SEB economic analyst Mihkel Nestor noted in a fresh forecast from the bank that at the start of 2025, major crises seemed to have been overcome, inflation had receded, and interest rates were making a rapid move downward, only for the unpredictable trade war started by the Donald Trump administration to dash those hopes.

"The unexpected moves by the U.S. in foreign and trade policy have quickly shattered those hopes. The resulting general uncertainty has caused a sharp decline in financial markets, weakened the dollar's position, and made both businesses and households hesitant in making expenditures and investments," Nestor wrote in the forecast.

"Industrial production, retail sales, the real estate market, and corporate investments are all recovering," Nestor said, though noting that it was "true that this growth is not rapid."

Estonia's economy will grow by a modest 1.8 percent this year, SEB found, with the main obstacle being the performance of the domestic economy. Household consumption is being confined by tax increases, inflation, and wider uncertainty about the future, SEB found.

On the plus side, employment remains at a very high level, wages continue to grow, the economy will eventually adjust to the higher tax rate, and greater optimism is likely to return.

The continued rise of local tech firms will help to contribute to economic growth approaching 3 percent next year, while the export industry faces a moment of truth as well.

"It is easy to demonstrate large growth figures from a low comparison base, but rapid wage growth has already worn very thin our price-based competitiveness in foreign markets. Granting the next push to export growth will require great effort from companies; it may not be feasible for everyone," the analyst added.

The U.S. itself will prove to be the biggest loser in the trade war, SEB found. The bank has cut its GDP growth forecast from 2.8 percent to 1 percent, and only slightly higher than that in 2026.

Nestor stated that "direct impact of tariffs is not the main issue," but rather "the loss of trust — not only among trade partners but also in the eyes of financial markets and the country's own citizens," manifesting in "missed investments, higher costs of loans and equity, and lower spending."

Reversing course on tariffs will not be enough to regain that trust, he wrote; instead, a radical change in policy is needed. But this likely will not happen during Trump's term, with several years to go.

The economic impact of the trade war on Europe will be minimal, limited to a few tenths of a percent of GDP, SEB reported, and forecast that the European Central Bank's (ECB) deposit rate will fall to 1.5 percent in the second half of the year, leading to lower loan interest rates and increased investment.

While capital, always available in Europe, has traditionally flowed to faster-growing markets in the U.S. and Asia, in current conditions, investing closer to home now seems more prudent, SEB found.

However, economic growth will be slow in the EU, at 1 percent this year and 1.2 percent in 2026.

Germany has lifted its budget cap and launched a €1 trillion investment plan, backed by falling inflation and interest rates, SEB noted.

While Eurozone countries do depend on the U.S. market, their reliance is lower than that of several Asian countries, including China, which SEB forecast will face a trade war loss about half that of the U.S. and a GDP growth forecast at 4.2 percent this year, below its 5 percent target. China offset losses by expanding other markets and stimulating domestic demand, however, SEB reported.

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