Republic of Latvia

Latvia’s successful convergence to euro area income levels has slowed. GDP per capita has fallen behind, including relative to other Baltic states, due to weak total factor productivity and limited capital deepening since the global financial crisis. Additional pressures include rising labor costs, demographic decline, and geopolitical tensions. Although unemployment remains low and inflation has eased, the economy remains vulnerable to external shocks. At the same time, the government faces growing fiscal demands from pensions, health care, defense, energy security, and climate transition, requiring preserved fiscal space for future crises.