Forecast: Estonia's GDP to fall by 0.7 pct in 2024

According to the latest economic forecast by SEB, the gross domestic product (GDP) of Estonia will continue to decline this year. Photo: Marko Saarm

According to the latest economic forecast by SEB, the gross domestic product (GDP) of Estonia will continue to decline this year, but at significantly lower rate than last year, with full-year GDP estimated to contract by 0.7 percent.

«Economic growth will start to recover in the autumn, and next year GDP will already increase by 2.5 percent. For 2026, we forecast economic growth of 2.7 percent, which is close to the long-term growth capacity of the Estonian economy,» Mihkel Nestor, economic analyst at SEB Estonia, said in a press release on Tuesday.

Nestor noted that for Estonia, recovery will be limited by the domestic situation.

«People's confidence has not significantly improved in recent months, which limits household consumption and the undertaking of larger investments. In the coming years, several tax increases lie ahead, which will improve the state budget balance but have a dampening effect on economic growth,» he explained.

The decline in GDP is influenced by weak exports and low household spending.

«The two-year economic downturn has remained relatively invisible in society. There have been few bankruptcies, loan defaults are low, employment has remained high, and wage growth has also been rapid. Unfortunately, the economic upturn will also remain relatively invisible. There will be no strong economic growth during the forecast period, resulting in a relatively slow increase in corporate revenues, and wage growth will also be more modest than before,» he added.

At the same time, the situation of the global economy seems to be improving.

High interest rates have slowed inflation also in the euro area, which is already very close to the level desired by the central bank. According to the forecast by SEB, the deposit interest rate of the central bank will decrease to 2 percent by the end of 2025, with the Euribor rate to be close to that. Borrowing becoming cheaper should revive the economy of the euro area, which according to SEB's forecast will grow by a modest 0.8 percent this year, but by 1.6 percent already in 2025, Nestor said.

The fall in interest rates will also favor the Estonian economy. The analyst pointed out that compared to the other Baltic states, the debt burden of the private sector here is significantly higher, which means more money being spent on loan payments instead of consumption. At the same time, the debt burden of households and businesses is even higher in our main export markets, Finland and Sweden, which is also the main reason why the performance of the Estonian economy has been significantly weaker than that of Latvia or Lithuania in recent quarters.

«On the other hand, the expected interest rate cut could therefore be more favorable for our economy. According to SEB's forecast, Sweden's economic recovery will be quite strong, with GDP growth of 2.6 percent next year and close to 3 percent in 2026. The outlook for exports will remain constrained by Finland, where growth in the coming years will be roughly half that of Sweden,» Nestor added.