The economy is likely to shrink by more than 6%

  • The economic crisis has so far affected services businesses and the transport sector the most
  • How much the economy shrinks by will depend primarily on how long the restrictions last in Estonia and elsewhere, and how well companies are able to survive the crisis
  • If the situation eases by the start of May, the Estonian economy could shrink by 6%
  • If the situation eases by the start of August, the Estonian economy could shrink by 14%
  • If the situation eases quickly, the Estonian economy could rebound quite quickly and growth may be fast next year. If the restrictions remain in place for longer, the economy will recover more slowly
  • Government assistance should be directed to where it will help prevent long-term economic damage

It is now apparent that the restrictions put in place because of the coronavirus pandemic will make it very hard for companies to operate, and that the Estonian economy will shrink this year. The economy will suffer the negative impact in various ways. Relatively few people in Estonia have fallen ill with the coronavirus so far, and so the direct impact of sick people staying off work has been small. The quarantine requirements and the introduction of restrictions on gathering and on movement have had a bigger impact, as have difficulties in supply, falls in export markets, reduced consumer confidence, and the closure of borders and reduction or complete closure of transport connections.

The crisis is affecting companies in different ways depending on their sector of activity. Various services businesses have been hit fastest and hardest, such as hotels, restaurants, events organisers and travel agents, and the transport sector. Other sectors have also been affected, and the difficulties will deepen as the state of emergency continues.

It is not possible to forecast accurately the final economic damage that will be caused by the coronavirus pandemic, but rough estimates of how much the economy may shrink by in different scenarios can be proposed. How much the economy shrinks by will depend primarily on when the restrictions imposed because of the pandemic end and a normal operating environment returns, and how well companies are able to survive the crisis. If the restrictions are in place for a shorter time, the economy may recover very quickly, but if the restrictions remain in place for a longer time there will be many more companies that are not able to survive the crisis, and the recovery will be much more of a struggle.

“Estonian people and companies have shown repeatedly over the past 30 years that they can be very flexible and smart in adapting to changing circumstances. The Estonian economy recovered very fast from the deep crisis that hit it a decade ago, when compared to the economies of other countries. The flexibility of Estonian companies and the ability of the economy to adapt give reason to hope that the Estonian economy will be able to recover quickly from the recession caused by the coronavirus when the restrictions have ended”, said Governor of Eesti Pank Madis Müller.

The current decision from the government is that the state of emergency will end at the start of May. If restrictions are eased elsewhere in the world at the same time and a gradual recovery starts as businesses get back to normal economic activity, the Estonian economy will shrink by around 6% this year. Foregone tax revenues and increased social transfers will increase the general government budget deficit in this scenario by around a billion euros, or more than 3% of GDP. This estimate does not account for how the assistance measures planned by the government will impact the state budget.

Recent events suggest that the planned end of the state of emergency in early May may yet be postponed, and so the economy would be likely to decline by more than 6%. Every week that the state of emergency is extended in Estonia and the recovery in export markets is delayed will see the 2020 recession deepened by around 0.5%.

If the restrictions were to remain in place until the start of August, the deep depression would be compounded by the recovery taking more time. In that case the Estonian economy could shrink by around 14%. The general government budget deficit in this scenario would deepen by up to 2 billion euros, or 8% of GDP. This estimate does not account for how the assistance measures planned by the government will impact the state budget.

The actual decline in the economy and the impact it has on the general government budget will depend on the additional spending measures proposed in the government assistance package, which are currently planned at around 2 billion euros, which is 7-8% of GDP, depending on how much GDP shrinks by. The state treasury will receive part of this back from tax payments, but the load placed on the state budget this year will be very large.

The coming recession makes it clear that easing the crisis will seriously degrade the financial position of the Estonian state through the increased debt burden. Although the additional support for the economy from the government is necessary under current circumstances, the decisions taken about spending budget resources must still be considered carefully. It is extremely important to target the state aid as efficiently as possible, and especially towards areas that can help prevent long-term harm to the economy. It is important to support people and companies so that they can cope through the crisis period. In deciding on the steps needed to support the economy, decisions must be avoided that do not directly and effectively aid companies and people that have fallen into difficulty and that do not have broad support in society.

The impact of the coronavirus pandemic on the economy is generally expected to be temporary, and it is hoped that the economy will recover after the crisis. It is important to be ready though for the crisis to be longer and deeper, and for the economy to emerge differently from the recovery. The government has already announced effective decisions that are aimed to avoid companies going bankrupt and staff being made redundant, and to preserve the incomes of people. What further economic policy decisions would be the most effective will depend on how long the recession lasts and on how much it affects the structure of the Estonian economy. This means it is worth waiting to see how the first assistance package already announced affects the economy before making decisions about what the next steps should be to support the economy over a longer time.

Publication 

Estonian Economy and Monetary Policy 1/2020

Press release in Russian

Согласно прогнозу, экономический спад превысит 6%


For further information:
Viljar Rääsk
Head of Communications
Eesti Pank
Tel: 6680 745, 5275 055
Email: viljar.raask [at] eestipank.ee
Press enquiries: press [at] eestipank.ee