Inflation in Estonia in April was 4.5% over the year, while prices were a full 1% higher (1.7% without energy and food) than in March. It was pushed up by rising prices for services, especially medical ones, as hospital charges for exceptional assistance increased in April. Hotel rates also rose sharply. Rising wages were a further factor; Eesti Pank forecasts wage growth to average 6% this year. Yearly inflation for services will be affected by the fee for registering vehicles, the tax that will add around 1.2 pp.
Food prices were 7.4% higher than they were a year earlier, while energy prices fell. Natural gas costs more than it did a year earlier, but electricity and motor fuels (5% of the consumer basket) were cheaper. However, for the rest of the year, fuel prices will be pushed up by tax rises, as excise on diesel rose in May, followed by an excise on petrol in July. VAT will also rise in July, and it is estimated that the combined impact will add about six cents to the price of a litre of petrol.
Inflation may also fluctuate because of the wide-ranging tariffs announced by the USA in April. The confusion about trade restrictions and tariffs has so far caused prices to fall in markets for commodities and assets. Economic growth may consequently be weaker in the near term. If growth slows, spending declines because of uncertainty, and prices for commodities fall, then inflation will come down. Prices may also be pushed down by imports of goods from other countries that cannot be sent to the USA and so will seek to enter the EU market. However, if the EU set additional tariffs in retaliation, though, prices would rise for imports, and inflation would rise for certain groups of goods.
In this context, the flash estimate put the Estonian current account at 11 million euros in surplus in March 2025. Exports of goods increased by 16% over the year and imports by 11%. Exports grew in all the main groups of goods, but especially in transport vehicles, mineral products, and metal and metal products. Imports grew most for transport vehicles and mineral products
Additionally, the latest financial stability review finds that the capacity of companies and households to repay their loans was harmed by the series of crises, but remains generally good. The largest risks looking forward are geopolitical, as the war in Ukraine and the increasing stresses in international trade threaten growth in the Estonian economy and may make it harder for the banks to access foreign funding, and so limit their ability to lend.
Increased international trade tensions make it more likely that the Estonian economy will fall into recession again, which would make Estonian companies and households less able to pay their loans. So far, the level of bad loans at the banks remains historically low, though, despite rising a little, as companies and households maintained their ability to pay even during the years of recession. They were helped in this by the buffers built up during the good years, unemployment remaining moderate, and interest rates falling.
Any possible customs tariffs or interruptions to supply chains would affect the ability to pay of the exporting manufacturing first of all. At the same time, the general economic and political uncertainty may also reduce the confidence to invest and consume, and so may affect other sectors. Geopolitical tensions also make it harder for banks to borrow from international markets.
The interest rate cuts from the central bank have also brought Euribor down and so reduced loan repayments, and that has combined with the recovery in economic activity to increase demand for loans in Estonia. The growth in borrowing by businesses has been driven by real estate companies, and the share of the loan portfolios of the local banks that has gone to those companies is quite large in international comparison.
Eesti Pank is maintaining the countercyclical capital buffer for the banks at the level of 1.5%, a little higher than the average in the EU. Analysts find that this is justified because the small size and the openness of the Estonian economy mean it is more sensitive to a deterioration in the economic climate than others elsewhere in Europe.