Macroeconomic Projections Report. June 2026
- Global uncertainty remains high. At the beginning of this year, it appeared to be on a downward trajectory. However, following the outbreak of hostilities involving the United States, Israel, and Iran, this trend has reversed. A ceasefire alone provides little benefit to the global economy if maritime traffic through the Strait of Hormuz is not resumed. The availability of energy commodities has declined, while their prices have risen. At the same time, peace negotiations concerning Ukraine have lost momentum and, pending a resolution of the conflict in the Middle East, have been pushed into the background.
- Heightened geopolitical uncertainty and rising energy prices have weakened the outlook for external demand, weighing on growth and demand prospects in Latvia's main trading partners. Although economic activity in the Baltic States has remained relatively resilient, the weaker outlook for Germany and the EU as a whole continues to constrain Latvia's export growth prospects.
- Since the beginning of the year, the Governing Council of the ECB has increased the key interest rates by 25 basis points. The energy supply shock caused by the war in the Middle East, together with the resulting increase in energy prices, has led to tighter financial conditions.
- Despite heightened geopolitical uncertainty and higher market interest rates, the availability of financing in Latvia remains favourable in both the capital market and the banking sector. The loan portfolio continues to expand in both the corporate and household sectors, with corporate lending increasing across a broad range of industries.
- The budget deficit for this year is projected to be slightly above 3% of GDP, with the assessment broadly unchanged from previous projections. Legislative changes aimed at maintaining high defence expenditure also in the future, together with sizeable deliveries of military equipment in 2028, are expected to increase the projected budget deficit, bringing it close to 5% of GDP. Rising budget expenditure in the coming years will increase borrowing needs, and the government debt ratio is expected to exceed 51% of GDP over the medium term.
- The war in the Middle East is weighing on both domestic and external demand, resulting in slower growth in aggregate demand than previously projected. At the same time, investments in the production of military and dual-use goods are becoming an increasingly important driver of growth. This allows for a moderately optimistic outlook for future economic developments.
- The deterioration in the geopolitical environment is delaying a stronger recovery in external demand and prompting consumers to remain cautious. This weakens growth prospects in both export- and domestic consumption-oriented sectors.
- Labour supply is not increasing significantly, but labour demand is easing somewhat in the context of weaker economic growth. Nonetheless, the labour market remains tight, and unemployment will continue declining over the projection horizon, albeit at a slower pace than previously anticipated.
- Wage growth is expected to remain strong, although it will be moderated somewhat by economic uncertainty and a slight easing in labour demand.
- The inflation projection has been revised upwards for both this year and next, primarily reflecting higher global energy prices amid the war in the Middle East. This impact was mitigated by lower global food commodity prices and more moderate wage growth. Inflation is expected to approach 4% over the projection horizon, exceeding that level in some months.
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