Finnish economist forecasts the fastest economic growth in the Baltics for Latvia in 2027

The conflict in the Middle East remains one of the main risks to the global economy. Oil prices have fluctuated significantly during the summer depending on developments in the conflict and expectations regarding the opening of the Strait of Hormuz. The market currently expects the strait to be gradually reopened during the autumn and oil prices to continue declining.

“Despite the large fluctuations, oil prices have remained below the levels seen in the spring. The global economy is generally regaining momentum, and growth in global trade remains strong. However, the conflict in the Middle East continues to create significant uncertainty. If the Strait of Hormuz remains closed for an extended period, it could substantially worsen the outlook for the global economy,” says Joona Widgrén, Senior Economist at Finland’s leading financial group OP Pohjola.

Inflation in the major economies is gradually moving closer to central bank targets, and core inflation in the euro area has so far remained stable. However, the conflict in the Middle East and fluctuations in energy prices continue to create elevated inflation risks. This is reflected in financial markets through expectations of higher interest rates. Financial markets currently anticipate one further European Central Bank (ECB) interest rate increase this year and two in 2027, because of which the 12-month Euribor could exceed 3% next year.

“Although the business environment continues to be affected by changing global conditions, Latvian companies continue to implement development projects and seek new growth opportunities. We see sustained interest in obtaining financing for investment projects across various sectors, which will provide a foundation for Latvia’s economic growth in the years ahead,” says Elmārs Prikšāns, General Manager of OP Corporate Bank plc Latvia Branch.

Latvia’s economy surprises with strong growth

Despite high inflation and a challenging external environment, Latvia’s economic growth in the first half of the year has been broad-based, and second-quarter results exceeded economists’ expectations. J. Widgrén notes that Latvia’s growth this year could exceed the currently forecast 2.5% if global trade growth remains strong and private consumption in Latvia recovers more rapidly.

One of the positive signals in Latvia’s economy is strong growth in manufacturing. Economic development continues to be supported by domestic demand, both private consumption and public investment. Although higher defence spending increases the fiscal deficit, expansionary fiscal policy continues to support economic growth in the country.

Inflation in Latvia remains relatively high. However, compared with the previous economic review, the OP Pohjola economist has reduced the inflation forecast for 2026 from 4% to 3.5%, while inflation could decline to 2.5% in 2027.

Growth models of the Baltic states are beginning to diverge

Although all three Baltic economies continue to grow, the drivers of growth and future dynamics are becoming increasingly different. Lithuania is experiencing the fastest growth in the Baltics this year, largely driven by a temporary increase in private consumption resulting from pension reform. As this effect fades, economic growth is forecast to slow in 2027.

In Latvia, growth is supported by both private and public domestic demand, as well as expansionary fiscal policy. Estonia’s economy is recovering after a weaker period, while private consumption is being supported by rising household incomes and tax changes. Estonia’s growth could also receive additional support from Finland’s economic recovery. As Finland is an important export market for Estonia, particularly in investment and construction sectors, stronger demand in Finland may also boost Estonian exports.

Significant differences are also evident in the GDP forecasts for the Baltic states. Latvia’s GDP is forecast to grow by 2.5% this year, with growth accelerating to 3.0% in 2027. Estonia’s economic growth is forecast at 2.3% and 2.5% respectively. Lithuania is expected to record the fastest growth in the Baltics this year at 3.2%, but growth could slow to 2.0% in 2027. Consequently, Latvia is forecast to achieve the fastest growth among the Baltic states in 2027.

At the same time, all three Baltic states share common trends. Labour markets remain stable, but consumer sentiment is weak and private consumption continues to lag behind the long-term trend.

“We currently see a contradiction in the Baltic economies. Labour markets remain strong, and wages continue to grow, yet this has not been fully reflected in consumer sentiment and private consumption. Consumers remain cautious, and private consumption is still below the long-term trend. This means there is still potential for consumption growth in the Baltic economies if household confidence improves,” explains J. Widgrén.

The Baltic economies are relatively energy-intensive, and therefore fluctuations in energy prices affect them more strongly than, for example, the Nordic economies. This means that developments in the Middle East conflict and potential fluctuations in oil prices represent a particularly significant risk for the Baltic states.

The global economy is regaining growth momentum

The global economy is regaining momentum, and major economies are moving closer to their average growth rates. Growth in the United States is returning to its normal average pace, the euro area economy is expanding close to its potential growth rate, while stimulus measures in China are helping growth return to its target range.

J. Widgrén forecasts that global GDP will grow by 2.8% in 2026 and by 3.2% in 2027. Economic growth this year is forecast at 2.1% in the United States, 0.8% in the euro area, and 4.5% in China.

Although most forecasters expected almost zero growth in global trade at the beginning of the year, it is currently growing much faster than economists anticipated, which positively affects small open economies such as the Baltic states.