Finance Ministry lowers Latvia's GDP growth forecast for 2026 and 2027 to 2%

The Ministry of Finance (MoF) has reduced Latvia's gross domestic product (GDP) growth forecast for 2026 and 2027 to 2%, the ministry informed LETA. The projections were updated considering the latest economic trends and geopolitical situation, including the escalation of conflict in the Persian Gulf, which has led to a sharp rise in oil and energy prices, supply chain disruptions, and increased uncertainty.

Compared to the February forecast, the growth projection for this year was lowered by 0.6 percentage points, and for 2027 by 0.7 percentage points. By the end of the forecast period, economic growth is expected to return to the previously projected 2.5%, according to the MoF. Meanwhile, the inflation forecast for this year and next was raised by 0.7 percentage points to 3.6% and 3.3% respectively, stabilizing at 2.3% by the end of the period.

Employment indicators show no major changes – unemployment is projected at 6.6% in 2026, with a further decline, while the number of employed remains stable with a slight downward trend. Wage growth has been adjusted due to a faster-than-expected slowdown in the first quarter. In 2026, the average monthly gross wage is expected to rise by 5.5% to €1,915, with similar growth in the medium term.

The budget deficit for 2026 is forecast at 2.9% of GDP, slightly lower than previously, mainly due to higher non-tax revenue including dividends. However, under unchanged policies, the deficit will widen in the medium term: 4.2% in 2027, 5.4% in 2028, 4.3% in 2029, and 3.5% in 2030. This is driven by lower tax revenue projections due to weaker growth and higher social spending, especially pensions. Defense spending from 2027 is set at 5% of GDP.

After the expiry of temporary tax measures, revenue as a share of GDP will decline from 43.6% in 2025 to 37.9% in 2030. Expenditure will fall more slowly, from 46.1% to 41.4%, mainly due to social benefits and defense. Government debt is projected near 48% of GDP by end-2026 and 54% by end-2030 under unchanged policies.

The fiscal space in the medium term will be negative: €-28 million in 2027, €-279.1 million in 2028, €-237.8 million in 2029, and €-936.2 million in 2030. The MoF already indicates that decisions on spending cuts and revenue increases will be needed to comply with EU and national fiscal rules. Forecasts will be updated in autumn when preparing the 2027 budget.