The commission now forecasts a GDP growth of 1.1 percent this year and 2.3 percent in 2026.

A year ago, the commission's GDP growth forecast for Estonia for 2025 stood at 3.1 percent.

While the Russian threat continues to cause uncertainty, and it is still unclear how large and impactful Europe's growing defense expenditures will be on the economy, the commission says.

European Commissioner for the Economy Valdis Dombrovskis said: "There is one risk which is specific for Estonia, the Baltic states and eastern border countries in general, which is a geopolitical risk, which is something which investors are factoring in, and that's where it's important to have a strong EU level policy response strengthening our defense and security."

The impact of U.S. tariffs is also expected to exert a slowing effect on the European economy.

GDP for the EU as a whole will grow by 1.1 percent this year and 1.5 percent in 2026, according to the revised forecast.

Dombrovskis, a former Latvian prime minister, added that: "There are several drivers for this. So first it's a stronger investment or also EU funded projects are playing their important role. Also recovering incomes, which are fostering domestic consumption; better interest rate environment and also in terms of sentiment, we see both business and consumer sentiment improving."

Inflation is expected to fall to two percent, while purchasing power should recover over the next two years, the commission has said.

--

Follow ERR News on Facebook and Twitter and never miss an update!