Latvian economic growth will not be rapid

In the best case – without crises, shocks and political mistakes – the Latvian economy will grow by regarding 2-3% per year in the medium term. The potential for rapid growth of the Latvian economy has been exhausted, says SEB bank economist Dainis Gašpuitis.

Therefore, largely depending on the external environment, growth can fluctuate within 2-3%.

“Under the influence of strong external demand, growth may become more rapid for a short time, especially in the coming years, when quite significant revenues from European Union (EU) funds are still expected. It may also be strengthened by periodic intensification of domestic consumption. But such growth rates “are unlikely to be sustainable. The closer Latvia gets to the EU average level of prosperity, the more problematic its further growth will be. In other words, achieving 2.5% growth will become more difficult,” says the economist.

This is especially relevant given the geopolitical conditions: in the coming years, we will have to reckon with the revision and severance of economic ties with Russia and the creation of new alternatives. New opportunities will appear, but it will not be possible to find alternatives for all areas of economic cooperation. Therefore, Gašpuitis predicts that in the coming years there may be stages at which, given a weak external environment, this growth potential will not be realized.

If ties with Russia are severed, the hit to Latvia’s economy would be approximately 2% of gross domestic product (GDP), according to Bank of Latvia calculations made immediately following Russia’s invasion of Ukraine began. Considering that the volume of exports to Russia has not changed significantly over this time, they remain in force.

At the same time, for example, the Latvian transit business does not have too many alternatives due to the geographical location of the country. And the pharmaceutical industry is highly regulated, and entering new markets can be difficult and costly.