Economic overview 02/2026

GLOBAL OVERVIEW

US economic growth prospects continued to improve

The year 2025 was marked by heightened uncertainty stemming from the actions of the US administration, particularly related to foreign trade policy. Nevertheless, concerns that tariffs would significantly affect the global economy have not materialized yet, and the year proved favourable for both the global economy and financial markets. The new year has also started on a positive note – US growth forecasts have been revised upwards, stock prices in financial markets have remained on an upward trajectory, and companies in both developed and emerging markets are expected to report double-digit earnings growth in 2026. 

So far, neither the chaotic US foreign policy, nor the temporary shutdown of the government in the autumn, nor the cooling of the labor market have been able to derail the US economic growth. US labor market indicators have cooled considerably since the spring of 2025, but there are still no signs of a crisis – the wage pool continued to grow at a healthy pace and US consumers continued to spend actively at the end of the year. 

Since the beginning of 2025, investments in artificial intelligence and related infrastructure in the US have significantly accelerated, offsetting lower investments in other segments. The AI impact on the economy and financial markets has proven more positive than could have been expected a year ago. However, the effect on GDP growth figures is currently considered relatively modest, as imports of computers, microchips, and other related goods have risen alongside investments. As a result, consumption has remained the main driver of US growth. At the same time, the heavy concentration of IT companies in financial markets also makes the US particularly sensitive to fluctuations related to developments in artificial intelligence.

An additional boost to US growth in the first half of 2026 could come from both delayed spending due to last year's government shutdown and from the fiscal measures, with several tax changes coming into effect. US economic growth in 2025 is estimated at around 2.2% (it stood at 2.8% in 2024). Similar growth figure was expected in the US before the introduction of import tariffs. In 2026, GDP growth of around 2.4% is expected. It is noteworthy that this figure exceeds the forecasts made a year ago (at that time – around 2.0%).

The eurozone economy enters the new year with optimism, yet hurdles to growth remain

Although global trade continued to grow steadily despite US import tariffs, the situation in the manufacturing sector in developed countries remained relatively fragile. While conditions improved over the past year, sentiment among eurozone manufacturers was still slightly negative at the start of 2026.  However, positive trends also began to emerge in euro area manufacturing sector, with output growing on an annual basis since February last year (by an average of 1-2% in recent months). Overall, services sector was the one that sustained positive business sentiment in the monetary union throughout last year and into the start of this year.

The euro area economy maintained moderate but steady growth in the second half of 2025. Gross domestic product grew by 0.3% on a quarterly and by 1.3% on an annual basis.  For the whole year, eurozone growth was close to 1.5%. This result was much better than expected at the beginning of last year, when GDP was projected to grow by around 1%. Although the German economy continued to lag the eurozone average figures, it returned to growth in 2025 after a two-year pause, growing by 0.2% over the year. Fiscal stimulus and infrastructure spending could lift the country's growth closer to 1% in 2026. Germany's budget deficit is expected to rise towards 3.5-4.0% of GDP over the next two years, which would be the highest level in decades outside of crisis periods. 

According to Bloomberg-surveyed analysts, the economic growth in the eurozone is expected to slow to 1.2% in 2026. Economic data may suggest that nothing extraordinary happened in the global economy last year, with the bulk of the increase in import tariffs so far absorbed by US companies and consumers. Still, the new double-digit import tariffs on the US main trading partners, increased geopolitical risks, and uncertainty surrounding America's political course mean that staying vigilant remains essential. 

Eurozone manufacturers are also gradually losing ground in the competition with Chinese exporters. In 2025, despite rising protectionism around the world, China's trade surplus with the rest of the world for the first time in history exceeded 1 trillion USD. Exports from the eurozone to China have mostly declined over the past three years. Meanwhile, imports from China have been rising since mid-2024, widening the eurozone's trade deficit with China.

Largest central banks adopt wait-and-see stance

The inflation topic has receded from the spotlight. In the eurozone, inflation fell below the ECB’s 2% target at the start of 2026 (1.7% in January). Core inflation, representing consumer price changes excluding food and energy, also slowed to its lowest level since the fall of 2021, when inflation was just starting to pick up (2.2% in January). Inflation in the US has stabilized in the range of 2.5-3.0% over the past 1.5 years, with core inflation close to 2.5%. Inflation in both the euro area and the US is expected to remain near current levels throughout this year.

The impact of import tariffs on US inflation has been relatively limited so far and has not triggered a new wave of inflation. This allowed the US Federal Reserve System (FRS) to continue lowering dollar rates at the end of 2025. At the start of this year, with risks in the US labor market and inflation dynamics appearing more contained, the Fed adopted a more hawkish stance, keeping rates unchanged at 3.50–3.75%. Based on futures market pricing, two additional rate cuts of 0.25 percentage points each are expected this year, with the first likely no earlier than June.

The ECB has kept interest rates unchanged for five consecutive meetings, leaving the deposit rate at 2% since June last year. The ECB's future decisions will depend on the latest economic data, but investors no longer anticipate any rate changes in the eurozone this year. Previous interest rate cuts have helped to revive lending and boosted corporate bond issuance, with borrowing by both companies and households in the eurozone increasing. At the same time, the ECB has so far ignored the downward pressure that a strong euro exerts on inflation (imported products traded in dollars become cheaper in euro terms) and its negative impact on the competitiveness of local businesses. A further strengthening of the euro could prompt the ECB to reconsider the possibility of lowering rates.

