Latvia Economic Forecast

The economy failed to live up to market expectations in Q3, posting a second consecutive year-on-year decline. Absent a detailed breakdown, the contraction was driven by a drop in services sector activity, as consumer sentiment remained pessimistic. In addition, merchandise exports shrank more in July–September than in Q2, pointing to a downbeat contribution from the external sector. More positively, the downturn in the producing sectors softened from Q2, supporting Q3’s smaller decline. In Q4, the economy should stage a modest recovery as cooling inflation outweighs pressure on domestic demand from elevated interest rates. In other news, in November, Parliament voted in favor of slashing mortgage rates for a year. The policy, which could be extended, should support the economy and the housing market but will likely dent bank profits.

Inflation eased to 2.3% in October (September: 3.6%) on a sharper drop in transport prices and lower food price growth. Inflation should average less than a third of 2023’s rate in 2024, curbed by this year’s monetary policy tightening and lower commodity prices. Spikes in energy costs and stronger-than-expected domestic demand pose upside risks.