Growth will ease going forward, moderating wages and inflation, as international demand softens and domestic pressures abate, notably in construction. The outlook is vulnerable to external events, including global trade tensions.

Fiscal policies have been mostly prudent, resulting in the lowest debt in the OECD. In the recent upturn, fiscal policy has become pro-cyclical, which should be avoided. The free play of automatic stabilisers should be allowed and in case of a strong downturn, the exemption clause used. Extending the real estate tax base to residential real estate and higher environmental taxes and fees could partly finance long-term spending needs on infrastructure, health and social security and would provide room for cuts in labour and consumption taxes. Monetary policy will be supportive as growth is slowing.

Proposed changes to the pension system pose risks. The proposal to allow opt-out of the mandatory privately-managed second pillar of the pension system and early withdrawal of funds would boost government revenues, but may threaten macroeconomic stability and future pension adequacy. Moreover, impacts of the proposed changes have not been properly assessed. Withdrawal before retirement should not be allowed and pension funds should be more transparent about their costs and better governed to achieve greater efficiency and higher returns.

Money laundering issues are being addressed. The Financial Supervisory Authority (FSA) closed down Versobank and Danske Bank’s Estonian Branch following earlier breaches of anti-money laundering rules. The FSA and financial sector cooperate to implement necessary checks and balances to prevent new incidences of money laundering. The government is addressing weaknesses of the legal framework to counter money laundering. This should include increasing fines to deterring levels and allowing the prosecutor to freeze assets on the suspicion of money laundering. Nordic-Baltic cooperation in banking supervision could be further improved.

Estonia has adopted a business-friendly regulatory framework and is considering forefront regulatory tools for artificial intelligence. However, the productivity catch-up has slowed since the global financial crisis and the gap with top performers is large. Digitalisation of businesses provides a promising avenue to lift overall productivity. Further automation is key to boost competitiveness amid rising labour costs.

Estonia is a frontrunner in digitalising government services and boasts a number of native ICT unicorns. The country should build on these key strengths to nurture digitalisation economy wide. Industry digitalisation policies should be holistic and reflected in government documents and their implementation monitored.

Skills are key to boost the productivity gains from digital technologies. High educational attainment and skills give solid foundations to make the most out of digitalisation. Almost half of Estonian jobs are at risk of automation or significant change. Ensuring high and up-to-date skills is central to seizing the productive potential from digital technologies and to sharing the gains equitably. Improving unemployment insurance coverage might give the unemployed with up-skilling needs stronger incentives to participate in training.

Digital user skills are improving, but quality of ICT teaching varies across compulsory schools, and many teachers feel unprepared. Adult education and training needs a boost, and employers should take more responsibility to train their employees.

ICT activities for children should be designed to appeal equally to girls’ and boys’ interests to boost the number of women ICT specialists. Overall supply of ICT specialists is catching up with demand, but employment is highly concentrated in the ICT sector. Traditional industries lag behind, likely slowing down their productivity-enhancing digital adoption.

Manager selection and management practices could improve. Managers are key to the digital transformation to initiate and steer product- and process innovations, and they are responsible for assigning and developing human capital. Estonian managers have a low skill premium compared to other countries, and firms make limited use of high-performing work practices known to boost productivity performance and skills use at work.

Digitalisation of industry is an imminent challenge. Access to ultra-fast broadband is one of the major bottlenecks to the adoption of digital technologies, in particular for small firms.

Embracing digital tools provides a leapfrogging opportunity for Estonian firms. Big data, the Internet-of-things and artificial intelligence are driving the shift to modern industry in digital frontrunner countries.

The small scale of firms inhibits boosting productivity through adopting digital tools. Most firms do not reach the threshold where fixed costs of digital tools are affordable. Digital collaboration within industry associations and ICT clusters could alleviate that issue alongside mergers and joint operations.

Lack of awareness about the potential benefits of adopting digital tools and the type of tools to adopt are bottlenecks to digital transition. Bureaucracy should be reduced for digital diagnostics and take-up rates and success stories should be better disseminated.

Lack of financing is an obstacle to long-term investments, especially the lack of collateral among new and rural firms. Many SMEs’ loan applications are rejected and many do not apply in fear of rejection compared to other countries. Alternative financing sources should be explored.

Robust growth did not benefit all groups of society.

Income inequality is around the OECD average, but social disparities, including inequalities in life satisfaction or health outcomes, are high in some dimensions: between urban and rural, across regions, men and women, skilled and unskilled and citizens and non-citizens. The whole population should be covered by health insurance and non-recipients should be encouraged to enrol.

The gender wage gap is second highest in the OECD. Employers, including the private sector, should report the size of the wage gap and provide an action plan to eliminate it.

Reducing dependence on oil shale is a key environmental, social and strategic challenge. Estonia is the most carbon intensive and third most energy-intensive economy in the OECD, due to its heavy reliance on oil shale. The industry meets a dominant share of Estonia’s energy needs, it accounts for 4% of GDP, it is a key employer in the northeast of the country, where unemployment and poverty rates are high, and it is seen as key to the country’s energy security. Efforts towards increased refining improves resource efficiency, but the industry remains polluting and vulnerable to international prices of oil and CO₂ emissions.

The amount of household waste has increased with rising incomes in recent years and recycling is low, which calls for better infrastructure and incentives to reduce waste and recycle.