SEB has raised its forecast for Latvia’s gross domestic product (GDP) growth this year to 2.3 percent from 1.9 percent in November 2025, according to the bank’s latest SEB Nordic Outlook.
For next year, Latvia’s economic growth forecast has been raised to 2.4 percent from 2.3 percent.
SEB has maintained its forecast for Latvia’s annual average inflation at 2.4 percent this year and 2.3 percent in 2027.
SEB has maintained its GDP growth forecast for Lithuania this year at 3.2 percent. SEB has also not changed its 2027 GDP growth forecast for Lithuania, which is still estimated at 2.1 percent.
At the same time, the annual average inflation forecast for Lithuania this year has been lowered from 3.4 percent to 3.3 percent, while the annual average inflation forecast for 2027 has been raised from 2.9 percent to 3 percent.
For Estonia, the GDP growth forecast for 2026 has been increased from 2.5 percent to 2.7 percent.
Estonia’s annual average inflation forecast for 2026 has been lowered from 3.2 percent to 3 percent and for 2027 from 2.8 percent to 2.6 percent.
The rules-based international order and system of cooperation are gradually eroding as unpredictability of security policy increases, the bank informed LETA. Nevertheless, growth in the United States and the rest of the world was better than expected in 2025.
According to Nordic Outlook projections for economic developments in the future, global GDP will continue to grow at just above 3 percent per year from 2026 to 2027. However, the drivers of growth are different and the recovery since the pandemic has been rather uneven. World Bank data show that GDP per capita in 90 percent of developed economies currently exceeds pre-pandemic levels, compared to 75 percent of low-income countries.
SEB Banka’s chief economist Dainis Gaspuitis points out that one of the most pressing questions at the moment is how the new international order, which is increasingly less based on commonly accepted rules, will take shape and what impact it will have on economic development.
The economist explains that many countries are in a difficult situation in terms of security and trade policy. U.S. policies are creating additional tensions in the already unbalanced trade relations between Europe and China. Beijing is pursuing an export-led growth model and a focus on self-sufficiency, while creating price and profitability pressure on European companies. Meanwhile, the European Union is struggling with structural industrial problems and is only able to ensure very low productivity growth. Decisions that strengthen the EU’s internal market can therefore reduce the region’s vulnerability and boost growth.
“How issues related to security policy, trade and investment in AI development are addressed will have both positive and negative effects on growth and financial markets in the long term,” explains Gaspuitis. He points out that after last year’s tariff shocks, the downturn in the United States was smaller than expected, mainly due to unexpectedly strong investment in technology. Resilient household spending and a rapid rise in stock prices also contributed to growth. GDP growth is expected to reach 2.3 percent this year and 2 percent next year.
Growth in the euro area is projected at 1.2 percent in 2026. “Various indicators, such as the purchasing managers’ index (PMI), are at levels that suggest moderate economic activity. However, the combination of growth factors remains unbalanced,” the bank said. In indicators such as the PMI, the gap between the services sector and the manufacturing sector has widened, where it points to stagnation. For example, German industry is struggling with structural and cyclical problems and faces increasing international competition, particularly from China. French industry faces similar challenges.
The previous euro area growth model, where exports were the main contributor, will increasingly be replaced by household consumption and investment, Gaspuitis explains. Increased defense spending and infrastructure investment are positive for the German economy, as well as for the euro area as a whole. High unpredictability is causing companies to delay implementation of their development plans. Households remain cautious and continue to save more, regardless of rising incomes and lower interest rates. Tight public finances and the need for greater budgetary consolidation in France, Italy and Spain limit the room for fiscal maneuver. Fiscal policy in the euro area is expected to be neutral in the coming years.
Wage growth has slowed in several major economies, including the United States and the euro area. Deflation continues in China, where many commodity and food prices are declining. Economists are hopeful about productivity gains driven by AI, although the economic impact has yet to materialize. In the field of AI and technology, the main question is who will benefit more in the long run: companies that build infrastructure or companies that use the services.
