For centuries under
Hanseatic and German influence and then during its inter-war independence, Latvia used its geographic location as an important east–west commercial and trading centre. Industry served local markets, while timber, paper and agricultural products were Latvia's main exports. Prior to
World War I, Latvia was an advanced manufacturing hub within the
Russian Empire, primarily serving the Russian market. After attaining independence in 1918, Latvia lost its status as an advanced manufacturing hub. Until the middle of 2008, Latvia had the fastest developing economy in Europe. In 2003, GDP growth was 7.5% and inflation was 2.9%. The centrally planned system of the Soviet period was replaced with a structure based on free-market principles. In 2005, private sector share in GDP was 70%. Recovery in light industry and
Riga's emergence as a regional financial and commercial centre offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure was held steady in the 7%–10% range.
Economic contraction in 2008–2010 The
2008 financial crisis severely disrupted the Latvian economy, primarily as a result of the easy credit bubble that began building up during 2004. The bubble burst leading to a rapidly weakening economy, resulting in a budget, wage and unemployment crisis. Latvia had the worst economic performance in 2009, with annual growth rate averaging −18%. The Latvian economy entered a phase of fiscal contraction during the second half of 2008 after an extended period of credit-based speculation and unrealistic inflation of real estate values. The national account deficit for 2007, for example, represented more than 22% of the GDP for the year while inflation was running at 10%. By 2009 unemployment rose to 23% and was the highest in the EU.
Paul Krugman, the Nobel Laureate in economics for 2008, wrote in his
New York Times Op-Ed column for 15 December 2008: ''"The acutest problems are on Europe's periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina".'' By August 2009, Latvia's GDP had fallen by 20% year on year, with
Standard & Poor's predicting a further 16% contraction to come. The
International Monetary Fund suggested a
devaluation of Latvia's currency, but the European Union objected to this, on the grounds that the majority of Latvia's debt was denominated in foreign currencies. Financial economist
Michael Hudson has advocated for redenominating foreign currency liabilities in Latvian lats before devaluing. However, by 2010 there were indications that Latvia's policy of
internal devaluation was successful.
Economic recovery 2010–2012 The economic situation has since 2010 improved, and by 2012 Latvia was described as a success by IMF managing director Christine Lagarde showing strong growth forecasts. The Latvian economy grew by 5.5% in 2011 and by 5.6% in 2012 reaching the highest rate of growth in Europe. The GDP surpassed the pre-crisis level in 2018.
Economic issues 2022-23 The
Russian invasion of Ukraine in February 2022 caused some economic problems in Latvia. Real GDP growth slowed to 2.8 percent in 2022 from 4.3 percent in 2021. Russia was a major trade partner and EU sanctions impacted this. Dramatic rises in the cost of energy, the need to seek alternative sources of gas and oil as well as logistics issues resulted in inflation averaging 17.2% in 2022 before falling back to single digits in 2023. ==Privatisation==