Estonia’s economy has faced challenges over the past three years. However, a turning point is within reach, with signs of growth becoming evident, as highlighted on the podcast Sorainen Frequency by our Country Managing Partner, Kaupo Lepasepp, and the Prime Minister of the Republic of Estonia, Kristen Michal. The Prime Minister aims to return to the roots of Estonia’s success – emphasising freedoms and rights, balanced with civic responsibilities, minimal but necessary red tape and regulations, and a focus on security.
According to the Prime Minister, an ideal country is characterised by a low tax burden, straightforward administration, and greater civil liberties. Although critics argue that Estonia has regressed in these areas over the past year, Michal remains committed to making progress towards this ideal in 2025.
“According to forecasts from central and commercial banks, the economic downturn is essentially over, with moderate growth of 2–3% expected to begin in 2025. The hardest times are behind us, and the economy and people will find it easier to move forward,” says Michal. He emphasises that the most significant factor affecting Estonia’s economy has been the war in Ukraine, which has created uncertainty among investors in the region. Another key influence has been the performance of the Scandinavian markets, with the economies of Finland and Sweden also struggling.
“Additionally, during the COVID-19 pandemic and even earlier, many social issues and decisions in Europe and around the world were addressed with cheap money, leading to high inflation. When central banks intervened to control inflation by limiting the money supply, the value of money increased sharply. This adjustment hit our region hard, especially Estonia’s economy. Estonia’s private sector loan burden is about 110% of GDP. In comparison, it is around 60% in Latvia and Lithuania,” explains Michal, citing an estimate from Madis Müller, Head of the Bank of Estonia. “This brought our economy to a halt significantly faster. However, with the decline of Euribor, we should see significantly more funds available in the near future. Signs of economic revival are already visible, and life is becoming easier. In 2026, the ‘tax hump’ will also disappear, leaving people with more disposable income,” predicts the government leader.
Lepasepp has observed similar trends: “Law firms are slightly ahead of the economic cycle. We can sense an economic downturn even when the headlines remain optimistic. It begins with transactions slowing down and eventually coming to a halt. The same applies to periods of economic growth. Our firm noticed faint signs of revival in the first quarter of the year. The second quarter was intense, and the end of the year was also active. Transactions have resumed, and we dare to predict that the upcoming year will differ from the last. However, Estonia has a small economy, and global events significantly impact us. While economic growth might remain modest, wage increases could be substantial. After all, our population is small,” explains Lepasepp.
The Prime Minister has outlined three key goals for Estonia in 2025, which he is committed to achieving:
• By the end of the year, Estonia’s defence will be well-secured.
• The economy will grow, becoming more competitive and free from bureaucracy.
• Public debate will be respectful and constructive.
In the December episode of the Sorainen Frequency podcast, our Country Managing Partner at Sorainen Estonia, Kaupo Lepasepp, sits down with the Prime Minister of the Republic of Estonia, Kristen Michal, to reflect on the past year in Estonia. Together, they predict trends for the new year and discuss whether the free market economy is at risk, if citizens’ freedoms and responsibilities are balanced, and whether Estonia’s voice resonates in Europe. Additionally, they explore the government’s plans to reduce bureaucracy and drive economic growth in the coming year.
