Estonia - OECD Economic Outlook June 2020

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Estonia The COVID-19 outbreak is having a sharp impact on the economy. A second virus outbreak would delay the return of consumption and investment, which, together with the impact of virus confinement measures, could reduce real GDP by 10% in 2020. If the virus outbreak subsides by the summer, there would be a quicker recovery in consumer and business confidence and the fall in output would be lower, at 8.4% in 2020. Virus containment measures have been successful and widespread testing is readying the economy to open up.

The large rise in unemployment is concerning given that it may erode the substantial activation of disadvantaged workers that has occurred in recent years.

There has been a significant fiscal response to the crisis. Ensuring adequate health resources for a potential second outbreak is a priority. Further support for firms may be required should the crisis endure.

Interventions are likely to be needed to support the newly unemployed without cover and those who lose access to emergency programmes, potentially by relaxing eligibility conditions for unemployment benefits; increasing access to subsistence benefits; and expanding training and active labour market policies.

The COVID-19 outbreak has been successfully contained The pandemic response has so far resulted in fewer deaths and reduced transmission. The first case of COVID-19 was reported on 27 February and on March 12, the same day that local transmission was confirmed, the government announced a state of emergency establishing confinement measures. The country is well prepared for the relaxation of confinement, having set up a testing system with one of the highest coverage rates per population in the OECD.

Estonia The strength of the recovery depends on whether there is a second wave Index 2019Q4 = 100, s.a.

110

Consumer spending fell by a third during confinement Weekly card spending and cash withdrawal

Real GDP

Y-o-y % changes 40 Estonia

Single-hit scenario

105

Latvia

Lithuania

Double-hit scenario

30 20

100

10 0

95

-10

90

-20 85 80

-30 2019

2020

2021

0

0 Jan-2020

Feb-2020

Mar-2020

Apr-2020

May-2020

-40

Source: OECD Economic Outlook 107 database; and Swedbank.

StatLink 2 https://doi.org/10.1787/888934139271

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

188 _

Estonia: Demand, output and prices (double-hit scenario) 2016

Estonia: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

Current prices EUR billion

21.7 11.2 4.4 5.1 20.8 0.1 20.8 16.8 16.0 0.9

5.6 2.8 1.0 12.8 5.0 -0.5 4.3 3.8 4.2 -0.1

4.7 4.3 0.8 0.9 2.8 1.0 3.8 4.3 5.7 -0.8

4.4 3.3 3.0 13.8 5.9 -0.2 5.5 5.2 3.9 1.1

-10.0 -9.9 2.2 -13.6 -8.3 -0.7 -9.1 -13.4 -12.2 -1.4

1.6 1.1 3.0 1.3 1.6 0.0 1.6 1.5 1.6 0.0

_ _ _ _ _ _ _ _

3.8 3.7 2.0 5.8 -0.8 13.0 9.3 2.7

4.5 3.4 1.7 5.4 -0.6 12.7 8.4 2.0

3.2 2.3 2.4 4.4 -0.3 13.1 8.4 2.2

0.5 0.0 1.2 10.1 -9.3 24.8 20.1 -1.2

1.7 0.7 0.7 11.2 -7.5 32.3 27.6 -1.1

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137675

Confinement measures were less severe than elsewhere and have been relaxed over time. Most stores, except shopping centres, were able to remain open during the state of emergency as long as there was sufficient distancing. Restaurants, bars, recreation/leisure and other entertainment establishments had to close early, except for take-away and deliveries. Educational institutions, excluding kindergartens, were closed and substituted by digital learning solutions. Borders were closed. Restrictions have been eased and the emergency situation ended on 17 May.

