Economic overview 11/2025

Global overview

The US economy continues to grow amid a new tariff reality

After a weaker start to the year, US economic activity indicators showed signs of improvement. The decline in US gross domestic product in the first quarter was more than offset in the second quarter, as inventories of imported goods accumulated earlier were drawn down. Overall, in the first half of the year, the US economy was up by 2.1% over a year ago, compared with growth of around 3% in the first half of 2024. Despite significantly higher tariffs and concerns about their impact on business, sentiment among US companies has remained broadly neutral in recent months. The slowdown in the US labor market has not yet led to a wave of layoffs, helping to sustain steady income growth for households. As tariff-related concerns gradually subsided, household consumption in the US returned to a faster pace of growth.  

The US and global economies have so far adapted to the new tariff environment without experiencing any major disruptions. This resilience has also contributed to improved economic forecasts for the US. Over the next two years, US GDP is expected to grow by around 1.8% annually, still slightly below the pace anticipated before the tariff war began. Financial markets also quickly recovered from the stress experienced in the spring. With the tariff theme receding into the background, sustained investor risk appetite helped financial asset prices maintain their upward trend in recent months. Riding a wave of market optimism, US and European stock indices have reached new record highs, while risk premiums in bond markets fell close to historic lows.

Nonetheless, the tariffs remain a pressing issue. Since August, the effective average US tariff rate has stabilized above 18% – higher than during the spring tariff truce and significantly above last year’s 2.5%. During the summer, the US reached bilateral trade agreements with several major trading partners. According to IMF estimates, the European Union’s effective tariff rate now stands near 16%, almost ten times higher than at the end of last year. Since June, eurozone exports to the US have been declining, with the most negative impact coming from Germany and Ireland. Although the tariff war between the US and China is on hold until at least November, the additional 30% import tariff imposed on China is already reflected in trade figures, with exports to the US falling by an average of 25-30% year-on-year.

So far, previously accumulated inventory of imported goods has helped cushion the tariff impact on the US economy, probably masking the true effects on individual sectors. Anecdotal evidence suggests that some firms are currently absorbing part of the tariff-related cost increases rather than passing them fully to consumers. This implies that the full economic impact of tariffs is yet to be seen. At the same time, assessing the current state of the US economy has become increasingly difficult. With Republicans and Democrats unable to reach agreement on budget issues, the US government has been temporarily shut down, suspending the collection of official statistics as well. Historically, the negative impact of government shutdowns on the economy has been short-lived and quickly reversed once operations resume. However, the current episode may become unprecedented in terms of both its duration and scope.

Eurozone economy steadies after strong start to the year

Economic growth in the eurozone gradually normalized after strong performance at the beginning of the year, which was driven by large shipments of goods to the US ahead of the tariff hikes. In the second quarter, gross domestic product rose modestly by 0.1%, after increasing by 0.6% in the first quarter. Countries with relatively large manufacturing sectors, such as Germany and Italy, recorded negative growth in the second quarter. In recent months, the eurozone economy has clearly begun to lack growth momentum, with manufacturing output and trade volumes effectively stagnating since the spring.

Despite external challenges, weak domestic demand growth and a strong euro, business sentiment in the euro area has remained positive since the beginning of the year, reaching its highest level in almost two and a half years in October. This was driven by noticeable improvements in producer sentiment compared to the previous couple of years, while service providers remained optimistic. Available economic indicators suggest that the positive effects of the US restocking cycle have now faded, while the full negative impact of tariffs is apparently not yet fully reflected in the eurozone’s economic figures. As a result, domestic demand is set to play a larger role in the eurozone’s economic growth. Lower borrowing costs are expected to continue supporting growth, while next year, higher expectations are being placed on the potential boost from Germany’s infrastructure investment plan, both for Germany itself and for the wider eurozone economy. 

In tandem with the US, eurozone GDP growth forecasts have also been revised upwards since June. The most significant upgrades have been made for the coming quarters, while projections for next year remain broadly unchanged. According to analysts surveyed by Bloomberg, GDP in the monetary union is expected to grow by 1.3% this year before easing slightly to 1.1% in 2026.

ECB puts rate cuts on hold and passes the baton to the US central bank

Inflation in the US has accelerated to 3% from an average of 2.3-2.4% in the spring. However, the impact of tariffs on US inflation figures is still seen as limited. More than half of the inflation pickup over the past six months can be attributed to commodity price dynamics and some of the technical factors – oil prices were higher in the spring of last year compared to this year. Core inflation in the US reached 3.0% in September, compared with 2.8% in the spring. In the euro area, excluding the more volatile energy and food categories, core inflation stayed at 2.3% for the fifth consecutive month, indicating a period of relative price stability. 

