Central Bank of Estonia forecasts 2.4% growth and warns rapid public debt growth could weigh on the economy

The Central Bank of Estonia has published an economic forecast projecting gross domestic product growth of 2.4% this year, driven mainly by stronger household spending and higher general government expenditure. Changes to the personal income tax system are expected to reduce the tax burden on individuals and lift real net monthly wages, supporting domestic demand. The bank also said growth could remain around 2.5% in 2027 and 2028 if the situation in the Middle East eases, while warning that fast-rising public debt could become a drag on economic development. The forecast links the near-term expansion to large fiscal stimulus, but says lasting gains in wealth will require higher productivity, more business investment, modernization and a shift toward higher value-added production. Uncertainty tied to the war in the Middle East is seen as restraining the recovery by disrupting supplies, raising prices and loan interest rates, and limiting export opportunities in foreign markets. On prices, consumer inflation rose to 3.7% in May, partly because of higher energy prices after the conflict escalated, and the bank expects inflation to average 3.4% this year and remain around 2.5% in the following two years. The bank said the fiscal deficit needs to be reduced to prevent public debt and interest costs from placing increasing pressure on the economy and on the state’s ability to respond to future crises. State debt rose from around EUR 2.5 billion in 2019 to EUR 10 billion by 2025, and the Ministry of Finance estimates it could reach EUR 20 billion by 2030. The bank called for a broad cross-party agreement to set an affordable baseline for state debt and maintain it across future governments.