The initial decline in economic activity was large Restrictions on economic activity and changing behaviour have had a sizeable impact on consumption and employment. A third of the economy consists of the most exposed sectors, including construction, wholesale and retail trade, air transport, accommodation and food, real estate, professional activities, and arts, entertainment and recreation. The unemployment rate rose by 0.6 percentage points between mid and end-March. Indications are that consumer spending, based on card and cash transactions, fell by a third during confinement. Business confidence deteriorated sharply in April, but remained unchanged in May. Mobility data show that people mostly stayed in their main location during confinement, reducing trips and distance travelled.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

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Estonia: Demand, output and prices (single-hit scenario) 2016

Estonia: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

Current prices EUR billion

21.7 11.2 4.4 5.1 20.8 0.1 20.8 16.8 16.0 0.9

5.6 2.8 1.0 12.8 5.0 -0.5 4.3 3.8 4.2 -0.1

4.7 4.3 0.8 0.9 2.8 1.0 3.8 4.3 5.7 -0.8

4.4 3.3 3.0 13.8 5.9 -0.2 5.5 5.2 3.9 1.1

-8.4 -8.2 2.1 -11.7 -7.0 -0.7 -7.8 -11.2 -10.4 -1.0

4.3 3.9 2.0 5.9 4.0 0.0 3.9 5.3 5.0 0.4

_ _ _ _ _ _ _ _

3.8 3.7 2.0 5.8 -0.8 13.0 9.3 2.7

4.5 3.4 1.7 5.4 -0.6 12.7 8.4 2.0

3.2 2.3 2.4 4.4 -0.3 13.1 8.4 2.2

0.6 0.1 1.2 9.2 -7.9 23.4 18.7 -0.7

2.1 1.3 1.3 8.1 -4.4 27.3 22.6 0.6

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137694

The fiscal policy response has been sizable Since there is significant fiscal space, the pandemic-related fiscal stimulus has been large, at around 4.1% of 2019 GDP, contributing to a fiscal deficit of 9.3% of GDP in the double-hit case and 7.9% of GDP under the single-hit one in 2020. The stimulus includes resources for the health response, a temporary wage subsidy scheme, coverage for social contributions, transfers to local government, a temporary reduction in fuel excise taxes, and provision of liquidity to firms through KredEx, the government-owned financing institution for enterprises. Low public debt levels mean there is still fiscal space for a further substantial response to the pandemic. At the level of the euro area, the ECB has committed to “do everything necessary within its mandate” to support the economy through this shock. The Estonian central bank (Eesti Pank) has reduced the systemic risk buffer for commercial banks from 1% to 0% to make available EUR 110 million for banks to cover potential loan losses or to extend new loans.

A large contraction is expected, but the economy is in a good position to rebound A second COVID-19 wave would result in a fall in output of 10% in 2020 and a slow return to growth. If there is only a single pandemic hit, the output contraction would be lower at 8.4% in 2020 and the recovery faster in 2021. The country is a very open economy that is vulnerable to falling demand in its main export markets. Reduced consumer and business confidence will impede consumption and investment even as confinement is eased. The growth rebound in 2021 relies on a recovery of consumption and investment,

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

190 _ rather than a large contribution from net exports. Following years of rapid wage growth, a significant drop in compensation is projected. The unemployment rate is set to increase to double-digits during 2020 in the double-hit scenario. Given that the labour market has absorbed many disadvantaged workers in recent years, there is a risk of sizeable lay-offs and hysteresis. Economic risks are diminished, as public debt is the lowest in the OECD. Specialisation in digital goods could accelerate exports and productivity growth.

Future policy should build on the strong initial response The large fiscal response to the crisis has eased the impact on employees and firms. Going forward, increased health resources to combat a potential second wave will be a priority, including mobilising resources to raise the ratio of nurses to physicians in acute care hospitals, and ensuring that the uninsured continue to have access to support from the Estonian Health Insurance Fund. Additional support for firms may be necessary if there is a delay in the recovery. It will be important to conduct a rapid assessment to identify the newly unemployed who may lose access to temporary programmes and/or are not covered by existing government schemes. Interventions should then be put in place to support the newly unemployed without cover, potentially by relaxing eligibility conditions for unemployment benefits; increasing access to, and the level of, subsistence benefits; and expanding training and active labour market policies. Estonia has the opportunity to use its rich digital data environment to monitor economic and social impacts, gather evidence on the results of government programmes and ensure appropriate targeting of measures to households and firms. Finally, the crisis has shown the importance of digital connectivity for firms. Public investment should support better coverage for ultra-fast broadband or other appropriate technology at an affordable cost, including subsidising last-mile rollout for smaller enterprises.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020