to bring inflation down to 3.2% in 2024 and 1.9% in 2025. Unemployment is projected to decrease slightly in 2023 and further over the forecast horizon. The government deficit is set to decrease to 3.2% of GDP in 2023 and to remain at 3.1% in 2024 and 2025.

GDP growth (%, yoy)-0,22,43,0
Inflation (%, yoy)9,63,21,9
Unemployment (%)6,86,66,5
General government balance (% of GDP)-3,2-3,1-3,1
Gross public debt (% of GDP)41,742,343,2
Current account balance (% of GDP)-4,2-3,2-2,8

Government consumption and investment set to drive growth in 2023 and 2024

Latvia’s economy contracted in real terms in the two first quarters of 2023, driven by weaknesses in private consumption and in the export market. Slowing inflation, and the subsequent pick-up in real wage growth, is set to provide a relief to households’ purchasing power, starting to slowly boost consumption growth in the second part of the year. After two years of decline, the construction sector experienced a strong rebound (15%) in the first half of 2023, although relatively high prices of materials and interest rates could slow its growth going forward. Additionally, EU-funded investments, including those financed by the RRF, are projected to increase over the forecast horizon. In a context of weak external environment, exports and imports are expected to remain weak in the third quarter and should start to pick up by the end of the year. While growth is set to recover by the second half of the year, annual GDP growth is still expected to contract by 0.2% in 2023 given the negative performance in the first two quarters of the year. 

In 2024, growth is forecast to reach 2.4%. A marked slowdown in inflation and an acceleration in real wage growth are set to foster private consumption. A further increase in EU-funded investments is expected to continue boosting real investment. Export growth is projected to rebound as the inflation slowdown elsewhere in the EU boosts foreign demand. In addition, government consumption is set to be strong, in particular to support the public wage bill. In 2025, growth is expected to reach 3% mainly driven by private consumption and exports.

Labour market expected to remain tight

The contraction of the economy is set to slightly loosen up the labour market, as evidenced by recently falling job vacancies. However, the labour market is expected to tighten in 2024 and 2025 on the back of increasing demand, labour shortage and falling supply due to ageing. Nominal wage growth is set to stay strong in 2024 and 2025, supported by labour market tightness and increases in minimum wage and in public wages.

Inflation to gradually slow down

After reaching 17.3% in 2022, fuelled by the energy price surge, HICP inflation has been declining in 2023, posting 3.6% y-o-y in September 2023. Energy price inflation turned negative in the third quarter of 2023 and other price components also slowed down. Services inflation continued to increase until May 2023 and reached 12.1% y-o-y. Overall, inflation in 2023 is expected at 9.6%. By 2024, inflation is expected to slow down to 3.2%, but HICP inflation excluding energy and food is projected to remain at 4.6% as services price growth is set to remain higher than the other components. In 2025, inflation is expected to decrease further to 1.9%. 
Deficit to remain elevated in the medium term
In 2023, the general government deficit is projected at 3.2% of GDP, down from 4.6% of GDP in 2022 mainly due to better-than-expected tax collection. 

The phasing out of most pandemic-related support measures and the lower than projected fiscal impact of measures to mitigate the impact of high energy prices are set to drive the narrowing of public deficit. The net budgetary cost of energy-related measures is expected at 0.9% of GDP in 2023, compared with 1.5% in 2022. This forecast assumes a full phase out of these measures in 2024. At the same time, wage increases for administration and medical personnel, additional financing for oncology, science and research, as well as a substantial public investment package for defense and internal security are the main expenditure-increasing measures in 2023. 

In 2024, the government deficit is projected to decrease slightly to 3.1% of GDP. The impact of the phasing-out of energy-related measures by the end of 2023 will be more than offset by additional expenditure measures foreseen for 2024, including public wage increases (teachers, sectoral ministries and institutions), additional financing to healthcare and education, supplementary payments to pensioners and targeted support for the sharp increase in mortgage interest rates as well as development of technical infrastructure of the external border. The introduction of corporate income tax advance payments from the financial sector, an increase in the rates for a number of excise products and additional dividend payments from state owned companies are expected to yield a moderate increase in revenue.

In 2025, the government deficit is forecast to remain at 3.1% of GDP as both revenue and expenditure are expected to grow in line with nominal GDP.
The debt-to-GDP ratio is projected to reach 41.7% in 2023, increase to 42.3% in 2024 and 43.2% in 2025 due to positive stock-flow adjustment and nominal GDP growth being lower than debt growth.