In September, the US Federal Reserve (FRS) cut the federal funds rate by 0.25 percentage points to a range of 4.00–4.25%, delivering first rate reduction since the end of last year. Although the FRS sees risks to both of its mandates, with potential increases in both unemployment and inflation, it anticipates two additional 0.25 percentage point rate cuts by year-end, followed by one cut per year over the next two years. Market participants are more dovish, expecting as many as five rate cuts by the end of next year, with the policy rate reaching its lowest point in the 2.75-3.00% range.

On the other side of the Atlantic, the European Central Bank (ECB) has paused its rate-cutting cycle since July, keeping the deposit rate unchanged at 2.0%. Judging by the ECB's rhetoric, we are unlikely to see further rate cuts before the end of the year. Euribor rates, which closely follow ECB policy moves, have also stabilized at around 2% over the past six months. Market participants are currently divided on whether the ECB will resume rate cuts next year and whether it will reduce the rate by another 0.25 percentage points. Overall, it is relatively easy for the ECB to justify further rate cuts – after a strong start to the year, the economy appears to have cooled, while inflation is expected to remain close to or slightly below the ECB’s 2% target in the near term. In addition, lower rates could help weaken the strong euro, which is hampering eurozone exporters.

Baltic overview

Latvian economy: from strength to strength

Latvian economy has so far enjoyed a stable pace of economic cycle expansion, with real GDP growing by 1.4% and 1.1% on a yearly basis in 2025 Q1 and Q2. However, latest surveys and actual sectoral data suggests that Latvian economy is gaining strength, with growth supported by several sectors. It is therefore likely that the pace of economic expansion will quicken in the near future.

The industrial sector has been experiencing a real upturn, which is visible in both hard data (manufacturing output) and soft data (surveys of manufacturing companies). Calculations of “Citadele” bank based on the data from Latvian Statistics Department show that in August 2025 production output in Latvian manufacturing reached the highest level in 2.5 years, with pace of growth reaching the highest level in 3 years (+4.8%  vs August 2024). Cyclical sectors are showing particularly favourable dynamics, as in August 2025 production of wood and timber products rose by 9%, output in paper industry rose by 6.4%, production of cement increased by 7%, production of furniture rose by 13% vs the corresponding period of 2024. The data suggests that Latvian industrial sector is increasingly benefiting from the spill-over of lower rates into the euro area economy while also remaining competitive in the key export markets. Growing food production and increase in cement output is an indication of strengthening domestic demand. Surveys of Latvian industrial companies indicate that Latvian producers maintain their optimism on orders, while the level of stocks remains low, suggesting that there is further room for Latvian industrial output to grow. 

Latvian retail sector has also been going from strength to strength. Calculations of “Citadele” bank based on the data from Latvian Statistics Department show that in August 2025 Latvian retail sales grew by 2%  vs the corresponding period of 2024 – the fastest pace in 3 years. Non-food retail sales grew by 5.2% - the fastest pace in 2.5 years. While food retail sales remain stagnant, Latvian non-food retail sales are already 3.4% above their post-Covid peak level. More detailed view of retail dynamics in Latvia shows that retail of electrical household appliances; instruments and construction material; cultural and recreation goods are important drivers of the upturn in Latvian retail, further supporting the narrative of improving cyclicality in the Latvian economy. 

New lending data is also showing favourable dynamics. Calculations of “Citadele” bank based on the data from Bank of Latvia show that in August 2025 year-on-year growth in new lending to residents stood at 30%  and matched the post-Covid peak, with the sharp growth being supported by new mortgage loans and new loans to non-financial corporations. 

We remain positive on the perspectives of Latvian economy and predict that in 2026 Latvian real GDP will grow by 2%, i.e. a bit faster than the projected 1.4% GDP growth for the whole 2025. We expect wages to increase by 6.2% vs 2025 next year, outpacing inflation (2.1% in 2026), further supporting growth in consumer purchasing power and domestic demand.

Lithuania: divergences between dynamics in main economic sectors have emerged

Lithuanian economy has so far maintained a healthy and stable pace of economic growth, with year-on-year GDP growth of 3% and 3.2% in 2025 Q1 and Q2 respectively. The economic cycle has so far been well-balanced and supported by industry, growing domestic demand, gradual recovery in transportation sector, as well as a sharp upturn in the real estate market. However, the latest development and forward-looking indicators suggest that a divergence in regard to performance of main economic sectors is emerging.

While industrial output continues to expand, the latest data has, admittedly, been underwhelming and is showing that risks in regard to further growth of Lithuanian industrial sector have emerged. The latest official data indicates that in August, output in Lithuanian manufacturing grew by 4%  vs the same period of 2024, which is the slowest pace of expansion in 1 year. Surveys of Lithuanian manufacturing companies indicate that, while the overall optimism regarding flow of export orders is still high on a historical basis, industrial businesses are also becoming increasingly cautious on current export order flow, suggesting that further deterioration in Lithuanian industrial dynamics is likely. Having said that, the above-mentioned survey conducted by the EU Commission do not show a significant or a sharp deterioration in the Lithuanian industrial sentiment. Currently the slowdown in mostly visible in the chemical sector, which is suffering from a sharp competition with the producers of fertilizers from the CIS region, as well as in wood processing and furniture industry where recovery has stalled due to insufficient demand in export markets. Production in tariff-sensitive sectors has so far failed to disappoint, suggesting that tariffs had a mild impact on the slowdown in industrial growth.

