In an estimate published in May, the bank said it expected Estonia’s gross domestic product to grow by 2.1 percent this year and by 3.1 percent next year.

The revision of the GDP forecast was due to the first half of 2017 exceeding all expectations, as in the first quarter Estonia’s economy had grown by 4.4 percent, the bank said. Due to the stronger comparison basis, the bank expects growth to be slower in the second half of the year, which it now says should result in average GDP growth of 3.6 percent in 2017.

In the first half of 2017 growth was mainly driven by booming exports. In the first quarter, exports of goods and services surged by almost 12 percent. Exports flourished thanks to stronger-than-expected growth in two main export markets, Finland and Sweden, while trade with Germany and the other two Baltic countries also thrived.

In addition, stronger capital spending supported large sectors such as wood and metal product manufacturing.

With a positive outlook for Estonia’s main trade partners, exporters are expected to do well during the whole forecast period. SEB estimates export growth to total 3.8 percent in 2018 and 4 percent in 2019.

According to SEB, the growth of corporate lending seems to be decelerating. Capacity utilization has been hovering around 75 percent—a comparably very high level for Estonian industry—suggesting that expanding production capabilities is in order.

The bank expects the construction sector to remain active. In addition to housing, investments in other buildings and structures are also gaining momentum due to higher public sector spending. Because of large investments made, SEB estimates that gross fixed capital formation (GFCF) will increase by 10.6 percent this year, followed by a slowdown in 2018 to 1.8 percent due to base effects.

Private consumption, the main driver of economic growth in recent years, was expected to decelerate due to slower growth in real incomes, so the reported marginal growth of 0.6 percent in the first was a surprise. Surging wages and a strong labor market suggest much higher growth, which is why the bank expects household consumption to grow by 2.5 percent this year.

In the first half of 2017, HICP growth amounted to 3.2 percent, the highest in the eurozone. SEB expects average inflation to remain at 3.2 percent in 2017. The government's decision to raise various excise duties along with the tight labor market will keep inflation far above 2 percent in 2018 and 2019 as well, the bank added.

Sentiment indicators have mainly continued to improve. This is especially visible in the construction sector, where in addition to private sector contracts, public sector commissioned projects have started to flow in. Confidence has also substantially improved in services and manufacturing, the latter at its highest reading since 2011.

Despite the ongoing work ability reform seeking to bring some of the nonactive population back into the labour market, the unemployment rate has remained largely unchanged. According to SEB, the reform will lead to a higher unemployment rate, but its impact will be less than previously expected. SEB forecasts an unemployment rate of 6.8 percent this year as well as increases to 7.5 percent in 2018 and 8 percent in 2019.

A very high employment rate of 67 percent translates into strong wage pressure. Average pay has increased by almost 20 percent over the past three years. The yearly growth rate will remain above 5 percent during the forecast period. However, higher economic growth and recovering business sector profits mean that future growth will be more balanced, SEB said.

Estonia is looking at municipal elections in October. In economic terms, this has usually translated into higher public sector spending. This time the unknown variable is the ongoing administrative reform, which coincides with the elections and will result in only 79 municipalities instead of the current 213 after the election date.