Gaspuitis explains that inflation in the euro area is already around 2 percent, in the United States and Great Britain it is still too high but continues to decline. Core inflation in all these countries and regions still slightly exceeds targets. In Europe, strong wage growth is supported by tight labor markets. Even if wage growth slows, services inflation in the euro area will remain high.
Energy prices are constrained by weak growth, green energy investment and ample supply. Chinese export prices are also declining. Food prices are weakening and their impact on price growth is moderate. The economist explains that energy was the worst-performing commodity segment last year, with oil prices falling 18 percent and gas prices 40 percent. Fossil fuel production capacity is growing, while both solar and wind power generation increased by almost 80 percent in 2025. In addition, energy storage costs are falling.
OPEC+ is expected to cut oil production this year to stabilize the Brent oil price at around USD 65. The price of natural gas will decrease as global export capacity increases. Currently, gas prices have been rising due to cold weather and Europe’s low inventories.
Gaspuitis notes that prices of metals such as gold and silver are rising due to both geopolitical mistrust and industrial demand. For example, solar technology manufacturers account for 15 percent to 20 percent of demand for silver. These factors will continue to dominate this year. U.S. tariffs on various metals and concerns about new tariffs have affected global prices as importers have increased inventories. The supply and control of critical metals has become an important element of security policy. Competition for strategic global leadership, primarily between the United States and China, is affecting demand for rare earths and critical metals.
In 2025, several central banks reached their lowest interest rate levels, including the European Central Bank (ECB), Sweden’s Riksbank, the Swiss National Bank and the Bank of Canada. In 2026, the Federal Reserve will gradually reduce the policy rate, which is expected to reach 3 percent in the fall. The ECB rate is expected to remain at the current 2 percent in both 2026 and 2027.
Gaspuitis points out that GDP growth in 2025 was a positive surprise, but downside risks remain. These risks are related to political decisions and their impact on growth and financial markets. A possible ceasefire between Moscow and Kyiv could have some positive effect. Although the impact of the U.S. tariff war in 2025 was smaller than expected, political decisions can quickly create increasing negative effects. In addition to the direct impact of the U.S. tariffs, conflicts can also have a domino effect, for example, in financial markets.
Latvia’s GDP grew 2.5 percent year-on-year in the third quarter of 2025, confirming acceleration in the economic recovery and strengthening the growth outlook for 2026 and 2027. The economy is increasingly underpinned by a strengthening investment cycle, driven by EU fund inflows and increasing lending. Increasing construction activity is having a positive effect on other sectors. Growth is further supported by strengthening exports, primarily in services. Private consumption is showing signs of recovery, boosted real wage growth.
Gaspuitis expects that inflation will continue to ease, but service prices will continue to rise at a faster pace. Labor market activity will remain strong – although wage growth will gradually slow, it will continue to put pressure on competitiveness and profit margins. Geopolitical developments remain a key risk, with potential implications for both growth and inflation.
Lithuania’s economic growth, on the other hand, will further accelerate this year after a strong and broad-based expansion last year. It will be driven mainly by a temporary increase in private consumption due to pension fund withdrawals, as well as a sharp increase in investment in defense infrastructure and housing construction. While manufacturing remains stagnant, services exports continue to grow strongly. Inflation will slow slightly. Wage growth will also slow down, but housing prices will continue to rise faster than incomes. Fiscal policy will remain expansionary, with defense spending exceeding 5 percent of GDP in 2026.
Gaspuitis points out that after several years during which Estonian households faced high inflation and rising taxes, the situation is slowly improving. The introduction of a universal tax-free minimum of EUR 700 per month will significantly increase net income, especially for middle and higher-income households. This is likely to stimulate a recovery in consumption and support such sectors as hospitality, automobile sales and the housing market.
Inflation, driven by tax and food price increases last year, will gradually ease to around 3 percent, while the labor market will remain strong. Real wage growth will be among the fastest in recent years. The outlook for exports will improve as orders pick up and construction in the Nordic countries recovers. In the political environment, uncertainty about fiscal policy and deficit containment will increase as the 2027 parliamentary elections approach.
Source: BNS
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