Latvia Economic Forecast

GDP shrank less than initially estimated on an annual basis in Q2. Still, the deterioration was broad-based: Private spending fell at the steepest rate in more than two years, growth in both public consumption and fixed investment eased, and the decline in exports nearly doubled from Q1. In Q3, our panel expects the economy to rebound, with cooling inflation likely supporting spending. That said, industrial output fell at the steepest pace in six months in July, retail sales also slumped at a steeper pace at the outset of Q3, and the ECB hiked interest rates in the quarter. In politics, following August’s government collapse and the resignation of Prime Minister Karins, Parliament approved a new broad coalition government in September. Led by former welfare minister Evika Silina, the new government pledges to raise defense spending by 2027 and expand human rights protections.

Harmonized inflation fell to 5.6% in August from 6.6% in July, marking a near two-year low. The moderation was due to softer price growth for housing and utilities. Average inflation in 2023 will nearly halve from 2022’s peak on higher interest rates and lower commodity prices year on year. Energy price spikes and stronger nominal wage growth than in 2022 are upside risks.