In the latest macro developments report issued by the Bank of Latvia, the inflation forecast has been revised downwards for the entire projection horizon: to 10.0% for 2023, to 2.7% for 2024, and 2.6% for 2025. Reportedly, lower energy and food prices and assumptions about their developments allow a downward revision of the inflation forecast. But let’s forget overnight fix.

Inflation in Latvia remains high, as it was the highest among the euro area countries in February. Lower energy prices are also believed to have a favorable effect on core inflation by reducing production costs of goods and costs of providing services. Nevertheless, it will remain relatively high. In fact, although the impact of the wage increase on core inflation has so far been assessed as minor, a stable rise in wages and subsequent pressure on core inflation are projected in the context of labor shortage.

The recession experienced by Latvia’s economy in 2022 was shallow. However, the end of the year came as a surprise with a resilient consumption increase: owing to the GDP performance at the end of the previous year, the GDP forecast for 2023 constitutes a 0.5% rise instead of the previously estimated fall. In turn, it reduces the growth in the coming years: to 3.7% in 2024 and to 3.3% in 2025.

Wage growth was moderate, and this year, it will be supported by an increase in the minimum wage. However, the elevated inflation will continue to reduce the population’s purchasing power.

At the same time, the investment growth prospects have not improved, taking into account the sluggish absorption of EU funds as well as the elevated uncertainty and rising interest rates weakening the slow lending. With the absorption of EU funds becoming more active and input prices normalizing, 2024–2025 is expected to witness economic growth above 3% (3.7% and 3.3% respectively).

The most significant risks to Latvia’s economic growth involve the persistently low investment level and deteriorating competitiveness. Due to the accumulated input costs, exports could lag behind foreign demand. In the long term, investment is a precondition for a competitive economy.