RIGA, Jun 16 (LETA) - The Bank of Latvia has lowered its forecast for Latvia’s gross domestic product (GDP) growth this year from the previously projected 2.8 percent to 2 percent, said Uldis Rutkaste, Head of the Monetary Policy Department at the Bank of Latvia, on Tuesday while presenting the latest economic forecasts.

At the same time, the economic growth forecast for 2027 has been lowered from the 2.9 percent projected last December to 2.4 percent, while the GDP growth forecast for 2028 has been lowered from 3.2 percent to 3 percent.

The Bank of Latvia noted that external shocks are dampening the prospects for economic growth.

According to the central bank, external shocks are weakening external demand and increasing caution among consumers and investors. Meanwhile, investments in the production of military and dual-use goods, as well as the implementation of other significant government projects, are an increasingly important pillar of growth, allowing for the maintenance of a moderate growth forecast. Consequently, GDP growth is expected to be slower in the coming years, though still positive.

Similarly, the Bank of Latvia notes that the ongoing war in the Middle East are driving up costs for transportation, fuel, packaging, mineral fertilizers, and other items. Currently, farmers, producers, traders, and other economic players are largely absorbing the cost increases through profit margins and by drawing on previously stockpiled intermediate goods. Thus, part of the cost increase will only materialize as a real burden during the next phase of raw material procurement.

According to the Bank of Latvia, these previously built-up reserves will cushion new waves of caution, helping to maintain moderate growth in private consumption. Consequently, the faster recovery in consumption previously forecast must once again be postponed, primarily due to geopolitical turmoil.

The Bank of Latvia also notes that the backdrop of uncertainty is slowing investment growth; however, the high level of investment achieved last year will generally be maintained and will even strengthen in 2028. Several factors will help maintain this relative stability - investments in the production of military goods, a surge in housing construction, and major government investment plans and defense spending.

The Bank of Latvia also notes that the labor market remains tight, although demand for labor is declining slightly due to weaker economic growth.

The unemployment forecast has been raised slightly. The labor supply is not increasing significantly, as the rise in economic activity among the population only partially offsets the effects of an aging society and migration flows. At the same time, labor demand will decline only slightly, so the labor market will remain tight and unemployment will continue to fall over the forecast period.

Wage growth, however, will remain strong, though it is projected to be slightly slower than estimated in December. This will be driven by weaker economic growth and more moderate labor demand. At the same time, higher inflation will limit the slowdown in wage growth, according to the Bank of Latvia.

The central bank forecasts that unemployment in Latvia will stand at 6.7 percent of the economically active population by the end of 2026, 6.5 percent by the end of 2027, and 6.3 percent of the economically active population by the end of 2028.

Meanwhile, gross wage growth is projected to be 7.4 percent in 2026, 7.3 percent in 2027, and 7.5 percent in 2028.