Banks: Estonia's economy is improving, but people remain unconvinced

A new SEB forecast points to a narrowing of the long-standing contradiction in Estonia's economy: while wages and business turnover kept rising, GDP figures stayed weak. SEB analyst Mihkel Nestor says a recent revision of data by Statistics Estonia confirms the economy has actually been performing better than previous GDP figures suggested.

Despite the improved growth numbers, public sentiment hasn't followed — consumer confidence remains very low. Nestor points to several likely causes, including geopolitical tension, volatile raw material prices, and lingering memories of tax hikes and inflation. He also highlights a less-discussed factor: Estonians have simply grown used to faster growth rates than the economy can currently deliver. Between 2010 and 2019, GDP grew by nearly 4% annually on average — a pace Nestor says is unlikely to return, as the economy has entered a more mature phase. SEB forecasts 2.5% growth in 2026, followed by 2.7% in 2027 and 2.8% in 2028.

Wage growth fuels consumption

Swedbank expects growth to accelerate in the second half of the year, bringing full-year GDP growth to 2%, rising further to 2.5% next year. The bank's economists say consumption and increased government investment are the main growth drivers, helped by a unified tax-free income threshold and slowing inflation. Real net wage growth is expected to hit nearly 12% this year before slowing in 2027. SEB likewise notes the new tax threshold has significantly boosted real incomes, though most of that effect has already played out.

Both banks point to improving export prospects as Finland and Sweden, Estonia's key export markets, show stronger economic performance. However, the Nordic construction sector has yet to show signs of recovery, even though it represents the biggest growth potential for Estonian industry in coming years.

Consumer prices rose by an average of 3.1% year-on-year over the first seven months, and SEB expects the European Central Bank to raise interest rates once more this year, by 0.25 percentage points. Unemployment fell to 6.6% in the second quarter.

Economists from both banks note that supportive government fiscal policy — including tax changes and higher defence and infrastructure spending — has boosted growth but also widened the budget deficit and increased public debt. Nestor expects the economy to dominate the spring Riigikogu election campaign, though implementing real fiscal reforms afterward will remain difficult.