The Central Bank of Estonia published its latest economic outlook, stating that the economy has started to recover and forecasting gross domestic product growth of 1.5% in 2025, rising to around 2.5% in 2026 and 2027. Inflation is projected at 6% in 2025, with higher taxes contributing about one third of the increase in prices. Rising exports, supported by recovering foreign demand and slightly improved competitiveness, are expected to underpin the recovery, although sharply higher production costs versus competitors are seen as a longer-lasting constraint that will require productivity gains. The bank also highlights external risks from a more complex global environment and potential deterioration in trade conditions; a US tariff of 25% on European Union exports would slow Estonian growth noticeably but would not necessarily cause a recession. On prices and household demand, it points to the vehicle tax and increases in value added tax and excises as key drivers of higher food and services inflation, while the rise in income tax is expected to reduce wage purchasing power and limit consumption in 2025; purchasing power of disposable income is expected to be similar to 2024, with improvement anticipated in 2026 when the “income tax hump” is eliminated. The labour market is described as stable, with adjustment having occurred mainly via workloads rather than employment, and unemployment expected to fall slowly; accelerated wage growth is linked to skills mismatches. The release also cautions on public finances, warning that the European Union’s temporary deficit treatment for defence spending should not be used to widen deficits for other purposes and arguing for a durable funding solution if elevated defence spending persists.
Central Bank of Estonia 2025-03-25
Central Bank of Estonia forecasts 1.5% growth and 6% inflation in 2025 as tax rises lift prices
The Central Bank of Estonia forecasts GDP growth of 1.5% in 2025, rising to 2.5% in 2026 and 2027, with inflation projected at 6% in 2025 due to higher taxes. Rising exports are expected to support recovery, but high production costs and external risks, such as potential US tariffs on EU exports, pose challenges. The bank warns against using the EU's temporary deficit treatment for defence spending to widen deficits and calls for a sustainable funding solution if elevated defence spending persists.