This year, SEB estimates that Estonia's GDP will decrease by 0.7 percent due to weak exports and cautious household spending.

The bank's forecast predicts that the central bank's deposit interest rate will drop to 2 percent by the end of 2025, with the Euribor, or Euro Interbank Offered Rate, to reach a similar level. The lower cost of borrowing is expected to rejuvenate the eurozone economy, which SEB projects will grow by 0.8 percent this year and 1.6 percent next year.  

Interest rates to start dropping rapidly

On the global economic front, the outlook seems to be improving. Skeptics' predictions about an imminent U.S. economic recession have proven unfounded, the bank noted in its forecast.

"The U.S. economy has remained steady on its feet, and can expect decent economic growth again this year," SEB noted. "Slowing inflation will allow the Federal Reserve to begin cutting interest rates, bringing the key interest rate down from the current 5.5 percent to 3 percent by the end of next year."

High interest rates have also curbed inflation in the euro area, which is now very close to the central bank's target level. "Since the economic situation in the euro area has been weaker than in the U.S., the pace of further interest rate reductions will likewise be faster," it added.

The drop in interest rates will foster Estonia's economy as well.

"Compared with the other Baltic states, the private sector's debt burden here is significantly higher, leading to money being diverted from consumption to loan payments," the bank said. "Even higher is the debt burden of households and companies in our main export markets, Finland and Sweden. This is also the main reason why Estonia's economic performance has been significantly weaker than Latvia's or Lithuania's in recent quarters."

Tax hikes to slow Estonia's economic growth

Setting limits on the recovery of the Estonian economy is the country's domestic situation. People's confidence has not significantly improved in recent months, which limits household consumption and the undertaking of bigger investments, noted SEB.

"Several tax hikes lie ahead in the coming years, which will improve the state budget balance, but will have a negative impact on economic growth," it explained. "Due to weak exports and cautious household spending, Estonia's GDP will shrink this year as well, but by a much more modest 0.7 percent compared to last year. Economic growth will start to recover this fall, and next year, GDP will increase by 2.5 percent already. For 2026, we forecast economic growth of 2.7 percent, which is close to Estonia's long-term growth potential."

According to the bank, the two-year economic downturn has remained relatively invisible in society.

"There have been few bankruptcies, loan defaults are low, employment has remained high and wage growth has been rapid as well," it highlighted. "Unfortunately, the economic recovery will remain relatively invisible as well. No robust economic growth is expected during the forecast period, resulting in relatively slow revenue growth for companies and more modest wage developments than before as well."

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