Litauen
Estland
Russland
Deutschland
Schweden
Polen
NiederlandeGradual return to growth
2025 is set to be a year of recovery, paving the way for sustained growth against a backdrop of rebounding domestic demand and a gradual improvement in the external environment. A resilient job market (unemployment rate of 5.7% in February 2025) will support a solid rise in real wages, which will continue to fuel household consumption. The Latvian economy, the fifth-smallest of the EU, will nevertheless continue to incur stronger inflationary pressures than its partners: inflation reached 3.7% in February 2025 compared with the eurozone average of 2.3% due to price rigidity in services, ongoing partially-controlled energy dependency and strong nominal wage growth. However, inflation is expected to ease by the end of 2025.
The decline in exports and the sharp contraction in investment in 2024 should be reversed in 2025. The upturn in the economies of Latvia’s main trading partners (the Baltic states, Germany and Sweden) should boost foreign demand, particularly for timber, chemical and pharmaceutical products, and IT services. At the same time, lower interest rates will ease the pressure on investment. The disbursement of EUR 1.8 billion (5.5% of GDP) under NextGenerationEU as part of the National Recovery and Resilience Plan (NRRP) will also help accelerate infrastructure, energy transition and technological modernisation projects. Despite the difficulties encountered in 2024, the large-scale Rail Baltica project which integrates the Baltic states into the European rail network will play a central role, not only as a catalyst for growth, but also as a vector of support for several key sectors, including construction, transport, materials and logistics. At the same time, investment in private wind farms and LNG port infrastructure will enhance energy security and stimulate local production. These trends will also help develop the digital and IT sectors.
Public accounts weighed down by military spending
The budget deficit is set to widen in 2025 despite an upturn in activity that will support tax revenues, notably through VAT and income tax receipts. At the same time, the ongoing rise in public spending, particularly for the defence, energy, health and education sectors, will weigh heavily. Latvia plans to increase its military spending to 3.5% of GDP, i.e., above the NATO target of 2%. In addition, pay rises in the public sector and the acceleration of infrastructure projects such as Rail Baltica, the cost of which has skyrocketed (estimated at 22.6% of GDP in 2024, compared with 4.6% of GDP initially), will further increase the budgetary burden. The 2025 budget also includes tax increases – income tax reforms will be implemented as well as limited efforts to combat tax evasion – but spending pressures are expected to outweigh additional revenues. Against this backdrop, public debt will continue to rise, albeit at a relatively moderate level.
The current account will remain in deficit in 2025, but is expected to be slightly better than in 2024 thanks to a recovery in goods and services exports driven by European demand. The country remains a net importer of goods, notably energy, capital goods and raw materials. The services balance will remain in surplus overall, driven by transport (mainly road haulage), logistics and IT. The deficit will be financed mainly by borrowing, and a slight rebound in FDI is expected, directed towards green infrastructure and digital services. The structure of external debt will remain stable (98% of GDP, of which 60% for the private sector), essentially in euros and mostly subscribed by institutional investors (mainly European). Refinancing risk will therefore be contained, assuming that fiscal credibility is maintained.
A persistently tense political and geopolitical environment
Since 2023, Latvia has been led by Evika Sili?a, the Prime Minister and member of the centrist New Unity party (JV). She governs with a three-party coalition comprising JV, the Greens and Farmers (ZZS) and the Progressives (PRO). The alliance, which holds a slender majority (52 seats out of 100), is precariously balanced and remains exposed to internal tensions in the run-up to the October 2026 parliamentary elections. Despite significant ideological differences, the partners agree on the country's strategic priorities, such as support for Ukraine, European integration and energy security. President Edgars Rink?vi?s, who was elected in 2023, has an essentially honorary role, but remains a consensual figure.
On the social front, tensions are moderate but persistent. Territorial inequalities, pressure on public services and shortages of skilled labour are fuelling discontent. The healthcare sector remains under pressure, with regular union demands, while pension reform could rekindle frustrations over the lengthening of the contribution period to 20 years and the raising of the retirement age to 65.
Internationally, Latvia maintains a hard line on Russia and Belarus. It remains firmly aligned with the EU and NATO positions advocating stronger military deterrence and sanctions against Moscow. Relations with its Baltic neighbours remain solid, underpinned by joint structural projects such as Rail Baltica and the disconnection from the Russian electricity grid and connection to the European network (effective since February 2025). Internally, the policy of linguistic assimilation and the reduction of Russian-speaking media space remain sensitive issues, particularly with regard to the Russian-speaking minority, which makes up around a third of the population.
