Swedbank also revised its forecast for 2026 downward by 0.5 percentage points, predicting 2 percent growth.

Several factors are shaping Estonia's economic performance. The country is gradually recovering from a recession, and sectoral confidence has improved during the first months of the year, the report noted.

While U.S. trade policy and ongoing global trade tensions have dampened the economic outlook for Estonia's trading partners—slowing export growth—external demand is still expected to surpass last year's levels.

On the domestic front, Swedbank identified several policy shifts likely to support growth. These include the planned hike in defense spending to at least 5 percent of GDP, as outlined in the Reform-Eesti 200 coalition agreement; the introduction of a 2 percent corporate income tax; and the abolition of personal income tax calculations from the first euro earned.

Additionally, falling interest rates are providing further support for economic expansion.

Inflation is speeding up as people's purchasing power is falling

Swedbank forecasts consumer price growth to reach 5.5 percent this year, and 3.9 percent in 2026.

Around half of this year's inflation will be driven by tax increases and rising service fees.

The most significant contributors to inflation are expected to be food and transport costs, with service prices also continuing to rise sharply. Higher global food commodity prices are behind the increase in food prices, while the new vehicle registration fee is pushing up transport costs.

Combined with rising inflation and an increase in personal income tax, the real value of the average net salary is projected to decline this year, leading to modest consumption growth.

However, the planned elimination of the income tax "hump" next year is expected to considerably increase the purchasing power of average wage earners, thereby giving a stronger boost to consumption in 2026.

The unemployment rate, which was elevated at the start of the year, will result in a slightly higher annual figure compared to 2024. That said, improving economic activity is expected to gradually reduce unemployment.

Swedbank projects an unemployment rate of 7.7 percent for 2025, falling to 6.8 percent in 2026.

Tariffs causing turbulence worldwide

U.S. tariffs and the uncertainty they generate are having a notable impact on the American economy—an effect that is also rippling across the global economy, according to Swedbank.

This uncertainty has led businesses and households worldwide to delay investment and consumption, which has curbed economic activity.

Even if the U.S. rolls back or withdraws the planned tariffs, much of the economic damage has already been done, mainly due to the climate of uncertainty they created.

Nonetheless, the bank noted that monetary easing by central banks and fiscal support measures are helping to cushion the downturn in global economic activity.

Swedbank expects the U.S. economy to experience stagflation in 2025.

Tariffs and a weakening dollar are driving up the price of imported goods for U.S. consumers, thereby contributing to higher overall inflation.

While China has reduced its dependence on the U.S. to some degree, the American market remains an important destination for Chinese exports. Any further escalation in tariffs will significantly curb Chinese export growth.

Although China may redirect some exports to alternative markets, overall growth in exports is still expected to slow—even after a strong start to the year. Chinese authorities are responding with a mix of fiscal and monetary stimulus to counter the effects of external uncertainty.

In contrast, the euro area is less exposed to U.S. tariffs, with exports to the U.S. accounting for just under 3 percent of its GDP.

Within the euro area, private consumption is being supported by slowing inflation and rising household purchasing power. Additionally, increased security spending, especially in Germany, is providing a further stimulus.

Swedbank forecasts the euro area economy will grow by 0.8 percent this year and 0.9 percent next year—both figures down 0.2 percentage points from the January forecast.

Interest rates are falling more than forecast

According to Swedbank's spring forecast, the European Central Bank (ECB) is expected to lower its interest rate below 2 percent by September, reaching 1.5 percent by the end of the year.

By contrast, due to persistently high inflation in the U.S., the Federal Reserve is expected to be slower in lowering its rate, which will remain higher than the eurozone's in the short term.

Despite weakening in 2025, the U.S. dollar remains above its long-term average. Swedbank expects the dollar to continue its downward trend against the euro, citing a weaker U.S. economic outlook.

The euro-dollar exchange rate is projected to reach 1.20 by year-end.

Given continued global trade uncertainty and unresolved domestic issues, Swedbank notes that this current forecast contains several provisional estimates. These will be reassessed and updated in the bank's next economic outlook, due at the end of summer.

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