In the Latvian economy, the year 2024 has started with a slight decline, however, the recession is coming to an end and already in the second quarter of this year, positive growth in the Latvian economy is likely to resume. According to the preliminary GDP assessment published by the Central Statistics Office, in the first quarter of this year, excluding inflation, Latvia’s GDP decreased by 0.2% compared to the previous year, while compared to the last quarter of last year, Latvia’s GDP increased by 0.8%. Within one quarter, this is the largest increase in the Latvian economy since the beginning of 2022.
In recent months, the Latvian economy has seen more and more positive signals that growth could resume after two years of stagnation. Inflation has fallen from over 20% at the beginning of last year to 1% in March this year, business and consumer sentiment is no longer deteriorating, and has even improved slightly in recent months, while unemployment is low and wages continue to grow rapidly. This gives a positive impetus to consumption, and in March retail sales turnover in Latvia increased by 2.8%, which is the fastest retail sales growth since the fall of 2022, and financial markets still expect the first ECB interest rate cut already in June.
The increase in consumption is also confirmed by the payment card data published by the Bank of Latvia, but positive trends are visible not only in trade. In recent months, the economic situation has been improving in our export markets as well – in the eurozone, the mood of entrepreneurs reached the highest level in the last 11 months in April, the stocks of finished goods in industry in Europe continue to gradually decrease and new orders in industry are starting to increase in Latvia, which is a positive signal for exporters.
After two years of stagnation in the Latvian economy, there is now, in my opinion, a basis for cautious optimism and this year in the economy will most likely be better than the previous one, however the recovery will be moderate and uneven. In industry, there are reasonable expectations of a cyclical increase in demand, but this is rather related to the need to replenish warehouse stocks, and it is still too early to talk about sustainable growth.
Meanwhile, despite financial market expectations for a rate cut, interest rates in the eurozone remain high, holding back lending, and construction in the eurozone is likely to be in recession this year. Likewise, last year’s drop in output in Latvian industry and trade was compensated by growth in service industries, but in the first quarter of this year, the output of service industries in Latvia has decreased by 1.1% compared to last year. The number of tourists in Latvia continues to grow, but it still lags behind the 2019 level.
Also, in the second half of last year, the export of IT and business services in Latvia slightly decreased, which is only the third decrease in the last 20 years. At the same time, there are still many risks in the world economy and living in the shadow of war certainly does not help investments either, therefore, according to my forecasts, Latvia’s economy could only grow by about 2% this year.