Domestic demand continues its fast pace of expansion and has yet again reached historical highs. Total retail sales are now 6%  above the previous peak which was reached during the Covid pandemic, while non-food retail is 15% above the post-Covid peak (impact of higher prices is eliminated). Several key trends have emerged in the retail sector. First, we see a growing divergence between the luxury and used goods retail. While sales of used goods reached 4-year low in August 2025, retail of luxury goods is 2% above the post-Covid peak, suggesting the recovery in consumer purchasing power which is driven by both lower rates and the fact that salary growth is outpacing the growth of prices. We are also seeing more evidence growth in construction-related retail segments, which is in line with the recovery in the real estate market. 

Latest mortgage lending and real estate deals dynamics continue to show that the real estate market is experiencing a phase of rapid expansion – however, we see evidence of growth flattening out, as growth in flat purchase deal in Vilnius and Kaunas (2 largest cities in Lithuania) has stabilised at 27%  and 21% respectively, with pace of expansion not accelerating during the last couple of months. This is mostly driven by the end of a bottleneck effect, as most buyers who have been waiting for a decline in rates have entered the market and have already bought the desired real estate objects.

Despite the somewhat uncertain perspectives in manufacturing sector, we remain constructive in regard to the perspectives of Lithuanian economy. We forecast that in 2026 Lithuanian real GDP will grow by 3%, however growth will be more skewed to domestic demand. Compared to the previous iteration in June, we upgraded Lithuanian GDP forecast by 0.7% points, due to the positive impulse on domestic demand of the upcoming pension reform. Wage growth will continue to outpace inflation, with our forecasts indicating 7.5% wage growth vs 3.4% rate of inflation. The real estate market will continue its expansion, as our forecasts indicate the 4.1% growth in real estate prices.

Estonia: end of recession, but economic cycle is weak

Estonian economic cycle is gradually improving, however the improvement is not without weaknesses. In 2025 Q2, Estonian real GDP grew by 0.5% compared to the corresponding period of previous year – this was the first year-on-year growth of the Estonian GDP since 2022 Q1, i.e. in 3 years, as since 2022 Q2 Estonian GDP growth was either flat or negative. 

Manufacturing continues to be the main supporter of the Estonian economy, as the year-on-year growth of the Estonian manufacturing output has been positive every month since the start of 2025. On a sectoral level, the biggest contributors to the growth in Estonian manufacturing are the segments of food products, computers and electronic products, building materials as well as in the manufacture of wood, suggesting that both export and domestically-oriented sectors have raised production levels. On the other hand, the level of optimism of Estonian industrial companies regarding the order portfolio has stopped improving, and August saw the slowest year-on-year growth in the Estonian manufacturing output (+2.5%) in 2025. The slowdown may be attributed to both a temporary factors, such as the end of advance exports of EU goods to the US following the beginning of a new tariff regime from August 1, and to fundamental factors such as weak economic cycle in the EU (65% of goods produced by Estonian manufacturing are sold to export markets). 

Domestic demand also remains vulnerable. In August 2025 Estonian retail sales registered the slowest growth (+0.7% year-on-year)  in 6 months, following the increase in the VAT rate to 24% from July 1. The food retail segment is particularly vulnerable, with food retail in August declining by most in 2 years (-4.5% vs August 2024). Non-food retail sales continue to recover, however recovery also slowed in August. Part of the renewed weakness in Estonian retail sales is temporary and is driven by the end of advance purchasing before the VAT hike, however the overall retail sales picture also supports the narrative of weak economic cycle and vulnerability of consumer purchasing power. 

On a positive note, the latest new lending data continues to show growth in both new business loans and new mortgage loans. The first aspect suggests that Estonian businesses are becoming increasingly confident in the recovery of the economic cycle, while the latter factors shows that lower rates are increasingly filtering through the Estonian real estate market.

Overall, we expect Estonian GDP to increase by 1.5% this year and by 2.3% in 2026. To put it simply, 2025 will be the year during which Estonian economy exits recession, but overall economic cycle will be weak. The economy should pick up speed in 2026.

¹ Seasonally and calendar adjusted data, 6 month moving average
² Seasonally and calendar adjusted data, 6 month moving average
³ New loans to residents; 12 month moving average
⁴ Seasonally and calendar adjusted data, 6 month moving average
⁵ Seasonally and calendar adjusted data, 6 month moving average
⁶ 12 month moving average
⁷ Seasonally and calendar adjusted data, 6 month moving average