OECD Economic Outlook, Volume 2026 Issue 1

Estonia

The economic recovery will continue despite headwinds from the evolving conflict in the Middle East, with GDP growth reaching 1.8% in 2026 and 2.7% in 2027. Growth will be driven by stronger private investment, consumption and public investment. Inflation will reach 4.1% in 2026 as higher energy prices feed through to consumer prices, while the cancellation of a planned excise duty increase will have only a limited impact in cushioning households. Risks are tilted downward, including regional geopolitical tensions, weaker Nordic demand and persistently high energy prices.

The government deficit will increase to around 4.5% of GDP this year and next. Any positive fiscal surprises should be used to reduce the deficit, with steady consolidation starting next year. A long-term spending and tax strategy is needed to address pressures from ageing, climate and defence. Energy support should be temporary and targeted to vulnerable households. Investment in grids, energy security and storage would support resilience and the green transition.

Growth has picked up but price pressures have risen

Growth resumed last year, following three years of recession, and strengthened to 1.3% year-on-year in the first quarter of 2026, according to the first estimate. Household consumption has been broadly flat since the end of 2022, but retail sales volumes picked up in the first quarter of 2026. Inflation remained elevated at 3.3% in April due to rising energy price growth even though service inflation continued to moderate. Unemployment declined to 6.8% in the first quarter of the year. Consumer confidence fell in March and April amid weaker expectations about households’ financial situation.

Estonia

Source: OECD Economic Outlook 119 database; European Commission; and OECD calculations.

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Estonia: Demand, output and prices

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Estonia’s exposure to the evolving conflict in the Middle East is mainly through global energy prices, as direct imports from the Middle East are limited. Estonia is vulnerable to energy price volatility because energy and food represent a considerable share of household consumption and the pass-through to domestic prices is rapid. However, gas prices are expected to be less affected than in 2022, when European gas markets reoriented away from Russia towards new suppliers. Estonia has made rapid progress in increasing renewables generation, which accounts for around half of electricity supply.

Fiscal policy is expansionary

The general government budget deficit is projected to widen to 4.3% this year. This reflects a substantial fiscal easing, with defence spending rising by 1.6 percentage points to 5% of GDP and changes to the basic tax allowance, which will boost household incomes at a fiscal cost of 1.3% of GDP. In response to higher energy prices, the government cancelled a planned excise duty increase at a fiscal cost of 0.1% of GDP. The deficit is expected to rise further in 2027 as no significant consolidation measures are currently planned. Public debt is projected to rise from 24% of GDP in 2025 to over 31% in 2027.

The recovery is set to continue

The economic recovery is projected to continue this year and next, despite the headwinds from the evolving conflict in the Middle East, with GDP growth reaching 1.8% in 2026 and 2.7% in 2027. Growth will be driven by the recovery in private investment and consumption and strong public investment, including rising defence expenditure. Higher energy prices in 2026 and higher food prices in 2027 are expected to raise headline inflation to 4.1% in 2026 and to 2.6% in 2027. The effect on core inflation is likely to be more muted, given easing wage pressures. Risks are tilted to the downside and include geopolitical tensions in the region, more persistent weakness in Nordic demand and energy prices remaining higher for longer.

Fiscal consolidation and reforms would support economic resilience

Despite low public debt, Estonia faces growing spending pressures from population ageing, health care, the climate transition and defence. Given the substantial budget deficit, a steady consolidation effort will be needed from 2027. Any revenue overperformance or lower-than-expected spending in 2026 should be used to reduce the deficit faster. Existing measures to cushion increases in energy prices have limited fiscal costs but should be temporary and targeted to vulnerable households. A long-term strategy is needed for spending and taxation to manage fiscal pressures and keep debt low. Estonia should accelerate investment in grid reinforcement, energy security and storage to ensure security of supply, support price stability and enable the sustainable expansion of renewables. Broadening the reach of current upskilling policies would help advance the digital transition in traditional industries, prepare the labour force for the wider adoption of AI and the climate transition, and support more inclusive growth.