Eesti Pank lowered Estonia’s economic forecast for 2023 by 1.3 percentage points to 3.5% compared to its September forecast. If in September the central bank forecast economic growth for next year, Eesti Pank now forecasts a decline of 0.4%, or 1.8 percentage points less than in September.
“The state of the economy is worse than we thought a few months ago,” said Ülo Kaasik, vice-president of Eesti Pank, in the press conference presenting the economic forecasts. “It also makes life more difficult for people.”
According to Eesti Pank, the last year has turned out to be more difficult than expected for the Estonian economy, and the recession will last longer than previously expected. The ability of companies to sell domestically has been limited by people’s uncertainty about the future and the resulting savings.
Exports declining
However, sales in foreign markets were hampered by the worse performance of Estonia’s main export markets compared to the European economy as a whole and by the appreciation of the exchange rate with the Nordic countries. An important role was also played by the increase in production costs, the disruption of numerous existing supply chains and the disappearance of business models due to the war.
“If we look at the target markets to which Estonian exports are mainly directed, the neighboring countries, our main export markets are mostly in decline today. Take Sweden, Lithuania, Germany, Latvia, this year, according to recent forecasts of the European Commission, their economy is in decline,” Kattai added. “Our core markets are in worse shape than Europe as a whole.”
According to Kattai, this year the export of goods will decrease by one tenth and next year will also lead to a decrease in exports. From then on, the export of goods could grow again.
According to Kattai, if foreign trade is decreasing, consumption has also decreased significantly. On the one hand, people have started saving more, but in recent years, regardless of inflation, there has also been a certain boom in purchases, Kattai noted.
Declining investments
Along with increased uncertainty, both in the economy and in the external environment and taxation, business investment has also declined, Kattai noted. “Added to this are the effects of higher interest rates, i.e. the more expensive price of money, which partly slows down investments,” Kattai said.
“Considering the short-term outlook, another very important aspect is that, since the economy is in a state of decline, previous investments are relatively largely dormant. Perhaps before new investments are made on a larger scale, probably we will see that the current capital allocation and equipment will be taken on a larger scale and applied to some extent,” Kattai said.
“This year’s economic recession will be more extensive than it was in our last forecast. The volume of the economy will decrease by 3.5% this year. Unfortunately, in our latest forecast, we have achieved the result that the Estonian economy has entered a slow recession.” , an episode of long-term economic recession, in which we will experience economic contraction for three consecutive years,” Kattai noted.
The Estonian economy will also experience a slight decline of 0.4% in 2024, as demand for goods and services on domestic and foreign markets will only gradually recover. According to the central bank, opportunities for faster economic growth, close to 3%, can be expected in 2025 and 2026.
The deepening impact of the recession is reaching the job market
The effects of the economic recession are having an increasingly strong impact on the job market. So far, companies have tried to avoid cutting jobs, which is why total employment has remained at its highest level ever despite the nearly two-year economic recession, Eesti Pank noted.
“If until now the increase in unemployment is mainly due to the fact that employment has not decreased, but to the fact that people’s participation in the labor market has increased, in the future the decrease in employment will probably contribute significantly ” Kattai said. .
Retention of employees became possible due to the expectation of an imminent recovery of the economy and the decrease in real wages, which made work cheaper for employers. However, a sharp decline in productivity signals the underutilization of employees, and the most pessimistic predictions about what will happen in the near future will lead to an increase in unemployment, which will peak at 9% in 2024.
According to Eesti Pank, the cooling of the labor market will reduce wage growth. “The reduced demand for labor and the slowdown in price growth are also reflected in the slowdown in wage growth. In 2024, the collective wage agreements already concluded in the public sector and the increase in the national minimum wage to 820 euros will prevent wages from decreasing fully adapting to poorer economic conditions,” the central bank said.
According to Eesti Pank forecasts, in 2024 the average salary will increase by 6.6% and in the following years it will decrease to around 5%. The minimum wage increase of more than 13%, which takes effect next year, will likely be excessive for many companies with lower productivity and lower wage levels, and part of the increase in unemployment will be attributed to the wage increase minimum. salary, the central bank noted.
Kattai just pointed out that one of the reasons why unemployment is expected to increase is Estonia’s productivity per employee, which has decreased significantly. “The decrease in productivity per employee proves nothing other than the fact that employees are underemployed. Companies don’t have enough work to provide,” Kattai said.
Ülo Kaasik added that, at the same time, Eesti Pank certainly does not foresee an increase in unemployment in Estonia as happened during the last financial crisis, when the number of unemployed increased by more than 100,000. “In this case, we’re talking about 10,000 to 15,000 additional job seekers,” Kaasik said.
Kattai added that it cannot be ruled out that unemployment could reach 10% next year.
However, people’s purchasing power continues to improve
“To the extent that the dark tunnel we are going through waiting for the light to come has become longer, there are also more positive notes,” Kattai said.
“Slowing price growth, coupled with sustained wage growth, means that people’s purchasing power is still on the path to recovery. So far we have recovered about half of the decline in real wages, and the other half is yet to come.”
However, the remaining half of the recovery will last longer, because although inflation is slowing, future wage growth will also be more subdued, the central bank believes. The purchasing power that preceded the rapid rise in the cost of living will likely be restored in 2025.
The slowdown in price growth continues. The cost of the consumption basket has remained unchanged for more than six months and the current inflation level of 4-5% is due to the lower reference base compared to a year ago. Next year the price level will increase with the increase in VAT and excise duties and the consumer basket will increase by 3.4%, the central bank predicted.
2025-2026 The price increase expected by Eesti Pank in 2018 will remain slightly above 2%.
Price increases are slowed by weak economic activity, and in some sectors there are sufficient reserves to be able to lower prices at the expense of cheaper energy, raw material prices and profit margins.
According to Eesti Pank, preparing the state budget will become even more difficult.
As the business cycle will be weaker than usual in the coming years, fiscal policy support would be appropriate to stimulate the economy, the central bank noted. “If we have a smaller economy measured in euros in the coming years, this will naturally be reflected in lower tax revenues,” Kattai said.
At the same time, the budget is already in permanent deficit due to previous decisions, according to which further stimulus would mean an even larger deficit, increasing the state debt and interest burden in an accelerated manner.
“The long-term problem we have in public finances is more persistent and lasts longer. In other words, it also means that these decisions are more painful than we have to make if we want to balance our budget,” Kattai said. .
According to the central bank, the possibilities in this sense are also limited by the possible conflict with the rules in force at national and European Union level. As the increase in tax revenues will most likely remain lower than expected so far, pressure is growing to limit the increase in spending or to find new sources of income to prevent the debt spiral from deepening, Eesti Pank noted.
“The bigger the deficit we run now and the longer it lasts, the more burden we will put on the future and the more difficult it will be to cut these decisions in the future. Of course, in this extremely difficult economic situation, perhaps we shouldn’t rush to cut right away, ” Kaasik said. .
2023-12-19 10:15:00
eesti-pank-economic-recession-continues-and-unemployment-worsens-economy