Despite ongoing geopolitical uncertainty, global and Latvian economies demonstrated surprising resilience in 2025. A year marked by a shift in U.S. trade policy under President Trump – initially causing market turbulence – ultimately saw both U.S. and European stock indices post significant gains, with Germany’s DAX exceeding 20%. Economists are now analyzing the factors behind this performance, from the tempered impact of anticipated tariffs to robust investment in emerging technologies like artificial intelligence, as well as positive developments within the Latvian economy.
Global economists are reflecting on a year of significant shifts and surprises in both the world and Latvian economies.
2025 proved to be a volatile year for the global economy, largely shaped by a shift in U.S. policy. The year saw unexpected market reactions to policy announcements and a surprising rebound in equity values.
“The policies of the U.S. President Trump, including announcements regarding tariffs, marked a return to the past,” said Līva Zorgenfreija, Chief Economist at Swedbank Latvia. “After several decades of moving towards greater international cooperation and freer global trade, this year saw a return to bilateral negotiations, higher trade barriers, and protectionism. The chaotic policies and tariff announcements from the U.S. President led to a sharp decline in the stock market in April. However, by the end of the year, stock markets had not only recovered but also reached new highs.”
The U.S. S&P 500 stock market index rose by 14% since the beginning of the year, with a similar increase also seen in the European STOXX 600. Germany’s DAX achieved a gain of more than 20%, even considering it largely stalled in the second half of the year. This performance underscores the resilience of global equity markets despite geopolitical headwinds.
The acronym “TACO,” or Trump always chickens out, became popular. “Indeed, in 2025, it was repeatedly proven that the announcements of the U.S. President tended to be louder than actual action – especially regarding China. China clearly stated in 2025 that it would not allow the U.S. President to intimidate it. When China announced restrictions on the export of rare earth metals, it became clear to everyone that China had become indispensable to the rest of the world,” Zorgenfreija explained. China dominates the rare earth metal supply chain, accounting for 60-70% of rare earth metal mining and more than 90% of their processing. Rare earth metals are essential components in modern technologies – smartphones, cars, manufacturing equipment, and defense technologies. “This card is very powerful, and with its help, China was relatively easily able to cool the U.S. President’s desire to significantly increase tariffs on Chinese exports to the U.S.,” the Swedbank Latvia Chief Economist noted.
Relying on TACO, financial markets developed a knack for not taking the U.S. President’s announcements too seriously throughout the year. This helped the stock market recover. Another significant driver of the stock market’s rise was the advance of artificial intelligence (AI) and hopes for increased productivity related to AI. Some analysts believe the stock market shows signs of a bubble.
“After the tariff chaos in April, economists rushed to lower their forecasts for global economic growth. However, it is now clear that most economies managed to show unexpectedly good growth in 2025 overall. This was because tariffs were not as high as initially threatened, and because the impact of some tariffs will only be seen later. Growth was also driven by other factors. For example, the U.S. economy was largely supported by massive investments in data centers related to AI, which boosted both construction, investment in equipment, and software,” the economist commented.
Meanwhile, in Europe, economies in 2025 were supported by a resilient labor market and a decline in interest rates set by the ECB. “Loan interest rates fell significantly, promoting lending also in Latvia. As a result, we saw household and corporate loan portfolios grow at the fastest pace in more than 15 years. The Latvian economy grew by 1.7% in the first three quarters of 2025 overall. This means that a gradual recovery from the stagnation period caused by the full-scale Russian invasion of Ukraine is visible. The Latvian economy was supported by investment and a construction boom, largely related to the public sector. However, processing industry, the housing market, and even long-dormant private consumption are also growing strongly,” Zorgenfreija commented on the Latvian economy in 2025.
From Liberation Day to Waves of Enthusiasm
Looking back at the events of this year globally, one event stands out – the so-called Liberation Day or the start of the most dramatic phase of the global trade wars in April. Initially, a large drop in stock markets, concerns about a slowdown in the global economy, but this was gradually replaced by waves of great enthusiasm, noted Pēteris Strautiņš, an economist at Luminor bank.
