Latvia’s economy is expected to grow by 1% of GDP in 2025 after experiencing stagnation in 2024. Despite geopolitical uncertainties, both private and public investments are set to grow strongly. Private consumption is expected to slowly recover in the second half of the year, driven by wage growth, whereas government consumption is projected to be supportive. GDP growth is forecast to pick up to 1.7% in 2026 and to 1.9% in 2027 driven by private consumption, investment and exports. Inflation is set to rebound as the deflationary impact of energy prices fades, while services and food inflation remains strong. Inflation is projected to reach 3.6% in 2025, before falling to 2.2% in 2026 and picking up to 2.4% in 2027. 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 further to 4.3% in 2027, mainly due to higher defence expenditure.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 1.0 | 1.7 | 1.9 |
| Inflation (%, yoy) | 3.6 | 2.2 | 2.4 |
| Unemployment (%) | 6.8 | 6.6 | 6.5 |
| General government balance (% of GDP) | -3.1 | -3.5 | -4.3 |
| Gross public debt (% of GDP) | 48.3 | 49.9 | 54.5 |
| Current account balance (% of GDP) | -4.1 | -3.3 | -4.2 |
Private consumption and investment set to drive growth in 2026 and 2027
In 2025, the economy is expected to recover from the stagnation experienced in 2024. Real disposable income and private consumption are set to benefit from solid wage growth. However, the challenging geopolitical context is expected to encourage precautionary savings. Consequently, after a significant rise in 2024, the household savings rate is projected to increase further to 6.4% in 2025, higher than the pre-pandemic level. As a result, private consumption is expected to recover only slowly in the second half of 2025 and to pick-up further in 2026 and 2027. After a strong performance in the first half of 2025, investment is expected to remain robust throughout the rest of the year (10.5%) driven by inflows of EU funds inflows and increased defence spending and are is set to remain supportive in 2026 and 2027. After a significant decline in 2024, private investments are also set to recover in 2025, fuelled by robust corporate lending and lower borrowing costs. Public consumption is set to be weaker over the forecast horizon, partly due to a government policy to limit the growth of public wages and the phase-out of the RRF as of 2027. After two years of decline, service exports are expected to recover in 2025. However, goods exports are only set to recover in 2026 and 2027. Overall, real GDP growth is projected to reach 1.0% in 2025, before picking up further to 1.7% in 2026 and 1.9% in 2027.
Labour market expected to remain tight
With a recovery in economic growth expected from 2025 onwards, the unemployment rate is forecast to edge down to 6.8% in 2025 and decrease further in 2026 and 2027 on the back of increasing labour demand. After reaching 8.3% in 2024, nominal growth of compensation per employee is set to stay strong in 2025 at 5.8%, decreasing to 5.0% in 2026 and 4.0% in 2027, supported by increases in the minimum wage and tight labour market conditions.
Inflation set to increase in 2025
After a strong decline to 1.4% in 2024, fuelled by fast-declining energy prices, HICP inflation surged in the last quarter of 2024 due to higher inflation in services and food (both processed and unprocessed). Robust wage growth drives services’ inflation as well as food inflation. As a result, HICP inflation is forecast to reach 3.6% in 2025, and decrease to 2.2% in 2026 and 2.4% in 2027. Due to the introduction of ETS2, if not delayed, energy prices, which have been in decline since 2024, are expected to see a positive inflation in 2027. While services and processed food inflations are set to ease in 2026 and 2027, headline inflation excluding energy and food is expected to remain above HICP inflation over the forecast horizon.
Government deficit set to increase
In 2025, the government deficit is forecast at 3.1% of GDP, up from 1.8% of GDP in 2024. Revenue is expected to decrease due to reduced income tax revenue from the 2025 personal income tax system reform, and lower dividend payments from state-owned companies as a result of normalised energy prices. On the expenditure side, growth of social transfers, intermediate consumption and interest payments are the main factors behind the increase in deficit.
In 2026, the government deficit is forecast to increase to 3.5% of GDP, driven by revenue and expenditure factors. Revenue is expected to grow less than nominal GDP, mainly due to the lingering effects of the personal income tax reform on income tax growth and lower revenue from current transfers. An increase in the deficit from the expenditure side is projected mainly due to higher defence investment. Meanwhile, current expenditure contributes to deficit reduction, as growth in compensation of employees and intermediate consumption lags behind nominal GDP growth.
In 2027, the government deficit is forecast to rise to 4.3% of GDP. In terms of revenue, the deficit increase is driven by a downward adjustment in property income, mainly due to lower dividend payments from state-owned enterprises and lower interest revenue. On the expenditure side, increased defence investment, along with growth in social transfers and interest expenditure, further contribute to the deficit.
The fiscal stance is projected to remain slightly expansionary in 2026, supported by higher EU budget-financed expenditure and an increase in nationally financed investment. However, it is set to turn broadly neutral in 2027, with the RRF no longer providing fiscal support.
The debt-to-GDP ratio reached 46.6% in 2024 and is forecast to increase to 54.6% by 2027, due to high budget deficits and positive stock-flow adjustments impacted by upcoming Eurobond redemptions.