Latvia's Central Bank Lowers GDP Growth Forecasts; Consumption Recovery Postponed

The Bank of Latvia released updated economic forecasts on Tuesday, lowering its gross domestic product (GDP) growth expectations for several years. The forecast for this year was reduced from 2.8% to 2%, while the 2027 projection was cut from 2.9% to 2.4%, and the 2028 forecast from 3.2% to 3%.

The central bank noted that external shocks, including geopolitical tensions, are weakening external demand and increasing caution among consumers and investors. Despite this, investments in military and dual-use goods production, as well as other significant state projects, help maintain moderate growth.

Due to hostilities in the Middle East, costs for transport, fuel, packaging, and fertilizers have risen. So far, these increases are largely being absorbed by businesses through lower profit margins and use of previously stocked raw materials. However, part of the burden will materialize in the next procurement cycle. Household savings accumulated earlier will help cushion new waves of caution, thus sustaining moderate private consumption growth. The previously expected stronger consumption recovery is again being postponed, mainly due to geopolitical factors.

Investment growth is slowed by uncertainty, but the high investment level achieved last year will persist and even strengthen by 2028. This is supported by investments in military production, housing construction activity, and large government investment projects, including defense spending.

The labor market remains tight, although weaker economic growth is slightly reducing labor demand. The unemployment forecast has been raised slightly. Labor supply is not increasing significantly, as aging and migration only partially offset rising economic activity. Unemployment is projected at 6.7% by end-2026, 6.5% by end-2027, and 6.3% by end-2028.

Wage growth will remain strong but slightly slower than forecast in December — 7.4% in 2026, 7.3% in 2027, and 7.5% in 2028. The slower wage increase is due to weaker economic growth and more moderate labor demand, while higher inflation prevents a faster slowdown in wage growth.