The Estonian economy is set to resume growing in 2025, albeit weakly amid very high global uncertainty and tax increases. Private consumption is projected to recover slowly. Uncertainty is set to heavily weigh on private investment, while public investment is expected to increase. Exports and imports are projected to contract due to the tariffs and their impact on global growth. After growing by 1.1% in 2025, real GDP is expected to expand by 2.3% in 2026. HICP inflation is projected at 3.8% in 2025 amid persistent services inflation and tax hikes, and at 2.3% in 2026. The government deficit is expected at 1.4% of GDP in 2025 before increasing to 2.4% in 2026, and the debt-to-GDP ratio is set to reach 23.8% of GDP in 2025 and 25.4% in 2026.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,3 | 1,1 | 2,3 |
| Inflation (%, yoy) | 3,7 | 3,8 | 2,3 |
| Unemployment (%) | 7,6 | 7,6 | 7,3 |
| General government balance (% of GDP) | -1,5 | -1,4 | -2,4 |
| Gross public debt (% of GDP) | 23,6 | 23,8 | 25,4 |
| Current account balance (% of GDP) | -2,0 | -2,1 | -2,0 |
Growth to remain weak because of global uncertainty
Estonia’s real GDP contracted by 0.3% in 2024. In quarterly terms, economic activity expanded in all last three quarters, with real GDP growth in the fourth quarter being the strongest, at 0.7%, when both consumption and exports of goods rebounded. Consumption was likely driven by anticipated purchases ahead of higher taxes coming into force in 2025.
Despite higher tax rates, business and consumer sentiment improved in the first few months of 2025. Increasing real disposable incomes and lower borrowing rates, which reduce the interest burden quickly due to the prevalent use of loans at variable interest rates, supported consumption and investment. However, the sharp rise in global uncertainty following the announcements of US tariffs is set to weaken growth prospects, slowing private consumption growth until the impact on the economy and jobs becomes clear. Investment, which in recent years was weak due to low capacity utilisation, is set to take a further hit due to uncertainty, as private projects are likely to be postponed or cancelled. A partially offsetting factor is an expected increase in public investment, as some large projects, such as the Rail Baltic, are implemented, and defence investments are expected to take place.
Exports are set to weaken. While direct exposure of the Estonian exports to the US is not very large, the hit on Estonian exports is also expected to come from a decline in growth of the trading partners – particularly the Nordic countries and Germany. As a result of these factors, Estonian real GDP is projected to grow by 1.1% in 2025. With real income growing in 2026 and uncertainty subsiding, real GDP is expected to increase by 2.3% in 2026.
Labour market remains stable
The labour market remained relatively stable, with a very high participation rate, and the unemployment rate in early 2025 standing at 7.7%. As labour hoarding was observed in the past years, employment is not expected to pick up despite economy turning to growth. The unemployment rate is projected at 7.5% in both 2025 and in 2026.
Inflation remains high due to tax hikes
HICP inflation increased in early 2025 as VAT and other taxes were increased. It stood at 4.4% in the first quarter 2025, driven by services (where the new car registration tax was recorded), followed by processed food inflation. Going forward, inflation is expected to slow down as energy prices are declining and others are expected to moderate. However, further tax hikes in the middle of the year are likely to keep inflation up. Overall inflation is forecast at 3.8% in 2025 and to decelerate to 2.3% in 2026, as the impact of tax measures gradually dissipates and global food, energy and non-energy industrial good price pressures weaken.
Public deficit to remain stable in 2025 and increase in 2026
In 2024 the general government deficit stood at 1.5% of GDP (down from 3.1% in 2023). Revenue growth was supported by increases in the value added tax and environmental taxes’ rates, labour taxation collection due to fast wage growth, and receipts of value added and corporate income taxes due to purchases of motor vehicles and distribution of profits anticipating future tax increases. On the expenditure side, the planned increases in defence expenditure, social benefits and operating expenses of local governments were not fully implemented.
In 2025, the deficit is expected at 1.4% of GDP, mainly on the back of increases in revenue. These are projected to come mainly from increased tax rates, namely on personal and corporate income (both by 2 pps. to 22%), income for credit institutions (by 4 pps to 18%), value added (of 2 pps to 24%), and from the introduction of a motor vehicle tax. The recovery of the economy is also set to improve the intake of these taxes. On the expenditure side, strong increases are expected in gross fixed capital formation for defence.
In 2026 the deficit is forecast to increase to 2.4% of GDP. The net effect of additional increases in the personal and corporate income tax rates (both by 2 pps to 24%), together with additional excise duties on alcohol, tobacco and energy products, are likely to be mostly offset by the impact of the increase in the personal income tax-free threshold, accounting for 1.5% of GDP. The outlook for 2026 is rather uncertain following policy announcements by the new government coalition at the beginning of the year, including the intention not to introduce the planned corporate income tax rate increase and to introduce a minimum exemption to the personal income tax rate increase of EUR 700 per month. These announcements have not been incorporated in the forecast, as coalition negotiations are still ongoing.
Public debt is projected to increase over the forecast horizon, from 23.6% of GDP in 2024 to 25.4% in 2026, This represents an improvement with respect to previous forecasts, due to the easing of public deficit.