Until the spring of 2025 Latvian economy spent three years in stagnation, GDP in Q2, 2025 was almost exactly the same as in Q2, 2022. It could have been worse, of course. Soon it will be better.
Why? In brief, bad things stopped happening and good things started to happen.
Transport service exports decline has not much further to go. The amount of cargos shipped from the east to Latvia’s ports and loaded in ships has dwindled to volumes that do not impact the economy as a whole. Tourism has adjusted to bad geopolitical aura. Exports of white-collar services have surmounted recent (2023-2024) weakness. Manufacturing has adjusted to a sharp reduction of the remaining exports activity towards Russia.
About good things happening – first and foremost, manufacturing started to benefit from the investment boom in previous three years. Food processing, long stagnant, has dipped its toe into double-digit growth zone. Timber industry is rapidly adding output in higher value-added subsectors. Picture in engineering sectors is mixed, but achievements in drone production are stunning, the sector has grown about 20 times in the last 10 years, working for both civilian and military markets. Growth of business and IT services is back in its numerical comfort zone – up 15% in the first half of the year.
For those uninitiated with the Latvian economy – there is a national particularity and peculiarity called “EU funding cycle”. Every EU financial framework period of seven years starts with a bureaucratic quagmire where all preparatory documents remain stuck for years. Then comes a moment when the volume of procedural absurdities reaches some critical mass of self-annihilation and with superhuman effort the ultimate shame – losing EU funding reversibly, is avoided through a whirlwind of activity. It creates all sorts of inefficiencies, but also nice growth numbers for a while. Every time the nation promises itself to do better next time, to no avail. Latvia is just entering that period when builders, planners, architects etc. are fully booked.
In 2025 GDP growth is likely to be just above 2%, but during the next three years it is likely to fluctuate around 3% with a good chance for upward surprises, unless the infamous geopolitics or any other external vicissitudes worsen again. Looking at the Latvian economy “from inside”, all arrows point in the right direction. Manufacturing investment boom will continue, high-tech sectors like software and the mentioned drones and some others are stewing in their own juice just deliciously, I mean, enjoying the full flourish of cluster effects and achieving breakthroughs in global markets. Household debt is remarkably low and in combination with affordable house prices create an energetic mix for positive feedback loop in real estate markets. Business debt is remarkably low too. Government will spend a lot on defense and, well, yes, EU funds will flow.
What role will trade with the USA play in this? A moderate one. For advanced EU countries exports to America usually make up about a tenth of total merchandise exports. In Latvia the ratio is about 3%, it has been even lower still recently. The country mostly trades within the region, most of its products are not so highly differentiated to justify transport times and costs. The biggest item in trade with USA are timber products, like in merchandise exports in general. After a lull a tariff just been imposed: 15% from October 14 on timber products from the EU. As other countries also have to pay and for some the tariffs are much higher, but USA cannot supply itself fully, that might not be so important. Electronics, mostly communications equipment is the next biggest product, plus there are some drinks and so.
This article is a part of the 2025 Latvia-USA Business Report.