Estonia’s economic performance continues to lag most advanced OECD economies, with the gap in GDP per capita widening since 2021. Labour supply has expanded due to increased immigration, largely driven by the war in Ukraine and labour force participation is high. ICT activities are well developed, but traditional sectors perform less well, and productivity continues to underperform owing to earlier erosion in cost competitiveness. Aging of the population is expected to further constrain growth.

Digitalisation and AI applications offer a key opportunity to reinvigorate convergence, but this will require enhanced infrastructure and broader adoption across traditional sectors of the economy. To unlock labour market capacity, targeted reskilling and upskilling is needed, alongside improved health outcomes supported by sustainable financing and the promotion of healthier lifestyles.

The Estonian economy began to recover in 2025, and growth is projected to strengthen to 2.9% in 2026 and 2.8% in 2027, supported by stronger household incomes and fiscal expansion. Improved financial conditions and an upturn in external demand will further sustain the recovery. Consumption may surprise on the upside if consumer confidence rebounds more strongly, while an increase in geopolitical tensions around the Baltic and a slower recovery in Nordic partners could slow the recovery.

Lower euro area interest rates are supporting the recovery. The fiscal deficit has widened sharply, reflecting a large increase in defence spending but also other expenditure pressures and cancellation of planned tax increases. As the economy recovers, fiscal consolidation is required to narrow the deficit, while a longer-term plan is needed to finance long-term defence spending, population ageing and climate pressures. Digitalisation can speed convergence if infrastructure and adoption improve. Easing rules for notaries and lawyers and obtaining licences and permits would improve the regulatory environment.