OP Corporate Bank plc revises GDP growth forecast for this year and foresees gradual recovery of economy in Latvia

Economic stabilisation

"Latvia’s economy has entered a gradual recovery phase and is expected to continue to grow. Although, the growth in the second half of the year will be slow, we expect it to be much stronger during the next year. Demand in export markets remains relatively weak as in all Baltic states, but the situation should change. If positive changes in export will support the growth of the country’s economy next year, public spending and investments are expected to support the economy still this year. Meanwhile, sentiment indicators are already improving, and this improvement should reflect in private consumptions," explains Joona Widgren, Senior Economist at OP Financial Group.

The bank has revised and lowered its GDP growth forecast for Latvia, predicting a 1.1% increase this year, which is 0.3% less than predicted in the previous quarter. According to expert, economy in Latvia has stagnated for the last 1.5 years, but during 2025 it will get better, and already now all Baltic countries’ economies are growing near the potential growth rate.

GDP growth forecast for next year remains unchanged, expecting a 3% increase.

The bank’s economists anticipate that inflation in Latvia this year will be slower than previously predicted, reaching 1.5%. Next year, this figure is expected to rise to 2%, the lowest among the Baltic countries.

Less uncertainty for businesses

Good news is anticipated from the European Central Bank (ECB) Governing Council meeting on September 12th, where a second reduction of the base interest rates by 25 basis points to 3.5% is expected. OP’s economists predict that the ECB will make another such cut in December this year.

"The main reason that slowed down investments in the private sector was the high level of uncertainty in the market, related not only to geopolitical risks, but also to inflation and high interest rates. Many companies are unwilling to borrow at high interest rates and prefer to wait or make cautious investments using only their own equity. Further interest cuts and inflation rate, being at its lowest since 2021, will create more attractive environment for investors," says Elmārs Prikšāns, General Manager of OP Corporate Bank plc Latvian Branch.

Due to inflation and high costs, investment in the construction of residential buildings had also decreased in recent years. Uncertainties about the purchasing power of consumers also affected the development of the industry, but OP Financial Group experts predict that the situation will gradually improve, and construction investments will increase.

Business sentiment indicators in all three countries are similar and close to the long-term average, but they are expected to increase slightly already at the end of this year, being currently the weak link in all Baltic countries, are predicted to grow.

Labour market and consumer confidence in Latvia - with positive dynamics 

The unemployment rate in Latvia is the lowest among the Baltic states, at approximately 5%, reaching almost the lowest level in the last two decades. In Lithuania, it has slightly decreased and currently stands at around 8%, while in Estonia it remains at 7.5%.

It’s expected that the downward trend in Latvia will support households’ purchasing power and private consumption will improve already this year.

Consumer confidence indicators in all Baltic countries differ. While in Lithuania consumer confidence is the highest among all three countries, in Estonia consumer confidence is very low, and it’s due to low expectations towards country’s economy in the near future.

With inflation rate being low, consumer confidence in Latvia has quite a positive development since 2023, and this should reflect in private consumption in the near future. Another aspect is wages that continue to grow. If in 2022 and 2023 due to inflation, real wages weren’t growing, now with inflation rate being lower, nominal wages continue to grow and already later this year it will increase private consumption and boost GDP thus supporting economy growth next year.

The situation in the housing market is also gradually stabilizing. After the Covid crisis, the rapid rise in housing prices in the Baltic States has calmed down, and it is expected that the further increase of the prices will at a normal pace – forecastable and stable.

Different growth prospects among the Baltic states

OP Financial Group experts forecast different growth prospects for the Baltic States. A 2% GDP growth is forecast for Lithuania this year, and a 3% growth next year, which is also similar to the forecast for Latvia.

However, the situation is different in Estonia — this year it is expected to see a 0.5% contraction, followed by a projected 3.5% growth next year, the highest among the Baltic states.

According to Joona Widgren, Estonia’s forecasts do not include potential tightening of fiscal policy and tax increases. If these measures are implemented, they are likely to reduce next year’s economic growth by one percentage point to 2.5%. The increase in income tax is expected to particularly affect household consumption.

Although in Estonia the inflation is still too high, in general inflation spikes have melted in the Baltic countries. In Lithuania, it is expected to be 2% this year, higher than in Latvia, and to rise to 3% next year. Meanwhile, inflation in Estonia will be higher than previously forecasted in June, reaching 3.8% this year, but is expected to decrease to 2.5% next year.

About OP Corporate Bank plc Latvian Branch

OP Corporate Bank plc is the central bank of OP Financial Group, Finland's largest financial services provider. We started our operations in Latvia in 2012, and we are currently the fifth largest bank in Latvia in terms of the volume of corporate loans issued. We provide financial services to the leading companies in Latvia and play an important role in the long-term development of the country and the entire region.