For the first time, the market capitalization of a company (Nvidia) exceeded $4 trillion. This was a fantastic year for several U.S. technology giants, but it also raises concerns about a possible stock market correction, the economist said.
The U.S. central bank lowered interest rates three times. “Nothing special, it happens, but the third step down was taken, expressing political pressure at a time when the justification for such action is not entirely convincing. This could be a sign of an era where monetary policy may be subject to the president’s will, creating risks of overheating the economy, increased inflation, and currency market instability. Concerns about this led to a very rapid rise in the price of gold,” Strautiņš commented.
China’s new five-year plan (2026 – 2030), which envisages further strengthening of its leading position in key technology areas, the implementation of ambitious investment plans that could exacerbate the problem of overcapacity, deflation in China itself, and unbalanced trade relations with the rest of the world.
Commodity prices fell for the most part in 2025, with oil, grains, and several other food products becoming cheaper, impacting the consumer basket in Latvia as well: butter, cocoa, orange juice. The price of liquefied gas is also gradually falling. “This promises significantly lower inflation next year, until further notice. However, the S&P GSCI industrial metals index rose by 24% this year, driven by huge demand in data center construction and renewable energy,” the economist said.
Meanwhile, Latvia’s GDP growth in the third quarter reached 2.5% per year. “This figure is not outstanding, but could be a sign of a cyclical upturn in the economy. Favorable conditions are being created for both consumption (real wage growth, improved consumer sentiment, household lending), investment (EU fund cycle, lending) and exports (a fairly favorable mosaic of demand market forecasts),” Strautiņš noted.
Registered unemployment in September and October was below 5% in all regions except Latgale – something that has never been experienced before. There are a number of processes that reduce the unemployment rate in the long term, which can be achieved without creating dramatic problems with inflation – changes in the population distribution in the country, increasing levels of education and skills. Unfortunately, the decline in the population is also one of the factors, the expert said.
“Speaking of developments in industries – the processing industry came out of recession with momentum. Volumes are growing, the industry is modernizing. A noteworthy event was the order for interceptor drones placed by the Belgian army with the Latvian company Origin Robotics, the exact amount is unknown, but it is certainly an eight-digit number – tens of millions or more. The implementation of several large investment projects, for example, has started production at Verems, a subsidiary of Latvijas Finieris.
Can we say that the construction of the Rail Baltica main line has begun? Well, at least the preparations for it are taking place, the manifestations in nature are visible,” the Luminor bank economist commented.
Taxes on capital gains and Rīgas ūdens debut on the stock exchange
Meanwhile, Oļegs Andrejevs, Head of Savings, Investment and Pension Offer at SEB banka, notes that 2025 in the Latvian economy was marked by fundamental changes.
“On the one hand, the government, by implementing labor tax reform, made significant changes to capital taxes – the personal income tax rate on capital gains and dividends was increased from 20% to 25.5%. On the other hand, the local capital market experienced a positive historical event – SIA Rīgas ūdens became the first municipal company to successfully launch on the Nasdaq Riga exchange. By issuing green bonds, the company attracted funding in the public market, and the high demand demonstrated investors’ willingness to invest in local infrastructure companies,” the expert said.
In the technology world, the year began with a shock – in January, China’s DeepSeek demonstrated the ability to create high-level artificial intelligence (AI) at negligible costs compared to U.S. giants. This briefly caused a significant correction in stock prices in the AI sector and also raised a fundamental question of whether such large investments are necessary in this sector. However, this DeepSeek shock turned out to be short-lived, and U.S. technology giants regained their positions and reached new heights in the second half of the year, Andrejevs noted.
The geopolitical background was influenced by political changes in the U.S. “With the return of Donald Trump to the presidency, a wave of protectionism resumed. The introduction of new tariffs and aggressive rhetoric created tensions between the U.S., China and the EU, changing global supply chains. Meanwhile, in Europe, the strategic focus on strengthening military production made the defense industry one of the fastest growing sectors,” the SEB banka Head of Savings, Investment and Pension Offer commented.
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