Based on futures market pricing, investors now believe that the ECB’s rate-cutting cycle has come to an end, and that the next move in 2027–2028 is likely to be upward. This belief is also reflected in current interest rates for borrowers – the 6-month Euribor has stabilized at 2.10–2.15% in recent months, above the ECB deposit rate.

BALTIC OVERVIEW

Latvia: economic cycle keeps improving

After a weak start to the year, Latvian economic cycle improved visibly in the second half of 2025, laying the ground for a further upside in 2026.

Latvian manufacturing sector, which is heavily-linked with export markets, finished 2025 on a solid footing: in 2025 Q4 production output increased by 6.4% compared to the corresponding period of 2024. Key segments of the Latvian industry – wood, timber, furniture, metal processing – were the main supporters of the increase in output. Latvian furniture (+6.8% yoy in 2025 Q4) and timber industry (+5% yoy in 2025 Q4) are benefiting from the more favourable rate environment in the key euro area and Scandinavian export markets. However, tariff-sensitive sectors, such as computer and electronic products and electrical equipment, also finished 2025 on a positive note, with computer, electronics and optical production output growing by almost 20% compared to 2024 Q4, thus defying the tariff risks. What is more, production in the non-metallic mineral products (cement) sector rose by 14% vs the same period of 2024, suggesting the cyclical upturn in the Latvian construction sector, which is also one of the key benefiters from the more favourable rate environment.

Latvian domestic demand has also clearly shifted gears in the second half of the year, as retail sales grew by 3.5% and 2.9% year on year in 2025 Q3 and Q4 respectively. The upturn in retail sector continues to be driven by the more cyclical non-food segment, where sales were up by 4.4% year on year in 2025 Q4. We continue to observe signs of positive impact of lower rates on the Latvian domestic demand, which is well illustrated by the sharp recovery in ICT and electrical household segments, where sales were 13% and 10% higher than in 2024 Q4 respectively.

Inflation has entered a moderation phase, with annual inflation in December 2025 slowing to 3.5%, i.e. to the lowest level in 9 months, as lower global energy prices cushioned the impact of higher heating prices. The disinflation is especially visible in the transportation segment, where lower global oil prices resulted in a 0.6% year on year increase in transportation inflation. Services inflation remains a major contributor to the inflation rate, with services inflation stuck at almost 6% - the result of higher wages.

We expect that the positive macro momentum of the second half of 2025 will spill over into the 2026. We predict that this year Latvian GDP will grow by 2%, with growth to be driven by both export-oriented and domestic demand-oriented sectors. We expect average wage to increase by 6.5% in 2026, driven by stronger economic cycle, higher labour demand and labour shortage. We anticipate that inflation rate would stand at 2.3% in 2026 and will be mainly driven by higher wages and thus services part of the inflation.

Estonia: brighter economic perspectives

Estonian economy finished 2025 on a much brighter note compared to the start of last year. In the fourth quarter of 2025 annual GDP growth stood at 1%, while leading economic indicators point to a brighter economic outlook ahead. Both actual data and business surveys point to positive dynamics in export-oriented Estonian manufacturing sector. Data compiled by Statistics Estonia shows that in December 2025 Estonian manufacturing output rose to the highest level since February 2023, with computer, electronics, fabricated metals and wood sectors leading the recovery, indicating that the gradual pick up in the economic cycle in Scandinavian region is positively impacting the Estonian industry. EU Commission surveys indicate that Estonian manufacturing companies are most upbeat on export orders since the end of 2022, indicating that there is further room for growth in the Estonian industry and export.

Domestic demand remains weak and has been flat throughout the 4th quarter of 2025, with retail sales being dragged by the food segment as well as limited upside n the non-food segment. However, the latest Estonian consumer surveys indicate that the consumer optimism has reached the highest level since May 2025, with Estonian consumers becoming increasingly optimistic on their financial perspectives, as well as perspectives of the Estonian economy. It is therefore likely that domestic demand will start contributing more towards the recovery of the Estonian economy.

We forecast that in 2026 Estonian GDP will grow by 2.3%, driven by both export and domestic demand. We expect wages to increase by 5.7% vs 2025, while inflation rate should stand at around 3%.

Lithuania: further room for growth

Lithuanian economy finished 2025 with a 2.5% year on year GDP growth in fourth quarter and an overall GDP growth of 2.7% for the whole 2025. The end of 2025 was marked by a growing divergence between the export-oriented manufacturing which entered stagnation, and a further dynamic growth in retail sales as well as construction and real estate sectors. However, we see more evidence that manufacturing sector has most likely reached its bottom, in part thanks to the renewed production of fertilizers (was stopped in summer due to unfavourable conditions in EU fertilizer market). Latest surveys of Lithuanian manufacturing companies indicate that manufacturing businesses are most positive on export orders since April 2023, suggesting that there is room for another upturn in the Lithuanian industry. 

Domestic demand has been and remains resilient, with the more cyclical non-food retail sales segment continuing to drive the overall growth in domestic demand. Construction and real estate sectors also continue to demonstrate strong growth numbers, however there is more evidence that real estate sector cycle has entered a more mature stage, where growth remains robust, but somewhat slower than at the start of 2025. 

We forecast that in 2026 Lithuanian GDP will grow by 3%, supported by both exporting sectors (transport and manufacturing), as well as domestic demand-oriented sectors. Pension reform will add more fuel to an already hot retail and real estate sectors. We expect average wages to increase by 7.5% this year driven by an 11% increase in minimum wage as well as the strong economic cycle. This, however, will also support inflation, which we estimate will stand at 3.4% despite the moderation in global commodity prices, as higher wages will keep pushing services prices upward.