Estonia’s economy is finally edging out of stagnation, according to the latest forecast from the Bank of Estonia; the central bank expects growth of 0.6% this year, with expansion picking up to more than 3% over the following two years – much of the momentum in 2026, however, will come from extra government borrowing pushed into the economy.
“The conditions for growth within the economy itself will improve steadily until 2027, when the government’s financial stimulus comes to an end. By then, foreign markets will be in a stronger position than they are now, and Estonian companies will have become more competitive,” the central bank notes.
“Rising production costs and taxes will keep inflation in Estonia high this year at 5.3%. It is expected to fall to around 2% next year and remain at that level in 2027.”
The Bank of Estonia says the economy has in fact been recovering since last year, though this is not yet visible in headline statistics.
“Growth in exports, manufacturing and retail sales, as well as increased lending activity, indicate that several sectors have been performing better since the middle of last year. The trade agreements signed in the summer reduced the uncertainty caused by US tariffs, which has had a positive effect on the Estonian economy. Growth has been further supported by lower interest rates and falling prices for oil and other commodities.”
Not wise to use the maximum deficit allowed
The Bank of Estonia expects the economy to grow by 0.6% this year, down from the 1.5% it forecast in June.
“The economy will be given a powerful boost in 2026 by money borrowed by the government and channelled into the economy,” the central bank said. It added that its outlook for the coming year is based on tax changes already passed and approved spending plans – the most significant being the rise in defence spending to 5% of GDP, the equal application of the tax-free income ceiling, and the abolition of income tax from the first euro earned.
The bank cautioned against exploiting the maximum state budget deficit permitted under the exemption clause.
“Given that the economy is recovering and there is a permanent, wide deficit in the state budget, it would be wise to limit any further deterioration in the fiscal position to only what is required for additional defence spending. If defence expenditure remains high for a prolonged period, however, it would need to be covered from the state’s existing revenues.”
Wages to grow by over eight per cent
The Bank of Estonia predicts that the average net wage will rise by more than 8% next year, lifting purchasing power by around 5%. “If the currently legislated rise in income tax is cancelled, the purchasing power of the average wage will rise by even more, at around 6.5%,” the central bank noted.
It added that the sharp rise in incomes will boost consumption, stimulate domestic demand and help the economy recover, with employment increasing and unemployment falling faster than previously expected.
Inflation, currently high, is forecast to fall to close to 2% by the second half of 2026. The impact of the motor vehicle tax will fade at the start of the year, followed by the effects of VAT rises and higher regulated medical service prices in mid-2026. Further pressures on prices will be limited by slower wage growth, a stronger euro, falling oil price expectations and stable or declining food commodity prices.
