According to Statistics Estonia, GDP increased by 0.9% year-on-year in the second quarter and by 0.6% compared to the first quarter. In the short term, growth has been facilitated by stronger consumption, but slowed by uncertainty in the external environment.

Compared to the first quarter, both private and general government consumption increased in the second quarter. Private consumption growth was driven, at least to some extent, by the VAT hike in July, which led to a slight increase in retail sales in spring, since some products were apparently purchased prior to the tax increase. July, however, saw retail sales weakening again. Investment and exports decreased in the second quarter compared to the first quarter. The fall in exports was likely due to the uncertainty caused by the fear of trade restrictions. The decline in investment was mostly caused by construction, but generally, this kind of bouncing between quarters is nothing out of the ordinary.

Looking at fields of activity, the energy sector provided a fairly strong boost to the economy in the second quarter, but its strong growth is not reflected in the volume of energy production. However, on the basis of the increase in industrial production, stronger growth in the manufacturing industry could have been expected. The impact on economic growth was also strongly influenced by taxes on production, which can be linked to consumption before the increase in VAT. Excluding the effect of net taxes on production, the economy grew at constant prices by only 0.3% for the year.

Looking at the broader set of economic indicators, the economic situation has improved over the past year. In the second quarter, both exports and private consumption were higher than in the previous year, and investment was broadly at the same level as in 2024. The turnover of the industrial sector increased last year, mainly in the euro area markets, indicating that companies have found new partners and export destinations. Industrial exports to non-euro area countries also improved at the end of last year. At the beginning of 2025, however, the manufacturing was experiencing setbacks, which can be linked to uncertainty related to trade restrictions. At the end of the second quarter, the volume of industrial production was broadly at the same level as at the end of the previous year, meaning that a new deep decline has not occurred. However, business expectations for the coming months have become more pessimistic, reflecting the uncertainty in external markets. 

Generally speaking, we should see a gradual strengthening of the economy from now on. Rising defence spending across Europe should boost demand for industrial output and help offset the effects of uncertainty caused by trade restrictions. Purchasing power has also strengthened in recent years, which should lead to a normalisation of demand for services and goods by Estonian residents and businesses. This is already reflected in loan growth, which has become quite strong.

Eesti Pank’s most recent economic forecast will be published on 23 September.

Additional information:

Hanna Jürgenson
Eesti Pank
Communications Specialist
Tel: 5692 0930
Press enquiries: [email protected]