The latest forecast from Eesti Pank finds that after two years of recession, conditions have improved for the economy to return to growth. Prices for energy and other commodities have fallen, inflation is coming down and the purchasing power of people in Estonia and Europe is improving. Estonian companies are also working hard to become more competitive. The economy is expected to revive during this year, though the figures for the whole year will still be below those of last year. The central bank is forecasting growth of 3% for the following two years.

Conditions for a return to growth in the economy have improved. The Estonian economy has been shrinking for two years in a row, which makes the current recession longer and more persistent than earlier episodes. This has happened because problems have accumulated that have magnified one another, though some of them can now be seen to be easing or are likely to be resolved in the near future. Economic activity will be given a boost by commodities becoming cheaper, prices for fuel and energy coming down from their peaks, supply problems being eased, exchange rates becoming more favourable, inflation falling, and interest rates being cut by the European Central Bank. Purchasing power for people will continue to improve, which will encourage consumer spending and growth in the economy. The strong resilience that the labour market has shown to the current difficulties has laid a firm floor for growth in the economy, as high employment and low unemployment mean that the increase in purchasing power and the capacity to consume will be spread more evenly throughout society.

Economic activity will increase, but slowly. The impact of the energy crisis fading and inflation falling will increase the purchasing power of people in Estonia. The same factors will also improve the purchasing power of consumers in foreign markets, which will make an important contribution to reviving the export opportunities that have been suffering badly. The European economy is equally expected to start growing more strongly from next year. An additional issue for Estonia is that the traditional export markets, especially Scandinavia and Germany, are faring worse than Europe as a whole. A large part of the production capacity of Estonian businesses has been standing idle because demand has been weak, and this means that there is potential in the economy to accelerate growth very powerfully. This though would require a leap in exports in a weak external environment, and so it is still more probable that the new cycle of growth will unroll in a restrained manner and that strong growth in the Estonian economy can be expected from 2025. Entry into new markets will help increase export opportunities, and companies are increasingly emphasising this, though it takes time to open up those opportunities.

Estonian companies are working hard to become more competitive. The price-based competitiveness of businesses is no longer under the same strain that it was a year or two ago, though the cost bases of companies are higher than they were. This will nudge production in Estonia to become more efficient and innovative, though not all companies will be able to keep up with that and so production resources will continue to be reallocated between different sectors and different companies. The trend has continued for people to be very active in changing jobs, and there has been movement to sectors that have been doing relatively better. This indicates that businesses are adapting and are able to create new and attractive jobs. It is also one reason why employment has held steady despite the recession. Employment has also been maintained by working hours being reduced, which has mainly happened at the instigation of workers, and employers will in future have to do cope with different expectations from their staff.

The state has softened the recession, but doing so has widened the budget deficit. The general government budget deficit has increased and has injected additional money into the economy, some of which has encouraged demand and restricted the extent of the recession. If the governing coalition maintains its earlier expenditure levels with the tax changes that have been legislated, the budget deficit and the stimulus to the economy will increase even further in the coming year. Economic growth is expected to be quite fast in 2025, and so the economy will not need any additional support from the state budget. The nature of the key problems that have hindered growth so far of difficulties in export markets, supply problems, expensive energy, some business models being made redundant by the war in Ukraine, and a loss of price-based competitiveness means that spending by the state will not particularly ease them. The need to reduce the structural and lasting deficit in the budget is becoming ever more apparent. Keeping the state finances on a sustainable track means that the challenge in the coming years will be not to exceed the 3% deficit limit, and doing so would in any case breach the common rules of the European Union. Restoring fiscal discipline is important to prevent debt accumulating, but it is also important that exiting the deficit by withdrawing the fiscal stimulus should be done in a way that does not harm the capacity for growth in the economy.

For further information:
Viljar Rääsk
Head of Communications
Eesti Pank
6680 745, 5275 055
Email: [email protected]
Press enquiries: [email protected]