Growth in the wealth of Estonia depends on whether Estonian companies and the Estonian economy can remain competitive, since the exit route from previous crises has largely been through exports said Governor of Eesti Pank Madis Müller. The current recession has left Estonian companies operating in circumstances where the cost base has been growing faster than that of competitors, supply chains connecting to Russia have been broken, and demand is weak in the main markets for exports. Exports from Estonia have declined.

“Prices rising more quickly than those of competitors does not automatically mean that competitiveness is being lost, as long as better goods and services can be provided for those higher prices”, said Mr Müller at a public seminar on competitiveness at Eesti Pank. Right now however, the rapid rise in prices has been accompanied by a steep drop in export volumes, and the figures for Estonian GDP in the third quarter show exports falling further. “That is not a good sign”, noted Mr Müller. Consumer prices in Estonia are 35% higher than they were in 2019 before the pandemic and the other crises and producer prices in manufacturing are 40% higher, while in the European Union, consumer prices are up 21% and producer prices 33%. Labour costs per employee are around 30% higher in Estonia than they were in 2019, while the average increase in the European Union is only half that. The average electricity price paid by Estonian companies in the first half of this year was a little below the European Union average, but above the price in Finland or Sweden.

The Estonian economy has been shrinking for almost a full two years now and society is becoming increasingly concerned about how competitive the economy is.

“A competitive economy is one that can successfully introduce new technologies and invest in innovation, which attracts new investment and skilled labour, and so the state can create an environment in which businesses can thrive”, said Mr Müller. He observed that a competitive economy is one where productivity is increasing, and so is the wealth of the population. Labour productivity in Estonia, shown as real GDP per employee, fell by almost 5% last year and has not improved this year.

Mr Müller spoke about several reasons why the Estonian economy has performed less well than others in Europe. One reason is that Russia’s military aggression and its consequences affected the Estonian economy more than it did others on average. Higher energy prices and interest rates have had a more immediate impact in Estonia than elsewhere, while Estonia’s main trading partners have been performing worse than the average. “It does appear though that wood processing and metalworking, which are the sectors that have been hit hardest, are past the steepest part of their fall, and so the next question is what their recovery will be like”, said Mr Müller.

It will be harder to recover though if the recent crises have had a lasting impact on the economy and if the competitiveness of companies, and of the whole economy more broadly, has actually suffered more seriously. There have also been changes in the external environment. Geopolitical tensions have caused a lot of supply chains to be reorganised, which may change the outlook for Estonian companies. Subsidies and industrial policy measures have been introduced in several European Union countries and elsewhere, and it is hard for Estonia to compete against them. “We need to ask how much things have changed for businesses in recent years”, said Mr Müller, inviting a debate about what the success factors could be for Estonia in the changed circumstances. “The question is whether we should just hope that our exporting companies will bring growth to the Estonian economy as other economies in Europe recover, or whether we should look for some other ways to become more competitive”, he said.