Estonia's economy shrank 0.3 percent in the first quarter of 2025, Statistics Estonia reported Friday.

Vitsur told ERR that last year's strong year-end growth disrupted the cycle of indicators, so a slower first quarter was to be expected as a correction.

"So this picture is currently distorted not by the economy itself, but by external factors — effects caused by tax changes," he said.

Without the introduction of the motor vehicle tax and other changes, he continued, "there wouldn't have been a minus 0.3 [percent] — it would have been something else. And last year's growth might not have been growth at all, it may have been zero."

Vitsur described the current situation as not catastrophic, but nothing to cheer over either.

While vehicle purchases will likely rise somewhat ahead of Estonia's VAT hike in July, he doubts it will trigger a car-buying boom like last year's, before the car tax and registration fees were introduced at the start of the new year.

On a positive note, industrial production — the country's most vulnerable sector — has stabilized over the past six months, the economist noted. Exports aren't falling, though they fluctuate month to month, but the overall trend is improving.

"That's the most encouraging part," he said. "The rest will depend on that."

Vitsur believes tax hikes will suppress economic growth and activity, pointing out that over half of people already report having too little money, and after the tax hikes kick in, they will have even less. This, in turn, will mean reduced economic activity and less spending.

"Spending — meaning the quantity of goods and services purchased and consumed — is the GDP," he explained. "So wage growth supports GDP growth, but at the same time, tax increases will drag it down significantly."

Modest decline a rather good sign, says Luminor economist

Luminor chief economist Lenno Uusküla noted that Estonia's GDP grew 0.1-0.2 percent each quarter last year, but fell 0.3 percent in the first quarter of this year after strong car sales lifted the previous quarter.

"It's no big surprise that it's hard to maintain last year's fourth quarter levels at the beginning of this year," he said. "Though there was a decline, the small magnitude of it is actually rather good news for the health of the Estonian economy, given the overall situation."

Domestic demand grew slightly on year, and while consumer spending dropped 0.6 percent, this was a significantly smaller decline than before, Uusküla noted.

Investments, previously in sharp decline, have stabilized, he highlighted, adding that there have previously also been individual quarters in which investments were up, but those gains didn't hold.

In the construction sector, things have improved somewhat in terms of building construction, but he acknowledged that civil engineering saw a decline in the first quarter of 2025.

Luminor's chief economist added that looking ahead, Rail Baltica construction will continue, and exporters are cautiously expanding production capacity as orders firm up.

However, he warned that Estonia's economic environment remains unsettled, as the new Reform-Eesti 200 coalition agreement includes a wide range of tax and fee hikes.

Uusküla noted that changes and adjustments have been ongoing for years, and with local elections approaching — and Riigikogu elections not far behind — it's uncertain whether more changes may be ahead.

"Measures that would improve the economic environment reach the economy with a significantly longer lag time," he said.

The chief economist said he expects this year's GDP growth forecast of around 1 percent to hold, but added that hitting that target will require actual growth.

Real incomes grew last year, and falling interest rates saw disposable income rise as well.

"Though real incomes will decline this year, they will still be better than this time a year ago," Uusküla said. "Export markets are recovering, and companies have found new markets. This is reflected in both manufacturing and Estonia's export statistics."

He also noted uncertainty over the outcome of U.S. trade tensions, but added that Estonian and European companies may have the opportunity to benefit if negotiations end favorably.

Bigbank economist: In turbulent times, models miss the mark

Raul Eamets, the chief economist at Bigbank, said first-quarter results clearly show that in turbulent times, all kinds of model-based calculations don't work.

He noted that Statistics Estonia attributed the changes to volatile car sales, referring to a busy year-end followed by a quiet start to the new year.

"Maybe it's that we're overestimating price growth," Eamets said, explaining that real growth is nominal growth minus the impact of inflation.

"GDP rose 4 percent nominally on year," he continued. "A simple calculation shows that the price deflator used to calculate real growth was 4.3 percent."

Setting aside consumer price changes, the Bigbank chief economist acknowledged that this inflation rate is realistic, so "we can't blame it on an overestimation of price increases this time either."

Eamets saw positive growth in industrial value added, but a notable drop in transport. The energy sector's decline was likely due to a mild winter, he added, which reduced household heating costs.

"As information and communication companies have sharply raised the prices of their services, this was reflected in a solid increase in their value added as well," he said.

He also highlighted growth in foreign trade, but noted that domestic consumption, which has the biggest impact on GDP, fell 0.6 percent on year in the first quarter.

"This isn't surprising, since consumer expectations remained very pessimistic in the first quarter," Eamets acknowledged. "Unfortunately, price hikes will continue into the summer as well, as we have a VAT hike coming up."

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