OECD Economic Outlook, Volume 2025 Issue 2

Estonia

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.

Growth is gradually recovering

The economy returned to growth in the first three quarters of 2025, following almost three years of recession. Household consumption is recovering on higher incomes, though the July 2025 VAT increase will curb spending. Food remains the main contributor to inflation, projected at around 5% this year. Pressures remain in services prices, pushing core inflation to around 6%. Excluding tax changes, core inflation is broadly stable at below 4%. The unemployment rate has risen, but survey-based employment expectations are now at their highest level since 2022. Investment edged up in the first half of 2025, led by machinery and equipment.

Estonia

1. Maastricht definition.

Source: OECD Outlook 118 database.

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Estonia: Demand, output and prices

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Exports have partly recovered amid diversification into faster-growing markets, and export orders are improving. Improvements in export growth has been broad-based, including the largest items – exports of wood, and machinery and equipment. Nordic demand remains weak, while sales to Poland and Lithuania rose sharply. Estonian-origin exports to the United States - one third of which is telecommunication equipment - represent 5% of total Estonian-origin exports.

The budget deficit will widen significantly

The fiscal deficit is projected to widen from 1.3% in 2025 to around 4.5% of GDP in 2026, driven by defence expenditure rising from 3.4% in 2025 to 5% of GDP and the scrapping of planned income-tax increases, and higher non-defence spending. Changes to the basic tax allowance will lower the tax burden on labour and boost households’ purchasing power. Government investment will rise by around 32%, mainly due to higher defence-related outlays. The fiscal policy stance will be strongly expansionary, though higher imports will mute GDP effects. Ministry of Defence funding will rise by around 54%. Over half of this will go to special-purpose defence equipment, mostly imported. Around half of total public investment is real estate, with a larger impact on GDP. Fiscal policy is assumed to remain broadly neutral in 2027. Public debt is projected to rise from 23.5% in 2024 to 31% of GDP in 2027, still among the lowest in the EU.

Growth will strengthen amid strong fiscal stimulus

Growth is expected to pick up to just under 3% in 2026-27. Changes to the basic tax allowance will lift real household purchasing power and support the gradual recovery in household consumption. Wage growth is projected to moderate to around 5% in 2026-27, down from 6% in 2025, easing inflationary pressures. Despite the economic recovery, employment growth will be modest, reflecting a declining labour force and labour hoarding by firms. Strong public investment will support activity in 2026. Private investment is projected to pick up gradually, supported by easing financial conditions, improving demand for exports, and rising capacity utilisation. Downside risks include an increase in geopolitical tensions around the Baltic, elevated inflation due to faster-than-expected wage growth and a slower recovery in the Nordics, who are key trading partners. On the upside, consumption may surprise if consumer confidence rebounds more strongly.

Reforms are needed to increase budget revenues and sustainable growth

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. Profit and property taxation offer some untapped revenue potential. Digitalisation can accelerate convergence, but this will require enhanced infrastructure and broader adoption across traditional sectors of the economy. Regulation of professional services is generally less restrictive than the OECD average, but rules for notaries and lawyers—such as advertising bans, ownership limits, fees and territorial constraints—could be eased. Obtaining licences and permits can be cumbersome and streamlining via regular licence-inventory reviews, a “silence is consent” rule, and tailoring procedures to risk would help.