Latvia's economic growth is accelerating after a prolonged period of stagnation – signs of recovery are being observed, particularly in household consumer spending and investment. Although global trade uncertainty surrounding US customs tariffs still poses a risk, inflation in Latvia is stabilising and a rise in activity is expected in the export sector, explains Joona Widgrén (Joona Widgrén), economist at Finland's leading financial group OP Financial Group, in its quarterly Baltic economic review.
"The pace of Latvia's economic growth is accelerating after a long period of stagnation. However, risks to growth remain, particularly in the area of trade policy. Although the direct impact of US customs tariffs on Latvian exports is still limited – they affect only a small share of GDP – broader uncertainty in global trade could have more serious consequences. Growing barriers to international trade and disruptions to supply networks may reduce investment and export activity, especially as Latvia's economy is heavily dependent on exports. While uncertainty in global trade creates risks, Latvian companies have a good track record of adapting to challenges, ensuring long-term stability in the economy," Widgrén forecasts.
Latvia's economy is resilient
Despite the challenges, Latvia's economy continues to be stable and flexible. Rising wages and falling inflation will drive an increase in household consumer spending, and investment and exports are expected to become more dynamic. As global trade continues to develop, Latvia remains well positioned to navigate these changes and maintain economic stability over the long term.
The latest data show that inflation, which had risen sharply across all the Baltic states, is now falling and in Latvia is close to the 2% target, increasing household purchasing power. Investment is expected to increase, further supporting economic activity. The labour market across the Baltic region has remained comparatively strong, contributing to the economy's resilience. Compared with Estonia, where consumer confidence is low, Latvia is seeing stronger growth in household consumption.
"Amid persistent uncertainty, we are seeing moderate economic activity. Nevertheless, we look to the future with a positive outlook and expect gradual growth. Last year we saw a substantial increase in the number of investment projects launched, which is likely to drive GDP growth this year," notes Elmārs Prikšāns, head of the Latvian branch of OP Corporate Bank plc.
Differences between the Baltic states persist
OP Financial Group forecasts that the fastest GDP growth this year will be in Lithuania (3%), followed by Latvia at 2.5% and Estonia at 1.7%.
While inflation in Latvia is under control, providing a more stable environment for businesses and households, Estonia is still facing inflationary pressure, and tax increases are expected to push inflation higher next year.
Among the Baltic states, Lithuania's export market is the most resilient, while Latvia and Estonia are showing the first signs of recovery in the manufacturing sector. However, household consumption in Estonia and Latvia remains weak, although the situation in Latvia is improving. Housing markets in all three countries have remained stable compared with the rest of Europe, particularly the Nordic countries, where price swings have been more pronounced.
Global economic outlook: growth continues amid tariff uncertainty
"The global economy continues to grow steadily, and the key indicators point to resilient growth. Trade has recovered, reaching a record high, which signals a strong global outlook. Despite the broadly positive global trade environment, the main concern is still the risks posed by additional tariffs. Uncertainty in international markets could affect economic indicators more than the tariffs themselves," says the economist.
He adds that, under the administration of President Donald Trump, the US is likely to continue introducing customs tariffs, although the scale of these measures remains unclear. But the higher the tariffs, the greater the impact on the global economy – Trump has threatened Europe with a blanket 25% tariff which, if introduced, would have significant economic consequences for both Europe and the US. According to an assessment by the Kiel Institute for the World Economy, a 25% tariff imposed by the US would reduce GDP by 0.4% compared with the baseline scenario. If the European Union responded with a 25% tariff, the impact would increase to more than 0.5%.
This uncertainty overshadows an otherwise optimistic outlook for the global economy. In such conditions, economies must adapt to an increasingly unpredictable environment, but despite these challenges the broader global outlook remains optimistic, and resilient growth trends will support further economic growth.
About the Latvian branch of OP Corporate Bank plc
OP Corporate Bank plc is the central bank of OP Financial Group, Finland's largest financial services provider. It began operating in Latvia in 2012 and is currently the fifth largest bank in Latvia by the volume of corporate loans issued. The Latvian branch of OP Corporate Bank plc provides financial services to leading companies in Latvia and plays a significant role in the long-term development of the country and the region as a whole.