The latest economic forecast from Eesti Pank finds that the Estonian economy is recovering. The revival in the economy in 2026 will be supported above all by the rebound in foreign markets and by measures taken by the state. Income tax changes will leave people with more money available, and the increase in spending by the state will steer additional funds into the Estonian economy. Lower interest rates, good access to bank loans and falling inflation will also improve the outlook for the Estonian economy. The Estonian economy is forecast to grow by 3.6% in 2026 with growth then slowing to 2.5% by 2028 as the fiscal stimulus fades. The outlook for the economy is still overshadowed by the difficult geopolitical situation and uncertainty about the future, including a lack of clarity about how the state finances will be returned to a path of sustainability.

The general government budget will be in large deficit next year. The deficit in 2026 will be the largest of the past 30 years other than that in the pandemic-year budget of 2020. The main causes of the deterioration in the budget balance will be the changes to the income tax system and the rise in spending on defence above 5% of GDP, a large part of which will go on imports and so not contribute to the revival of the Estonian economy. The information available at present shows the budget deficit remaining wide throughout the forecast horizon until 2028. Growth in the economy will receive a short-term boost from the state taking less in tax and increasing spending but there will be a lasting increase in both the loan burden of the state and its annual interest expenses. The loan burden is likely to increase to 31.5% of GDP by 2028, while interest payments double from what they are now to around 400 million euros. The longer the return to fiscal balance and the stabilisation of the state debt are postponed, the harder it will become to achieve them. Growth in the economy will be more subdued as the state budget moves towards balance.

Inflation will fall in the years ahead. The effect of the motor vehicle tax will disappear from the inflation rate at the start of 2026, and the effect of the rise in VAT will exit the inflation figure in the middle of the year. Lower prices for food commodities will pass through into retail prices at the same time, and inflation for food will no decelerate. Slower growth in wage costs will help to reduce the high level of inflation for services. Although the fiscal stimulus and the sharp jump in domestic demand resulting from it will cause additional inflation pressures, they will be offset by faster growth in productivity and by companies being able to raise prices for their output more slowly than their input costs rise. Consumer price inflation will come down from 4.9% this year to 2.9% in 2026 and 2.4% in 2027.

Increased economic activity means the outlook for the labour market is good. The number of employees did not fall as fast as output volumes during the recent recession and so companies will at first be able to increase their production without rapidly hiring new employees. Employment will increase a little in 2026, but after that it will remain quite stable. Unemployment will fall gradually, but will mainly do so not through a rise in employment, but because the labour supply will shrink. The number of people active in the labour market will fall because of the population ageing, but the general participation rate will still remain high, and will also be high in international comparison.

The average gross monthly wage will rise more slowly, but the change to the income tax system will cause a sharp jump in net incomes. The changes mean that the average net wage will rise twice as fast in 2026 as the gross monthly wage, as it will gain around 10%. Inflation falling at the same time will increase people’s real purchasing power substantially. The income tax change will at the same time reduce cost pressures for employers, and this will let them recover the profitability they have lost in recent years. Labour costs have increased as a share of value added created to close to their historical peak in recent years and any improvement in corporate investment capacity will require this increase to go into reverse and the profit share to recover.

Access to loans and repayment costs continue to favour borrowers. Market expectations are that future movements in Euribor will be small, but the cuts that have been made so far and the good capacity of the banks to lend will give support to both businesses and households. The majority of loans in Estonia, unlike those in most other euro area countries, have interest rates based on the short-term or six-month Euribor, and only a small share of loans have interest rates fixed for a longer time. The cuts in interest rates by the European Central Bank consequently reached borrowers in Estonia much faster, and this will give support to the revival in the economy in the coming years.

Read also: The Estonian Economy and Monetary Policy 4/2025

For further information:
Hanna Jürgenson
Communications officer
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