Latvia’s economy grew by 2.1% of GDP in 2025, driven by domestic demand. Due to the conflict in the Middle East, GDP growth is forecast to slow to 1.4% in 2026. It is set to pick up slightly to 1.6% in 2027. Inflation is expected to increase to 3.6% in 2026 due to higher energy prices, before falling to 2.2% in 2027. The general government deficit is forecast to increase to 3.3% of GDP in 2026, driven by higher defence investment, interest expenditure and social benefits, and rise further to 4.3% in 2027, mainly due to defence expenditure.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 2.1 | 1.4 | 1.6 |
| Inflation (%, yoy) | 3.8 | 3.6 | 2.2 |
| Unemployment (%) | 6.9 | 6.8 | 6.7 |
| General government balance (% of GDP) | -2.5 | -3.3 | -4.3 |
| Gross public debt (% of GDP) | 46.9 | 48.8 | 53.8 |
| Current account balance (% of GDP) | -5.0 | -5.8 | -7.0 |
Following strong growth in 2025, growth to slow in 2026 amid energy crisis
In 2025, Latvia’s economy returned to growth with private consumption benefiting from solid wage growth. Private consumption is expected to continue growing, by 1.6% in 2026 and 1.9% in 2027, despite higher energy prices. Real wage growth is expected to remain robust, also supporting household savings. Investment rebounded in 2025, growing at a rate of 9.8% and driven by private investments, inflows of EU funds and increased defence spending. Investment is set to continue expanding, by 3% in each year. Public consumption is set to be weaker over the forecast horizon, partly due to more limited growth in public wages and the phase-out of the RRF as of 2027. While exports of goods and services rose by just 0.1% in 2025, imports surged by 5.7%, driven by strong domestic demand. Exports are expected to grow modestly, by 1.7% in 2026 and 1.9% in 2027, as geopolitical uncertainties persist. Overall, real GDP growth is projected at 1.4% in 2026 and 1.6% in 2027.
Unemployment rate set to decline gradually
Despite the economic recovery in 2025, the unemployment rate rose to 7%. It is projected to ease slightly to 6.9% in 2026 and further to 6.8% in 2027. Nominal compensation per employee grew by 8.4% in 2025 and is set to remain strong at 7.0% in 2026 before decreasing to 5.8% in 2027. This growth is supported by increases in the minimum wage and public sector wages, and skill shortage in some sectors.
Inflation expected to rise in 2026
HICP inflation reached 3.8% in 2025 as services and both processed and unprocessed food inflation remained strong. Robust wage growth continued to drive services and food inflation, with both set to gradually ease over the forecast horizon. Due to higher energy inflation, HICP inflation is expected to rise to 3.6% in 2026 before falling to 2.2% in 2027. Inflation excluding energy and food is expected to remain below HICP inflation.
Government deficit set to increase
In 2025, the government deficit increased to 2.5% of GDP, primarily due to the adverse fiscal impact of the personal income tax reform and reduction of property income, affected by lower dividend payments from state-owned enterprises and lower interest revenue.
In 2026, the government deficit is forecast to increase to 3.3% of GDP, largely due to higher expenditure. Revenue from indirect taxes and social contributions is expected to grow in line with the expanding tax base, supported by consumption, public investment and compensation of employees. However, weaker income tax revenue and lower property income are forecast to weigh on overall revenue growth. At the same time, expenditure is projected to rise further, reflecting higher investment (including in defence), increasing interest costs, and continued growth in social benefits, largely due to pension and benefit indexation outpacing economic growth, and a rising number of pension recipients.
In 2027, the government deficit is forecast to rise to 4.3% of GDP. While social contributions are expected to grow strongly, in line with compensation of employees, the lingering effects of the personal income tax reform and diminishing property income will continue to drag revenues. On the expenditure side, the sharp increase in defence expenditure, particularly via inventories, public investment and intermediate consumption alongside growth in social transfers and interest expenditure, will contribute to the widening deficit.
The debt-to-GDP ratio reached 46.9% in 2025 and is forecast to increase to 53.8% by 2027, due to high budget deficits and positive stock-flow adjustments impacted by upcoming Eurobond redemptions.