In its economic forecast published Tuesday, SEB notes that while Estonia's economic indicators clearly improved in the first half of the year, the rebound has still fallen short of expectations. The 0.3 percent GDP contraction in the first quarter was largely due to weak consumer spending.

Consumer confidence remains at a historic low for the third consecutive year. This has been driven by rising taxes, prevailing (geo)political uncertainty and — most significantly — ongoing inflation.

The forecast highlights that although inflation has mostly normalized across the euro area, Estonia is an exception. Consumer prices in Estonia rose by an average of around 5 percent in the first half of the year.

"If the expectation of continuous price increases becomes entrenched, it turns into a self-fulfilling prophecy that erodes purchasing power and Estonia's competitiveness," the bank states.

SEB forecasts average inflation in 2025 to reach 5.2 percent, easing to 3.2 percent the following year.

On the other hand, there are also numerous positive signs in the economy: exports and industrial output are on the rise and low interest rates have boosted the real estate market and business investment. Due to a weak start, Estonia's economic growth will be limited to 1.2 percent this year, but with accelerating exports, it is expected to reach 2.5 percent in 2026 and 2.8 percent in 2027, SEB projects.

The euro area economy has gained some momentum this year. While last year's growth was limited to 0.9 percent, SEB now forecasts a 1.2 percent expansion for 2025.

Swedbank, which also released its economic forecast on Tuesday, projects euro area growth of 1.2 percent for both this year and next, with an acceleration to 1.6 percent in 2027.

Sweden's economy is expected to grow in the coming years, while Swedbank revised its growth forecasts downward for Latvia and Lithuania, as the global economic slowdown hampers their export growth.

Latvia's economic performance is further weighed down by weak private consumption. In contrast, private consumption in Lithuania is strong and next year's second-pillar pension reform — which will allow individuals to withdraw their savings tax-free — is expected to further boost growth.

Swedbank: Household purchasing power falling

According to Swedbank, Estonia's economic recovery has been slower than expected this year.

"However, we forecast that household purchasing power will improve next year. A decline in the household tax burden and interest rates will help boost private consumption, while strong credit growth is increasingly translating into investments. That said, U.S. trade policy is expected to have a moderately negative impact on Estonia's exports," the bank stated.

Preliminary data show that the first half of the year was weaker than previously anticipated, prompting the bank to revise its GDP growth forecast for 2025 down to 0.6 percent.

As the GDP figure for the first six months of this year — comparable to the Statistics Estonia figures revised through 2024 — was not yet available at the time the forecast was compiled, Swedbank plans to update its economic growth projection once more accurate data becomes available.

For next year, Swedbank expects economic growth to accelerate to 2 percent, rising to 2.3 percent in 2027.

The bank also noted that while retail sales volume has picked up, the growth is not broad-based and sales of food products are declining. The new vehicle tax and registration fee introduced at the beginning of the year have kept car sales down. Swedbank's card payment statistics also point to a decline in private consumption in the first half of the year.

Inflation to slow to 3.7% next year

Consumer prices in Estonia rose by 4.7 percent year-on-year during the first seven months of this year, but inflation has accelerated in recent months as expected. According to Swedbank's forecast, consumer prices will rise by 5.5 percent this year, about half of which is attributed to higher taxes and fees, including value-added tax, excise duties and the vehicle tax.

Swedbank expects inflation to slow to 3.7 percent next year. In both this year and next, rising food prices will be the main driver of inflation.

High inflation combined with tax increases has dealt a blow to household purchasing power and the bank estimates that real private consumption will decline this year. A slight drop in employment is also contributing to weaker private consumption.

However, the government's planned elimination of the income tax "hump" (Estonia's gradual basic exemption reduction scheme – ed.) next year is expected to reduce the tax burden and increase household incomes, according to Swedbank.

The forecast also highlights that lower interest rates and a gradually improving ratio between apartment prices and net wages have improved housing affordability this year. Next year, the expected strong growth in real net wages should help stimulate both private consumption and activity in the housing market. Additionally, the continued growth of housing loan portfolios for both non-financial enterprises and households — driven by lower interest rates — is increasingly reflected in rising investment levels.

