After three difficult years, the Estonian economy is showing signs of recovery, and inflation is set to calm down. Public consumption expanded, while private consumption is expected to gradually increase. Investment is benefitting from lower borrowing costs, but high geopolitical uncertainty weighs down growth. In 2026 and 2027, investment will rise due to higher defence spending, while higher real disposable incomes are set to push consumption. Export performance is expected to improve with the recovery of the Nordic economies. Real GDP is projected to increase by 2.1% in 2026 and 2.0% in 2027. HICP inflation is projected at 4.8% in 2025, driven by services and food inflation and tax hikes, but is forecast to ease to 2.2% in 2027. The government deficit is projected to increase over the forecast horizon, driven by a personal income tax reform and increased defence spending.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.6 | 2.1 | 2.0 |
| Inflation (%, yoy) | 4.8 | 2.8 | 2.2 |
| Unemployment (%) | 7.6 | 7.2 | 7.1 |
| General government balance (% of GDP) | -1.3 | -4.4 | -4.4 |
| Gross public debt (% of GDP) | 23.4 | 25.9 | 29.2 |
| Current account balance (% of GDP) | -1.5 | -2.4 | -2.3 |
Timid recovery under way
After stagnating in 2024, Estonia’s economy is witnessing a cautious recovery, with real GDP growth projected at 0.6% for 2025, primarily driven by domestic demand. Public spending is increasing, while private consumption is set to recover slowly as wage growth outpaces price increases and debt-service costs fall. Still, confidence remains fragile, and the VAT rise led to frontloading some purchases to the spring 2025, resulting in softened demand in the second half of the year.
Investment is picking up, with increased corporate lending thanks to lower borrowing costs, and activity boosted by public and EU-related projects. The housing market is showing signs of revival, although sales are concentrated in the secondary market. Exports are growing but very moderately due to sharp cost increases over the last few years.
In 2026 and 2027, private consumption is expected to strengthen more markedly, supported by favourable tax reforms and reduced interest burden on existing and new loans. Investment is set to get a substantial boost in 2026 from increased defence spending, while exports are expected to pick up alongside the recovery of the real estate market and construction activity in the Nordics. However, due to high import content, especially in defence, net exports are set to weigh on growth in 2026 and 2027. Overall, real GDP is projected at 2.1% in 2026 and 2.0% in 2027.
Unemployment edges up
Unemployment has been rising slowly amid prolonged economic challenges, reaching 7.6% in third quarter 2025. Employment growth in 2025 was slower than the previous year, but the activity rate is at 74.4%. Due to labour hoarding in the past, the unemployment rate is set to decline only modestly, to 7.2% in 2026 and 7.1% in 2027, despite the foreseen recovery. Although wage growth has slowed, it is expected to exceed inflation, helping to improve real incomes.
High inflation largely due to tax hikes
HICP inflation rose to 5.7% in the third quarter of 2025, primarily driven by mid-year VAT rate increase. Certain product categories, notably food and services, recorded particularly high price increases (with services affected by car registration fees and increased administrative costs such as medical fees). The fall out of the past tax hikes and slower wage growth are set to reduce inflation in 2026 to 2.8%. In 2027, inflation is projected at 2.2%, with ETS2 contributing to higher energy prices.
Public deficit to exceed 3% of GDP due to increased defence spending
The general government deficit is projected to decline to 1.3% of GDP in 2025, down from 1.7% in 2024. This improvement is mainly driven by increases in personal and corporate income tax rates to 22% (up 2%) and a rise in the VAT rate to 24%. These measures, alongside a new motor-vehicle tax, are set to amount to close to 1.1% of GDP, supported by improved tax collection amid the economic recovery. Total public expenditure is set to increase by 0.7 pps. mainly on the back of increased investment directed at the implementation of public infrastructure projects.
In 2026 the deficit is forecast to increase to 4.4% of GDP. Revenue will be impacted by the transition to a universal tax-exemption system that also raises the income threshold to €700, costing 1.4% of GDP. Defence spending is set to increase by 1.3 pps. of GDP compared to 2025.
In 2027, if policies remain unchanged, the deficit is projected to remain at 4.4% of GDP.
After a strongly contractionary fiscal stance in 2025, fiscal policy is projected to turn highly expansionary in 2026. In 2027, it is expected to become contractionary again, as the RRF winds down.
Public debt is projected to increase from 23.4% of GDP in 2025 to 29.2% in 2027, driven by high deficits during the forecast horizon.