Leading commercial banks operating in Latvia have already revised their macroeconomic forecasts for the country, despite the conflict in the Middle East being less than three weeks old. Economists at these banks estimate that Latvia’s gross domestic product (GDP) growth will be lower than previously forecast due to the war. Wage growth is also expected to be less robust than initially anticipated, although inflation is projected to be higher than earlier predictions.
Latvia’s GDP Forecast Lowered
Luminor bank’s revised forecast projects a 2.5% increase in Latvia’s GDP this year, compared to a previous estimate of nearly 3%. According to bank economist Pēteris Strautiņš, if the blockade of the Strait of Hormuz continues, forecasts will be even lower, potentially bringing Latvia’s GDP growth down to 1.8% this year.
Citadele bank also revised its forecasts this week, indicating a 1.8% GDP growth for Latvia in 2026. This represents a decrease of 0.2% compared to the forecast issued in December.
“Currently, the main factor influencing the final forecast results is the ongoing hostilities in the Middle East, which have significantly increased energy resource prices, which, although with a delay, will have a negative impact on inflation in Latvia as well,”
explained Kārlis Purgailis, an economist at Citadele bank. The rising energy costs are a key concern for the Latvian economy, potentially impacting various sectors.
Swedbank economist Līva Zorgenfreija noted that Latvia’s economic growth will undoubtedly be slower than the previously forecast 2.3%.
“However, in the current conditions of uncertainty, it is difficult to predict exactly how much slower. The longer the war drags on and the more disruptions there are to the extraction or export of energy raw materials in the Middle East region, the more negative the consequences will be for the Latvian economy. If we see prolonged tensions and supply disruptions, it is not ruled out that we will not see the expected growth in the Latvian economy at all,” Zorgenfreija stated.
Meanwhile, SEB bank noted that its growth forecasts for this year were already among the lowest, as they included the possibility of unfavorable geopolitical developments.
“although Latvia’s potential indicated stronger growth than our forecasts, external environment uncertainty and the level of interstate confrontation risk led to taking this into account and lowering expectations,” explained Dainis Gašpuitis, an economist at SEB bank. “the current forecast of 2.3% will not be corrected for the time being, although this cannot be ruled out if the impact of the Iranian conflict prolongs or expands, or if new influencing factors appear.”
Higher Inflation Forecast
In connection with the war in the Middle East, banks have also revised their inflation forecasts. Citadele bank increased its inflation forecast for Latvia this year from 2.3%—as estimated in December—to 3.2% this week.
Luminor’s adjusted forecast indicates that inflation in Latvia this year will be 3.7%, compared to approximately 3% previously estimated. If the war in the Middle East continues, consumer price increases could reach as high as 4% this year.
Swedbank publishes its forecasts four times a year, with the next release scheduled for early May. However, the bank’s current rough estimates suggest that inflation in Latvia could average around 4–4.5% this year. If the conflict in the Middle East persists and oil and gas prices remain high for an extended period, inflation could be even higher, according to the Swedbank economist.
“For example, quick estimates present that in a situation where oil prices are around $130–140 per barrel and gas prices are around €90/MWh for several quarters, the direct impact of energy resource prices would raise inflation in 2026 to close to 6%.
Together with indirect effects, inflation could reach 8–9%. This is a lower rate of price increase than in 2022, but still extremely rapid,” the Swedbank economist noted.
SEB bank acknowledged that its inflation forecast will need to be revised upwards.
“Currently, forecast adjustments would include a short-term impact, but everything will depend on the development of the Iranian war. The view on inflation can change rapidly and frequently. Forecasts will be updated in May, when it will be possible to better assess the development of events and their potential impact on inflation,” Gašpuitis added.
Lower Wage Growth Also Forecast
Higher inflation also means lower growth in purchasing power or—in the event of a prolonged conflict in the Middle East—even a possible decline in purchasing power, noted the Swedbank economist. “Wage growth rates in Latvia are slowing down, and even before the war in the Middle East, slower wage growth was forecast for this year than in 2025,” Zorgenfreija observed.
According to her, companies’ profit indicators are stable, but not as high as before the previous energy crisis. Financial reserves and the safety cushion are not as large as they were for many in 2022. In 2022, when companies were largely able to raise wages for their employees, and purchasing power for the average wage earner returned to its previous highs relatively quickly after the inflation shock.
“Currently, there are no signals that demand is sufficient for companies to be able to raise their sales prices to cover both rising energy costs and rapidly raise wages for employees, who are increasingly likely to feel the general increase in the cost of living,”
said the Swedbank economist.
Although Luminor previously estimated that wages would increase by around 7% this year, this forecast has also been revised, predicting wage growth of around 6.5% in Latvia this year. However, the unemployment rate could reach 7%, compared to the previously calculated 6.7%.
Citadele bank’s average wage growth forecast has changed insignificantly, reducing the forecast by 0.1%—Citadele bank expects wage growth of 6.4% this year. The unemployment rate forecast remains at the December level, namely 6.5%.
“The base-case scenario of the current forecast assumes a calming of the Middle East conflict and, stabilization of energy resource prices in the coming weeks. In the event of a prolonged conflict, macroeconomic forecasts are likely to have to be revised again in a negative direction,” added the Citadele bank economist.
The Bank of Latvia revises its macroeconomic forecasts twice a year—in June and December. According to its latest forecast, Latvia’s GDP will grow by 2.8% this year, and inflation will reach 3.2%.
