Conditions have improved for growth in the economy to recover says Madis Müller



The economy in the euro area and in Estonia will remain weak this year, but the conditions have improved for a recovery in economic growth. Governor of Eesti Pank Madis Müller said at the “Tuulelohe lend 2024” conference of the Estonian Employers’ Confederation that positive yearly growth may be expected in the coming year.

A clear positive sign is that in general inflation has fallen, primarily because energy prices have fallen on global markets, but also because of the intervention of monetary policy. Inflation in the euro area is approaching the target of the central bank of 2% of GDP. “This gives grounds to believe that we will not need to raise interest rates any further”, said Mr Müller. However, the European Central Bank is waiting for additional confirmation that inflation will continue slowing before interest rates can start to come down again. “It is possible that the economic data for the coming months will give us that confirmation”, noted Mr Müller.

The fall in the Estonian economy was the biggest of any country in the European Union last year. This is because the war in Ukraine affected manufacturing and transport more than it did elsewhere in Europe, and also because Estonia’s main export markets have been among the weakest in Europe. Mr Müller explained that the competitiveness of exporters has also been undermined by wages rising faster than those of competitors, and an unfavourable exchange rate with the currencies of Scandinavia and central Europe. Domestic consumption has fallen from its peak of 2022, when the savings accumulated during the pandemic and withdrawn from the pension system were spent with enthusiasm.

“We can say though that we are getting over the worst, and that the conditions needed for the economy to start growing again have improved”, said Mr Müller. He noted that companies are adapting and actively searching for new markets, and that alternatives have been found to the supply chains that were broken. Prices have fallen for several inputs and availability of them has improved, while energy prices have almost returned to normal. Foreign markets have also started to get back on their feet, though the recovery is expected to pick up strength only in the second half of this year or next year. There has been no clear return of growth in industrial output or goods exports, but services exports have been doing better and hit a record level in the fourth quarter of last year.

The labour market has remained relatively strong despite the recession dragging on, and unemployment has risen by less than forecast. Incomes have not fallen, and indeed measured in euros they have increased by almost a third in the past three years. High inflation meant that wages lost a notable amount of purchasing power, but this is now recovering strongly and is approaching where it was before the recession. This recovery is supporting consumption, though consumers remain cautious. Incomes not having fallen in euros has allowed people to cope well with the increase in debt liabilities resulting from the rise in interest rates. The amount of overdue loans has remained small. The purchasing power of wages will continue to recover this year, though at a slower rate.

The short-term outlook for the Estonian economy depends largely on the performance of Estonia’s export partners, and on how well Estonian companies succeed in finding new markets and adapting to higher costs. Mr Müller observed that it is equally important though, that political policymakers maintain an economic environment that supports business.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
Press enquiries: [email protected]