In December 2025, the Bank of Latvia published its latest macroeconomic forecasts.
In December 2025, the Bank of Latvia published its latest macroeconomic forecasts. They indicate that further economic recovery will be driven by investments, as private consumption becomes increasingly stronger and exports gradually regain momentum.
Inflation and the labour market
In the medium term, inflation is estimated to be within 3–4% (in 2026 – 3.2%, in 2027 – 2.9% and in 2028 – 3.6%), which is higher than June 2025 forecasts. Inflation will mainly be determined by a more pronounced increase in wages, a review of administratively regulated tariffs and government decisions, including an increase in excise duties. In turn, in 2028, the implementation of ETS2 (the second European Union emissions trading system) will have an additional impact on inflation.
Compared to June 2025, wage growth is forecast to be slightly higher, driven by an increase in the private sector wage bill and a faster-than-expected increase in public sector wages. Consequently, the purchasing power of the population will continue to strengthen, as wages grow faster than inflation.
Labour demand will remain resilient, including due to upcoming large investment projects (including Rail Baltica). Unemployment will remain low during the forecast period, and could decrease to 6.2% in 2028, driven by improved employment, a gradual recovery in the external financial environment, and further economic recovery.
Stronger GDP growth is expected
The Bank of Latvia explains that economic growth in the medium term will be supported by security-enhancing investments, the inflow of EU funds, and increased lending. At the same time, the phase of faster growth – taking into account adjustments to the implementation schedules of certain large investment projects – has been shifted from 2027 to 2028.
Private consumption is becoming more resilient, as household purchasing power improves, which at the same time means more moderate savings in the medium term. Stable growth is being created by public and private investments, which are reinforced by rapidly growing lending. Investments in development contribute to structural changes in the manufacturing industry and an increase in production capacity.
Overall, with domestic and external demand rising, the Bank of Latvia forecasts GDP growth of 2.8% in 2026, 2.9% in 2027 and 3.2% in 2028. These recovery signals are also reinforced by improvements in industry, retail trade, services and consumer sentiment. At the same time, forecast risks are related to the rapid increase in labour costs, uncertainty caused by geopolitical conflicts and fluctuations in the external environment. However, as tariff uncertainty decreases and external demand recovers, stronger export dynamics are expected.
Fiscal policy trends
In conclusion, the Bank of Latvia indicates that fiscal policy will remain supportive during the forecast period, promoting domestic consumption and investment. Consumption growth will be supported by additional budget expenditures for defence and demography, as well as an increase in teacher salaries, while at the end of the period, investment flows will increase due to military supplies and the Rail Baltica project.
At the same time, the budget deficit will increase in the medium term (above 3% of GDP), which will be particularly affected by the increase in defence spending. The state exception clause approved by the EU Council will allow these expenditures to increase faster than previously set conditions. Defence financing will be achieved largely through borrowing, so public debt will continue to grow and slightly exceed 50% of GDP at the end of the period.
