Estonia’s economy has been in decline for two years now and general confidence still shows no signs of improvement. However, falling inflation and falling market interest rates offer relief to families and businesses. Although the number of unemployed is increasing and employment is decreasing, the labor market has suffered greatly from the prolonged recession.
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What is the outlook for foreign demand this year and next?
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When will the Estonian economy grow again?
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How much will unemployment increase?
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Will inflation continue to slow?
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When will the European Central Bank start lowering interest rates?
The Eurozone economy is weak
According to Tõnu Mertsina, chief economist at Swedbank, the situation remains The euro area economy will also weaken in the near future. Inflation in the Eurozone has moved lower in most countries, leading to expectations that central banks will start cutting interest rates. “Our forecast is that the European Central Bank will start lowering interest rates in April,” Mertsina said.
Euribor fell rapidly until the beginning of this year, now it has started to rise gradually. The reason is the Red Sea crisis, Metrsina explained. She added that container transportation rates from China have increased, but they are not the same as in the second half of 2021. Latvia’s economy saw a slight decline last year, Lithuania’s economy fared better. Swedbank expects improved growth for them.
The volume of the Estonian economy decreased by 3.5% year-on-year compared to the first three quarters of last year. More than half of the economic crisis at the time came from energy production and transportation. The weakening of foreign demand accentuated the decline in exports.
The export of goods was hit hardest, as was the processing industry, which had a very significant negative impact on the economy. Manufacturing industry output has fallen to the level of five years ago. The sharp decline in imports of production inputs shows that, at least in the short term, the volumes of imports and exports of goods will decline, which is why industrial companies’ expectations regarding export opportunities in the coming months are pessimistic.
The share of time deposits increased sharply last year, which could slow the recovery in consumption in the near term. Compared to June 2022, 70% of Swedbank customers increased their real estate loan installment up to 100 euros, 8% by more than 200 euros. Euribor affects around a quarter of families.
Purchasing power has improved, wage growth is slowing
Liis Elmik, senior economist at Swedbank, said energy prices are not expected to rise in the next two years. She added that so far food prices have fallen relatively little, by 3% in recent months. Food prices in stores fell less. Food prices have increased more in Estonia than in the Nordic countries. Estonian food prices have reached the level of Finnish prices.
Swedbank expects a price increase of around 4% this year, half of which is due to various taxes. A price increase of almost 3% is expected next year. Elmik pointed out that purchasing power has started to improve. At the beginning of 2025, the purchasing power of the average wage earner is expected to improve further. The average net wage will increase rapidly in 2025 thanks to the elimination of the tax hump.
The job market has remained relatively strong during the prolonged recession. Elmik explained that last year the number of employed people increased, the unemployment rate increased moderately and wage growth was strong. However, the confidence of economic sectors has deteriorated significantly. Employment has not responded adequately to the economic crisis, which is why labor productivity fell at constant prices more than five years ago.
In a situation where low demand slows economic activity for at least the first half of the year, companies may lay off overworked workforces, Elmik said. Last year the unemployment rate was 6.5%, according to the bank’s forecasts this year it will rise on average to 8.1%. The economic recovery expected next year is expected to reduce unemployment to 6.9%.
In the last two years the average growth in wages has been double digits, this year companies will have to significantly limit the growth in labor costs. Nominal wage growth is slowing, but according to Swedbank it will remain strong for at least the next few years. “According to our forecasts, wages will grow on average by 7.3% this year and 6.9% next year. Together with the slowdown in inflation, real wages turned into growth already in the middle of last year.” Economic life is expected to improve by 2025.
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2024-01-25 10:15:30
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