This year, Latvia’s economic growth is projected to be sluggish due to weak demand from the main trade partners. Apparently, lower inflation facilitates consumption, while government spending boosts overall investment growth. But external demand has weakened. Consequently, the short-term GDP growth forecast for 2024 has been revised to 1.8%, down from 2.0% projected in the previous forecast.

The GDP growth forecasts for 2025 and 2026 remain unchanged compared to last December– at 3.6 % and 3.8 % respectively. With the external economic environment supposedly improving, exports are expected to expand.

Given the weakness of external demand, the activity in the manufacturing and transport sectors is expected to be lower in the short term. Retail trade has exhibited more inertia as consumer sentiment is only apparently improving. The outlook for the construction sector growth has remained broadly unchanged: the sector will be supported by EU funding and a gradual expansion of investment in the private sector.

The short-term inflation forecast has been revised slightly downwards due to lower global gas prices. As a result, the March forecast of Latvia’s average inflation predicts 1.5% for 2024, 1.9% for 2025 and 1.8% for 2026. However, over the medium term, the persistent rise in wages will further influence inflation, preventing the core (inflation excluding energy and food prices) from decreasing as rapidly as the headline.

In fact, there have been no revisions to the wage forecast, with wages remaining above their long-term averages at 8.0% for 2024 and at 7.9% and 7.6% for 2025 and 2026 respectively. Rising labor costs present risks to Latvia’s economic growth and the resilience of competitiveness. And, combined with the weaker economic activity, unemployment has been revised upwards to 6.5% and 6.3% for 2024 and 2025 respectively.

Indeed, it looks like optimism lies only on the news header.