Euribor to keep falling

Swedbank forecasts that the European Central Bank (ECB) will cut interest rates two more times before the current easing cycle concludes.

"According to our forecast, the central bank will lower rates in October of this year and again in February next year, bringing the euro area deposit facility rate down to 1.5 percent," the bank stated.

The U.S. Federal Reserve has so far held interest rates steady amid significant uncertainty, but despite rising inflation, slowing economic growth provides grounds for rate cuts in September and December of this year, in Swedbank's view.

In June, manufacturing output increased by 9 percent compared to the end of last year, with the wood industry making the largest contribution. Despite this notable growth, total manufacturing output remains 14 percent below its spring 2022 peak.

While domestic sales grew twice as fast as exports in the first half of the year, the overall impact was similar since nearly two-thirds of manufacturing output is exported.

Export growth continued in the first half of this year, with goods exports growing nearly twice as fast as services. Confidence and production expectations in Estonia's industrial sector have slightly weakened in recent months, but remain significantly stronger than a year ago.

Despite U.S. trade policy dampening the outlook for external demand, Swedbank expects global conditions to improve next year, allowing for moderate growth in Estonia's exports.

Labor market situation to improve

According to the labor force survey used for international comparisons, Estonia's unemployment rate in the first half of this year stood at 8.2 percent — higher than a year ago. However, registered unemployment is currently at its lowest level in the past five years.

The number of layoffs has also declined and more people are listed in the employment register compared to last year. The expected acceleration of economic growth next year is projected to further improve conditions in the labor market. After a slight decrease in employment this year, the number of employed persons is expected to rise again in 2026, according to Swedbank.

Among people aged 15 to 74, Estonia's employment rate is already among the highest in Europe — surpassing that of Latvia, Lithuania, Finland and the EU average.

On one hand, high employment enables companies to respond more quickly to improving demand; on the other, it slows the decline in the unemployment rate. Swedbank forecasts an unemployment rate of 7.8 percent for this year and 6.8 percent for next year.

Global economy to slow less than expected

SEB forecasts that euro area economic growth will accelerate to 1.3 percent next year and reach 1.5 percent in 2027. The recovery will be supported by lower interest rates and a strengthening of Germany's economic position.

On the downside, SEB points out that despite rising wages and easing inflation, households remain cautious about spending.

The global economy has had a bumpy ride this year, with sentiment swinging from one extreme to the other. Periods of extreme uncertainty have alternated with moments when a light seemed to appear at the end of the tunnel. However, according to the bank, we've now reached a point where heightened geopolitical conflicts and the outcome of U.S. trade negotiations are leading to a global economic slowdown.

"On the other hand, it must be acknowledged that the slowdown is less severe than feared, and unlike in the U.S., most countries' economies are trending upward," SEB's forecast notes.

Trade tariffs introduced under Donald Trump's trade policy — likely to average between 15 and 20 percent — are expected to limit economic growth, according to the bank. Although the actual impact remains to be seen, the tariffs are likely to harm the U.S. economy itself, primarily through higher inflation.

In addition to inflationary pressure, recent signs of weakness in the U.S. labor market and consumer spending, along with underwhelming returns on artificial intelligence investments, have all contributed to a gloomier outlook. As a result, SEB expects U.S. economic growth to shrink by nearly half this year compared to 2024, down to 1.6 percent, with a similar pace projected for 2027.

Swedbank emphasized that the U.S. has imposed higher tariffs on most of its trade partners at levels not seen since the 1930s.

Against the backdrop of global setbacks, China's economy has performed better than expected, making its near-5 percent growth target for this year appear achievable.

The decline in exports to the U.S. has been offset by stronger export growth to other markets. At the same time, the Chinese government has ramped up support measures to stimulate domestic demand. However, Swedbank expects China's economic growth to slow in the coming years due to demographic trends that will constrain the country's growth potential.

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