Latvijas Banka has published its latest macroeconomic forecasts (prepared in December 2025). Gross domestic product (GDP) is expected to grow by 1.7% this year. The further recovery of the economy will be driven by investment, ever stronger private consumption and exports.

Developments in the euro area

·        According to the latest forecasts by the European Central Bank (ECB), both inflation and economic growth in the euro area are expected to be slightly higher next year than previously projected. Inflation in the euro area will be 2.1% this year, falling to 1.9% in 2026 (the September 2025 forecasts were 2.1% and 1.7% respectively).

·        The decline in inflation is driven by the impact of falling energy prices, which will continue into 2027, while in 2028 inflation will reach the medium-term inflation target of 2%.

·        This trajectory allowed the ECB Governing Council once again to keep the key euro interest rates unchanged on 18 December. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will remain at 2%, 2.15% and 2.4% respectively.

·        The ECB Governing Council will continue to take its interest rate decisions on the basis of its assessment of the inflation outlook and the risks to it, taking into account the incoming economic and financial data as well as the dynamics of underlying inflation and the strength of monetary policy transmission.

Developments in Latvia

Inflation: domestic price growth is being sustained by rising pay and persistently high food prices.

·        Inflation data have exceeded the June forecasts and wages are rising faster than previously expected, so Latvijas Banka has raised its inflation forecast for 2025 to 3.9%.

·        Over the next three years inflation is forecast at 3–4% (3.2% in 2026, 2.9% in 2027 and 3.6% in 2028). The June 2025 forecasts put inflation at 3.4% in 2025, 2.1% in 2026 and 2.8% in 2027.

·        The decisive factor pushing inflation up is stronger wage growth, together with the revision of administratively regulated tariffs and government decisions, including on increases in excise duties. In 2028 the introduction of the second emissions trading system (ETS2) will create additional pressure on prices.

Labour market: the supply of labour remains limited and faster wage growth is expected

·        Compared with the June forecast, wage growth is projected to be slightly higher. This will mainly be driven by the increase in the private sector wage bill, but public sector pay has also risen appreciably faster than expected. Household purchasing power will continue to strengthen as wages keep growing faster than inflation.

·        Demand for labour remains resilient. Over the medium term it will also be supported by the implementation of the major investment projects ahead (including Rail Baltica). Unemployment will be low throughout the forecast period, falling to 6.2% in 2028. This will be helped by improving employment expectations, a gradual recovery of the external environment and the continuing recovery of the economy.

GDP: the weak activity of recent years will give way to stronger growth

·        The GDP growth forecast has been revised upwards, with GDP expected to rise by 1.7% this year, mainly on the back of newly received data. The outlook further ahead has not changed substantially, but, following an adjustment to the implementation timetable of several large investment projects, faster growth is now expected in 2028 rather than in 2027.

·        As consumer confidence and household finances improve, private consumption is becoming stronger. Over the medium term this will mean more moderate accumulation of household savings.

·        Public and private investment is a stable mainstay of the economy, helped along by rapidly growing lending. Investment in development is driving change in manufacturing, raising production capacity.

·        In the years ahead the situation will improve as domestic and external demand strengthen. GDP is therefore expected to grow by 2.8% in 2026, by 2.9% in 2027 and by 3.2% in 2028. The June 2025 forecasts put GDP growth at 1.2% in 2025, 2.8% in 2026 and 3.2% in 2027.

·        The economic sentiment indicator, which reflects changes in business and consumer confidence, also points to a recovery of the economy. Within the business cycle, industry, retail and services, as well as consumer confidence, are currently in an upward phase.

·        As global uncertainty about the impact of tariffs eases and external demand recovers more quickly, stronger export growth is expected. Challenges, on the other hand, come from the rapid rise in labour costs in Latvia, as well as from military conflicts and the related uncertainty in the external environment.

Fiscal policy will remain supportive and will encourage consumption and investment

·        Consumption will be supported by the government's new decisions on additional spending for defence and demography and by pay rises for teachers.

·        The flow of public investment will increase towards the end of the period under the influence of military procurement and Rail Baltica.

·        The budget deficit will widen over the medium term, substantially affected by the rise in defence spending, particularly next year. The deficit is forecast to exceed 3% of GDP. The Council of the European Union has approved Latvia's application to activate the national escape clause, which allows it to depart from the previously set expenditure growth condition and to increase defence spending faster than previously projected.

·        Faster financing of defence spending will be met through borrowing, so government debt will keep rising in the years ahead and will slightly exceed 50% of GDP at the end of the forecast period.

Macroeconomic indicators: forecasts by Latvijas Banka

The forecasts were prepared using information available up to 3 December 2025 (for certain technical assumptions, up to 26 November).