The Bank of Latvia has raised its forecast for gross domestic product (GDP) growth this year to 1.7% from 1.2%, said the President of the Bank of Latvia, Martins Kazaks, at a discussion organized by the Bank of Latvia on Friday.
The Bank of Latvia has maintained its GDP growth forecast for 2026 at the same level of 2.8%, while the economic growth forecast for 2027 has been lowered to 2.9% from 3.2% (June forecast). In 2028, the Bank of Latvia predicts GDP growth of 3.2%.
The Bank of Latvia noted that the GDP growth forecast has been revised upwards mainly due to new data. The future forecast has not changed significantly, but due to the adjustment of the forecast for some large investment projects, faster growth is expected in 2028 rather than in 2027.
In the medium term, thanks to improved consumer sentiment, the growth rate of household savings will slow down, while private consumption will increase.
Public and private investments are a stable support for the economy, which is also supported by the growth of lending, the central bank stated. Investments in development are fueled by changes in production, which increase production capacities.
The Bank of Latvia noted that the economic sentiment indicator, reflecting changes in the moods of entrepreneurs and consumers, also indicates an economic recovery. Industry, retail trade, and the service sector, as well as consumer sentiment, are currently in a phase of growth.
As global uncertainty decreases, more active export growth is expected. However, rapid growth in labor costs in Latvia, as well as military conflicts and related uncertainty in the external environment, pose challenges.
The supply of labor remains limited, and wage growth is expected to accelerate. Wage growth is projected to be somewhat higher than in the June forecast. This will mainly be due to an increase in the wage fund in the private sector, although wages in the public sector have also been growing significantly faster than expected. The purchasing power of the population will continue to strengthen, and wages will grow faster than inflation.
The Bank of Latvia noted that the demand for labor remains stable. In the medium term, this will also be supported by the implementation of large investment projects. The unemployment rate will remain low throughout the forecast period and will decrease to 6.2% in 2028. This will be facilitated by improved employment expectations, a gradual recovery of the external environment, and further economic growth.
Consumption, in turn, will be stimulated by new government decisions on additional spending on defense and demographics, as well as salary increases for teachers.
Public investment flows will increase by the end of the period due to military supplies and the "Rail Baltica" project.
The Bank of Latvia also noted that in the medium term, the budget deficit will increase, significantly influenced by rising defense spending, especially next year. The deficit is expected to exceed 3% of GDP.
Faster funding for defense spending will occur through borrowing, so public debt will continue to grow in the coming years and will amount to just over 50% of GDP by the end of the period.
