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Economy and Finance

Economic forecast for Estonia

The latest macroeconomic forecast for Estonia. 

Indicators 2023 2024 2025
GDP growth (%. yoy) -3.5 0.6 3.2
Inflation (%. yoy) 9.1 3.2 1.9

Estonia’s real GDP is estimated to have contracted by 3.5% in 2023, more than projected in autumn, with the downturn becoming broad-based and affecting not only investment but also private consumption and, particularly, exports. The latter were impacted by weak external demand and depreciations of major trading partners’ currencies. Despite the two-year recession, the labour market continued to be remarkably resilient in 2023. The unemployment rate remained low, while employment increased in the second half of the year. Wages grew strongly, though not yet fully compensating for the purchasing power lost due to high inflation over the last years.

Early indicators point to a weak start of 2024. Business confidence moved sideways in pessimistic territory over the last few months, with some improvement in industry and construction, but worsening in the retail sector. Consumers expect their financial situation to deteriorate due to the higher VAT and excise taxes applied as of 2024, still elevated inflation, and high borrowing costs. This suggests that domestic demand is set to be very modest in the first half of the year. Combined with subdued external demand from the country’s main trading partners, this prompts a large downward revision of real GDP growth in 2024, to 0.6%, compared to 1.9% in the Autumn Forecast. In 2025, growth is expected to resume on the back of an improving external environment, more favourable financing conditions and rising consumption, as purchasing power is restored through the combination of falling inflation and rising wages. It is projected at 3.2%, higher than in the Autumn Forecast.

Estonia recorded 9.1% HICP inflation in 2023, down from double digits in the first half of the year but still above 4% in the last quarter, despite significantly falling global energy prices and moderation in food and industrial goods inflation. The higher VAT applied as of 1 January 2024 is set to keep prices high, but inflation is expected to gradually decline in line with global trends, averaging 3.2% in 2024 and 1.9% in 2025. This is slightly lower than in the Autumn Forecast for both years.