Growth in the economy in 2021 exceeded expectations, but it will be slower from here on. The Estonian economy grew by 8.6% over the year to the fourth quarter, and by 1.8% from the third quarter. For 2021 as a whole the economy grew by 8.3%. The three reasons why growth will slow in future are that the available labour that allowed rapid growth has been used up, inflation will restrict consumption, and the war launched by Russia against Ukraine will hinder growth.

Very fast growth over the past year has allowed the utilisation of resources that were left idle during the pandemic, but growth will start to slow once those resources have been used. This is indicated by the worsening labour shortages and rapid inflation in Estonia. The GDP statistics show that inflation for the value-added created in Estonia was even higher in the fourth quarter than that in consumer prices, though it was largely caused by the same factors that have raised consumer prices. The prices of goods produced in Estonia have simply risen on global markets. Corporate surveys show that labour shortages have by now eased a little, but the economy has still continued to perform very well and upwards pressure on prices remains.

Inflation is limiting the capacity to consume, but the rate of recovery from the pandemic and the money released from the pension system allowed consumption to increase very rapidly in the fourth quarter. Households spent 16.5% more in nominal terms on consumption in the fourth quarter than they did a year earlier. Strong demand also makes it easier for merchants to raise prices.

On top of the labour shortages and higher inflation, growth in economy will be restricted going forwards by the increased tensions with Russia. These will cause greater uncertainty, which will make households and businesses more cautious. The fall in the purchasing power of Russia will limit exports to the Russian market. Access to raw materials was already deteriorating before the conflict broke out, but this will worsen the supply-side problems that have already held economic growth back in several countries.

Reduced access to raw materials may cause a short-term rise in prices until alternative suppliers are found. History shows that Russia increases its military activities when prices for raw materials are high. These periods are usually followed by a fall in prices of raw materials. It should also be noted that the economic links with Russia have weakened since Crimea was annexed, and Russia accounts for a small share of the global economy. Balance of payments data show that the Russian market has accounted for 2-3% of Estonian exports in recent years.

Additional information:
Hanna Jürgenson
Eesti Pank
Tel: 6 680 959; 56920930
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