The Estonian economy was gaining momentum before the outbreak of the conflict in the Middle East. Prospects for private consumption growth are now more muted, while geopolitical concerns weigh on private investment and exports. Real GDP is projected to grow by 1.6% in 2026 and 1.7% in 2027. HICP inflation is projected to increase to 4.4% in 2026, driven by higher energy prices, before easing to 2.9% in 2027. The government deficit is set to widen, reaching 4.5% of GDP in 2026 and 4.8% in 2027, reflecting tax cuts and spending increases.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.6 | 1.6 | 1.7 |
| Inflation (%, yoy) | 4.8 | 4.4 | 2.9 |
| Unemployment (%) | 7.5 | 7.1 | 6.8 |
| General government balance (% of GDP) | -2.0 | -4.5 | -4.8 |
| Gross public debt (% of GDP) | 24.1 | 26.9 | 30.5 |
| Current account balance (% of GDP) | -0.7 | -2.8 | -3.0 |
Growth to recover despite headwinds
The economy grew by a modest 0.6% in 2025 after three years of decline. The first months of 2026 showed signs of a stronger recovery, before the conflict in the Middle East disrupted this momentum. Retail and card payment data suggest private consumption was expanding, while external demand was slowly improving, and inflation was decelerating. However, the repercussions of the conflict are expected to slow or reverse some of these trends. At the same time, the spike in oil prices has led to a restart of shale oil production in Estonia, which is expected to provide a positive contribution to growth. Real GDP is set to grow stronger in 2026, by 1.6%, mainly due to domestic demand.
Private consumption is receiving a boost from the introduction of a flat tax-free allowance of EUR 700 per month as of 2026, even though given increasingly weak consumer sentiment, households are projected to save a high share of this additional income. Public consumption and investment are projected to remain strong, particularly in defence and infrastructure. Private investment is set to grow more slowly amid low capacity utilisation. While the issuance of construction permits has increased, uncertainty and rising costs limit the scale of expansion in construction investment. Net exports are expected to detract from growth in 2026. Exports are set to grow modestly due to subdued growth among Estonia’s main Nordic partners, despite efforts of Estonian companies to reorient and expand exports to other markets. Imports are set to outpace exports, given that most defence equipment is imported.
Real GDP in 2027 is projected to grow by 1.7%. Private consumption is expected to strengthen as income growth remains solid. However, public spending and investment are projected to contribute less to growth in 2027 as most public projects are projected to be completed, and export growth is set to remain relatively weak.
Muted labour demand and falling labour force participation
The unemployment rate was volatile in 2025, rising to 7.4% in the third quarter before falling to 6.5% in the fourth quarter amid lower labour market participation. Though still high, nominal wage growth has been cooling and is projected to remain just below 5% in 2026 and 2027. Employment growth is set to remain subdued, with labour shortages at levels below historic averages. The unemployment rate is projected to decrease from 7.5% in 2025 to 7.1% in 2026 and 6.8% in 2027, as economic conditions are expected to improve but also due to a shrinking labour force.
Inflation remains elevated
HICP inflation fell to 3.5% in the first quarter of 2026, mainly as a result of lower services inflation, as the effects of past tax hikes and administrative cost increases faded. However, food inflation remained high, with unprocessed food prices increasing by more than 10% y-o-y. The impact of the conflict in the Middle East adds to price pressures, with food and energy inflation set to remain above headline inflation over the forecast horizon. HICP inflation is projected at 4.4% in 2026, before falling to 2.9% in 2027, as energy inflation eases. The postponement of the ETS2 implementation removed an upward price driver in 2027.
Public deficit to exceed 3% of GDP due to growing spending needs
In 2025, the public deficit stood at 2.0% of GDP. Revenues increased by 0.6 pps, driven by higher personal and corporate income tax rates, a VAT rate increase and a new motor-vehicle tax. Revenues were also supported by improved tax collection amid the economic recovery. Total expenditure increased by 1.5 pps. due to higher investment in public projects.
In 2026, the deficit is set to reach 4.5% of GDP. The transition to a universal tax-exemption system and a rise in the tax-free income threshold are expected to reduce personal income tax revenues. This drop in revenues will be only partially compensated by a stronger VAT intake due to past rate rises and high consumer inflation. Due to these factors, as well as lower ETS2 and dividend returns, revenues are set to decrease by 1.1 pps. of GDP. Expenditure is set to increase by 1.5 pps., mainly due to defence spending reaching 5% of GDP, and other investment projects such as Rail Baltica. Employee compensation, particularly in health and education, and interest payments are also set to increase.
In 2027, the deficit is set to widen to 4.8% of GDP. Revenues are set to decrease by 1.0 pp. due to fading effects from prior tax increases, the end of the RRF and the postponement of ETS2 to 2028. Expenditures are expected to drop by 0.8 pps., in line with investment developments, though defence spending will continue to rise.
High and increasing deficits during the forecast horizon are set to drive government debt from 24.1% in 2025 to 30.5% of GDP in 2027.