The cooling of the economy will slow growth in wages and prices
The latest economic forecast from Eesti Pank expects the economy to grow by 3% this year, and by about 2% in the next two years. As demand for labour subsides in the cooling economy, wages are expected to rise more slowly from next year. The years of high inflation have also ended.
Slower growth in the economy is already leaving traces in the labour market, where churn is lower as people change job less frequently, there are fewer vacancies, and companies are no longer looking to hire as many new employees as they were in previous years. This is all reflected in incomes. The average wage will rise by 7.1% this year, but in the next two years it will rise by around 5%.
As wage costs grow more gently, so inflation will fall. Inflation will also be brought down by the reduction in the impact of tax rises, cheaper energy, and weaker growth in the prices of imported goods. The central bank forecasts that inflation will be 2.3% this year and below 2% in the next two years.
The main reason growth is slowing in the Estonian economy is that export markets have deteriorated and so there is weaker demand for Estonian products. This has particularly restrained the growth in industrial output. Companies focused on services and the domestic market are still doing well, as they are not so dependent on the performance of export markets.
As the precise content of the planned reform of the pension system and the date it will be introduced are not yet clear, the September forecast of Eesti Pank does not asses its impact.
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