Estonia flag Estonia: Economic and Political Overview

The economic context of Estonia

Economic Indicators

After its recovery from the crisis, Estonian growth was affected by an unfavorable regional situation (European sanctions against Russia and the following counter-sanctions), but it grew at a fast pace in recent years until the breakout of the COVID-19 pandemic. After returning to growth in 2021, the country recorded two consecutive years of recession in 2022 (-0.5%) and 2023 (-2.5%). The decline became widespread, affecting not only investment but also private consumption, with exports being particularly impacted as weak external demand and depreciations of major trading partners' currencies contributed to the downturn. Early signs suggest a sluggish beginning to 2024. With higher VAT and excise taxes in place, coupled with persistent inflation and elevated borrowing costs, consumers anticipate a deterioration in their financial situations, resulting in low domestic demand in the first half of the year. Alongside subdued external demand from key trading partners, this leads to a projected real GDP growth of 2.4% in 2024 (IMF, only 0.6% as per the EU Commission). Growth is anticipated to accelerate in 2025, driven by improving external conditions, better financing terms, and increasing consumption (to 2.7%).

Estonia became a member of the European Union on May 1, 2004, and was the first former Soviet country to join the OECD in May 2010. This Baltic republic has managed to move from a state-run and centralized economy to a dynamic market economy, liberalized by a succession of governments observing strict budgetary orthodoxy and modernizing the country. The country has stood out, mainly thanks to its IT sector (the invention of Skype, mobile payment systems, internet voting, multifunctional electronic identity cards, and initiatives in the sphere of cybersecurity), as well as its performances in the green energy sector. Furthermore, Estonia enjoys relative energy independence through the exploitation of shale oil, of which the country is one of the world's largest producers and which covers a large part of its electricity needs. In general, the country has stable public finances; in 2023, the general government fiscal deficit was estimated at 2.5% of GDP by the IMF, with a similar outlook over the forecast horizon (2.3% this year and 2.3% in 2025). As a result of widening fiscal deficits and weaker growth, the general government debt-to-GDP ratio increased to 21.6% in 2023, from 18.5% one year earlier. Albeit low, it is expected to increase to 25.9% by 2025 (IMF). In 2023, Estonia saw a 10% increase in HICP inflation, a decrease compared to the first half of the year, despite substantial drops in global energy prices and a moderation in food and industrial goods inflation. The implementation of higher VAT rates starting January 1, 2024, is anticipated to sustain elevated prices; however, inflation is forecasted to gradually decrease in alignment with global patterns, averaging 3.8% in 2024 and 3.2% in 2025 (IMF).

In recent years, the Estonian labor market has been characterized by labor shortages and consequently rising nominal wages. While wages experienced significant growth in 2023, they have not completely offset the decline in purchasing power resulting from high inflation in recent years. Throughout the year, the unemployment rate remained low (6.7%), with an increase in employment noted during the second half. The IMF expects a rise to 7.1% in 2024. In 2022, the Estonian real GDP per capita (PPP) was estimated at USD 46,697 by the World Bank, still 14% below the EU average. According to the latest data published by Eurostat, about 25% of the population is at risk of poverty.

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 37.9540.7643.4945.4847.70
GDP (Constant Prices, Annual % Change) -0.5-3.0-0.52.22.0
GDP per Capita (USD) 28,13629,83931,85533,34735,016
General Government Balance (in % of GDP) -1.2-1.9-2.2-2.7-2.7
General Government Gross Debt (in % of GDP) 18.520.723.025.527.6
Inflation Rate (%) 19.49.14.22.52.5
Unemployment Rate (% of the Labour Force) 5.66.48.17.77.0
Current Account (billions USD) -1.23-0.68-1.48-1.23-1.08
Current Account (in % of GDP) -3.2-1.7-3.4-2.7-2.3

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Agriculture accounts for only 2.5% of the country's GDP and employs around 3% of the workforce (World Bank, latest data available). With rich reserves of shale oil, Estonia draws a considerable part of its energy production (around 60%) from this resource, which gives it self-sufficiency in terms of electricity. Arable land and permanent crops cover almost 1 million ha, with 2.4 million ha under forest and 226 ha of organic crops. The main crops include cereals, potatoes, and vegetables. According to the latest figures from Statistics Estonia, in 2023, total cereal production decreased by 21.5% y-o-y (to 1.2 million tonnes), while the total agricultural output stood at EUR 1.36 billion, down by 16.6%.

The industrial sector represents around 24% of the GDP and accounts for 29% of total employment. The main industrial subsectors are the food industry (dairy products and meat processing), electronics & IT (a traditional sector), and the chemical and wood processing industries. Altogether, the manufacturing sector alone contributes to an estimated 13% of the country’s GDP (World Bank) and is export-oriented. Preliminary figures from Statistics Estonia show that in 2023, industrial production fell by 10.5% year-on-year. According to the agency, there was a decrease in output across all three industrial sectors: a 21% drop in electricity production, a 9.8% decline in manufacturing, and a 4.7% decrease in mining.

The services sector is the most developed (in particular transport and logistics, biotechnology, and financial services) and accounts for roughly 61.5% of the Estonian GDP, employing 69% of the active population. The ICT segment shows the strongest performance, accounting for nearly 7% of total GDP and employment (the country invested in this sector and created the TalTech’s School of Information Technologies and the Centre of Excellence in ICT Research - EXCITE). Concerning the country’s banking sector, it comprises 14 banks, of which nine are licensed credit institutions in Estonia and five are operating as branches of foreign credit institutions. The sector is dominated by foreign capital holding more than 80% of assets. The market is chiefly divided between Swedbank, SEB Bank, LHV Bank, and Luminor Bank (data European Banking Federation).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 2.7 29.0 68.3
Value Added (in % of GDP) 2.5 24.0 61.5
Value Added (Annual % Change) -24.9 -3.0 0.1

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
78,2/100
World Rank:
8
Regional Rank:
4

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
7.41/10
World Rank:
23/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Sources of General Economic Information

Ministries
Ministry of Economic Affairs and Communication
Ministry of Finance
Statistical Office
Estonian Statistics
Central Bank
Central Bank of Estonia
Stock Exchange
Nasdaq Baltic
Economic Portals
Postimees
The Baltic Times
 

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Latest Update: April 2024

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