Economist: Latvia's economy is accelerating, but inflation may rise sharply by year-end

Presenting Luminor bank's latest economic outlook, chief economist Pēteris Strautiņš said Latvia's economy is growing faster than expected in spring. The bank now forecasts GDP growth of 3% this year, up from a previous 2.5%, driven by exports, investment and private consumption. Growth is expected to slow to around 2.5% next year due to global energy and logistics disruptions, before potentially picking up again in 2028.

Inflation could top 5%

Strautiņš noted that inflation was surprisingly low earlier this year, but the impact of rising energy, gas and logistics costs — and gradually fertilizer costs — has yet to fully show up. He expects price growth to become more pronounced in October and November data, with annual inflation potentially exceeding 5% around the turn of the year, unless global commodity prices fall sharply. Service prices have already risen 5.3% this year through August, mainly due to labor costs, while food prices in August were 3% lower than a year earlier. At the same time, wage growth this year has been notably more moderate than in previous years, raising the risk that the improvement in household purchasing power seen since 2023 could stall, even as the overall labor market continues to improve.

Housing and industry

Private consumption is expected to grow about 3% this year, with retail turnover up 4.5%. Household lending growth has stabilized above 10%, mostly driven by mortgages, which Strautiņš describes as healthy rather than a sign of overheating. Commercial apartment construction has also picked up outside Riga, in cities such as Liepāja, Valmiera, Kuldīga and Smiltene. In manufacturing, engineering sectors have performed particularly well, boosted by rising European defense spending and investment in data centers.

Strautiņš considers Latvia's economy the most successful in the Baltics this year, while stressing that growth in neighboring countries also benefits Latvia. Looking ahead, EU funds, defense investment and the Rail Baltica project are expected to shape the economy, acting as both a stimulus and a burden on the state budget.