It is time to move from emergency crisis aid to a long-term plan
Estonia is going through a global pandemic with wide-ranging economic consequences that will leave the economy 10% smaller than it was last year if the virus fades away and restrictions are not re-imposed. The economy has already started to recover as the restrictions that have been introduced in Estonia and elsewhere to counter the pandemic have been eased, but the recovery will take time. The crisis will reach several sectors after a delay, some restrictions on activity have continued to apply after the emergency ended, and consumers are being careful in their spending. Economic growth will temporarily hit 8.5% in 2021 because of the exit from the low point of the crisis, but the economy will return to its level of before the crisis only in mid-2022. Faster recovery will be hindered partly because the Estonian economy and the global economy were already cooling before the coronavirus hit.
Getting the virus under control and removing the restrictions in Estonia will not eliminate problems for the economy, and so it is necessary to remain ready to deal with them. It is forecast that a little over two thirds of the fall in the economy this year has come from a reduction in foreign demand and around one third from the restrictions introduced in Estonia. Countries are removing restrictions and exiting the lowest point of the crisis at different speeds, and Estonia’s potential for growth in the future will depend on this. As it is still possible that there will be a second wave of the virus, the danger remains that the performance of the economy will be worse than forecast.
The impacts of the crisis are building up in the labour market. Unlike the great financial crisis that started in 2008 and hit hardest in manufacturing and construction, this crisis has hit most in the labour-intensive service sector. This has caused a much faster rise in unemployment than in the previous case even though wage compensation has stopped it from rising even faster. Around 120,000 people received wage support in April, which is a fifth of those in employment, and some of them would have lost their jobs without the support measures. Unemployment will rise when the wage compensation ends and will pass 13% by the end of 2020. There has also been a major adjustment in wages, which will fall by 1% this year contrary to expectations of wage rises at the start of the year.
This year has shown that crises can arrive unexpected by anyone and so to cope with them better it is wise for people and for the state to build up reserves during good times. When one person in ten is unemployed and the average wage is falling, savings that were put aside earlier become very important. The private sector as a whole is better protected against the crisis than it was the last time round, but the buffers needed to survive difficult times are very unevenly distributed. As the crisis this time has affected sectors where wages from employment are low, the government should be ready to ensure that the social safety net is strong enough.
The budget deficits of previous years have made it harder for the government to come to the aid of the economy. State spending, including orders from the private sector, should be based on a long-term plan and should not fluctuate with the vagaries of one economic cycle. Public sector spending exceeded revenues in 2016-2019 by more than 500 million euros, though a surplus should have been expected given the state of the economy. Maintaining structural balance over the past four years would have given the state 750 million euros in savings that could in the current difficult times have substantially limited the sharp rise in the state debt.
Economic policy should take a long-term outlook. State assistance for the private sector has been very important and helped in reducing the long-term damage to the economy caused by a short-term shock. The most effective part of this has been preservation of jobs, but this does not work as a long-term solution. The focus in future will need to be on retraining people and helping them move to different sectors of the economy. This will help the economy adapt to the new conditions and will support the creation of new jobs. The long-term outlook for the economy also requires steps to be taken towards digitalisation, the development of new technologies and economically sustainable advances that can make the economy more competitive. It is not only the exporting sector that depends on being competitive internationally, but the economy as a whole.