In discussions held last year about the state of the Estonian economy and its outlook, opinions spanned the full spectrum. Even so, two dominant approaches stood out, which could conditionally be described as two schools of thought.

The first could be called the cautious optimists. Their assessment was that the economy was nearing the bottom and that a recovery lay ahead — slow at first, but positive nonetheless. And if that direction holds, noticeably stronger growth, slowing inflation and declining unemployment could already be expected by 2026.

The second, persistently skeptical school of thought was characterized by the conviction that there were no meaningful signs of improvement in the economy and that further deterioration was more likely ahead. Every new indicator was taken as confirmation that things were not going to get better. And the culprit was usually the same: the government. If it acts, it gets it wrong. If it does nothing, it is guilty of inaction. If it deliberates, it is indecisive.

At the end of April, Eurostat released a large volume of fresh and significant data that gives reason to believe that cautious optimism was not unfounded last year.

Estonian economy growing faster than the European average

According to the preliminary estimate, Estonia's GDP grew by 1.3 percent year on year in the first quarter. At first glance, this is a modest figure. What is important to note, however, is that the average growth rate in the European Union was just 0.8 percent. The last time Estonia's annual economic growth exceeded the EU average was at the end of 2021.

The quarterly view shows an even stronger result. According to the preliminary estimate, Estonia's GDP grew by 0.6 percent compared with the previous quarter, while the EU average was only 0.1 percent. Finland grew faster than Estonia at 0.9 percent, but Lithuania and Sweden were both in slight decline. On an annualized basis, Estonia's figure corresponds to a growth rate of around 2.5 percent, which is by no means slow.

Inflation under control

According to the preliminary estimate, consumer prices rose 0.9 percent in April compared with the previous month — at first glance, and under normal circumstances, a rapid increase, though still slower than the eurozone average of 1.0 percent. No country has escaped the impact of the oil price shock on prices.

On an annual basis, the picture is clearer. Estonia's 3.3 percent inflation rate places the country 13th among the eurozone's 21 member states, or close to the middle of the pack. More importantly, this is Estonia's best relative position in the past 32 months. By comparison, Lithuania's preliminary figure has risen to 4.9 percent.

Labor market headed in the right direction

Eurostat's seasonally adjusted unemployment rate of 6.9 percent is slightly above the levels of the European Union as a whole (6.0 percent), Latvia (6.4 percent) and Lithuania (6.5 percent), but below those of Finland (10.4 percent) and Sweden (8.7 percent). More important, however, is the trend. Over the past year, the EU's average unemployment rate has remained unchanged, while in Estonia it has fallen by 1.3 percentage points — the fastest improvement in our immediate region.

These developments are also consistent with the unemployment rate registered by the Unemployment Insurance Fund, which has just reached its lowest level in more than six years at 6.0 percent.

Fewer people at risk of poverty

Eurostat uses the term "people at risk of poverty or social exclusion" to describe those whose living conditions are significantly worse than average. This group includes people who meet at least one of three conditions: they live in relative poverty, experience material deprivation or live in a household with very low work intensity.

According to the latest data, 21.8 percent of people in Estonia fell into this category last year. That is only marginally above the EU average of 20.9 percent. The corresponding figure was 24.7 percent in Latvia and 26.3 percent in Lithuania. Spain and Italy also recorded higher figures than Estonia. Even more important is the change over time. In the 11-year series covering 2015–2025, last year's result was Estonia's best.

Avoiding extremes is key

These results are neither accidental nor self-evident. Against the backdrop of the new global shock that began at the end of February, they are even somewhat surprising (how much further might we have come without the effects of the war in Iran?).

In a small open economy like Estonia's, the impact of external factors is inevitably very large. While in recent years economic growth was held back by weak economic conditions in the Nordic countries and the rapid rise in Euribor rates, those factors have now reversed. The somewhat improved performance of our northern neighbors has supported exports, while the cumulative decline in Euribor has had a positive effect on Estonian borrowers and the domestic economy more broadly.

Naturally, economic development does not depend solely on external winds. It is just as important whether a country's own policies support adjustment, investment and economic recovery or hinder them. I would argue that the decisions made by the government and the Riigikogu have also supported these more favorable developments, particularly changes that increase people's net incomes, reduce bureaucracy and create more room for business and investment.

At present, it is important not to go to extremes. There is no point in declaring that all problems have disappeared, because they have not, but there is equally little basis for claiming that the health of the Estonian economy has not improved or that things cannot improve further. The glass is no longer half empty, but at least half full. And if the Middle East crisis does not escalate significantly, it may yet fill further.

--

Follow ERR News on Facebook and X and never miss an update!