GDP records sharpest contraction in nearly two years in Q3

Economic downturn deteriorates in Q3: GDP dropped at a steeper pace of 1.6% year on year in the third quarter, below the 0.5% contraction seen in the second quarter and marking the sharpest contraction since Q4 2022. The drop largely stemmed from a high base of comparison, paired with decelerating public spending and persistently weak fixed investment. On a seasonally adjusted quarter-on-quarter basis, the economy remained in recession, as GDP declined 0.2% in Q3, following the previous period's 0.3% fall.

Public spending decelerates and fixed investment continues to decline: Domestic demand swung into contraction in Q3. Government consumption growth was the slowest so far this year, expanding 7.7% (Q2: +8.5% yoy). Moreover, fixed investment contracted by 5.1% in Q3, largely unchanged from the prior quarter’s decline. Meanwhile, household spending growth improved to 1.1% year-on-year in Q3 from a 0.1% expansion in Q2. On the external front, exports of goods and services rebounded, growing 0.2% year on year in the third quarter, which marked the best reading since Q4 2022 (Q2: -4.9% yoy). In addition, imports of goods and services bounced back, growing 0.2% in Q3 (Q2: -4.0% yoy), marking the best reading since Q1 2023.

Economy set to accelerate in 2025: The economy is forecast to return to growth in Q4 and accelerate in the following quarters. In 2025 as a whole, GDP growth will strengthen from 2024’s projection as private spending regains momentum and fixed investment and exports rebound. Lower interest rates in the Euro area and rising EU demand should boost Latvia’s economy. That said, public spending will decelerate notably. Risks are titled to the downside and include weaker-than-expected foreign investment and EU activity following changes in U.S. security and trade policies under President-elect Trump.

Panelist insight: EIU analysts commented: “Our central scenario remains that the economy will return to growth in 2025, assisted by interest-rate cuts by the European Central Bank and an improvement in external demand. […] The position of the incoming US administration on Ukraine is emerging as a key risk to this forecast. A reduction in US support and the boost that this would give to Russia could set investment in Latvia back further if businesses believe that security risks are intensifying. […] These risks […] include cyber-attacks, disruptions to communications services and naval confrontations in the Baltic Sea.”

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