Economic Outlook November 2019 Country Note, Estonia

 119

Estonia Growth is projected to slow from 3.2% in 2019 to 2.2% in 2020 and 2021, as exports are hit by weak global demand. Consumption is projected to hold up despite slowing real wage growth, as household finances are strong after years of increasing real wages and employment. Buoyant investment, notably in housing, will fall back to moderate levels. Inflation will stabilise somewhat above 2% as the economy cools.

The government is assumed to allow a structural fiscal deficit in 2020-21, in line with its intention to amend the fiscal rule, while the nominal deficit widens. Public debt is very low, and macroprudential tools have been put in place to damp potential financial excesses. A plan to allow people to withdraw second-pillar pension savings risks aggravating the problem of old-age poverty, if implemented fully.

Growth is slowing Growth has slowed significantly, despite strong investment growth. Relatively solid consumer sentiment contrasts with declining confidence in the business sector. This divergence reflects considerable household resilience after years of rising employment and strong wage growth, whereas the business sector expects a hit from weak global trade. Labour force and employment growth are moderating, as employers are more reluctant to hire. Headline inflation has fallen back to slightly above 2%.

Estonia Growth has weakened Y-o-y % changes 9.0

Business confidence has fallen

% of working-age population¹ 68 Employment rate →

7.5

Balance, s.a.

15

Consumer confidence indicator Industrial confidence indicator

12

66

← Real GDP

9

6.0

64

4.5

62

3.0

60

1.5

58

0.0

56

6 3 0 -3 -6 -9

-1.5

2011

2013

2015

2017

2019

2021

54

-12 0

2014

2015

2016

2017

2018

2019

-15

1. 15-74 years old.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934045278

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

120 

Estonia: Demand, output and prices

2016

2017

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

2019

2020

2021

Percentage changes, volume (2015 prices)

Current prices EUR billion

Estonia

2018

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 12.7 5.0 -0.5 4.3 3.8 4.2 -0.1

4.8 4.4 0.8 0.9 2.8 1.0 3.8 4.3 5.7 -0.8

3.2 2.7 2.4 14.1 5.6 -0.5 4.8 4.0 3.8 0.2

2.2 3.2 1.5 1.7 2.4 0.0 2.4 1.1 2.2 -0.7

2.2 3.1 2.0 2.5 2.7 0.0 2.7 2.1 2.7 -0.4

_ _ _ _ _ _ _ _ _

3.8 3.7 2.0 5.8 7.9 -0.8 13.0 9.3 2.7

4.5 3.4 1.7 5.4 8.2 -0.6 12.7 8.4 2.0

3.4 2.2 2.3 5.0 9.6 -0.3 12.9 8.5 1.4

2.3 2.3 2.5 5.1 7.7 -0.4 12.0 7.7 0.9

2.6 2.2 2.2 5.2 6.8 -0.8 12.0 7.6 0.5

Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

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 106 database.

StatLink 2 https://doi.org/10.1787/888934046342

The role of fiscal policy is set to increase Monetary policy in the euro area is expected to remain very accommodative. Somewhat contractionary fiscal policy in 2020 is expected to turn broadly neutral in 2021 following a proposed change to the fiscal policy framework, allowing current deficits without offsetting past surpluses or planned future savings.

Diminishing labour market pressures are set to accentuate the strain on the part of the population negatively affected by ongoing structural shifts towards higher value-added production. Strengthening the social safety net and automatic stabilisers, notably by increasing unemployment and health insurance coverage, and renewed efforts to re-skill and up-skill are important in this respect. These policies are also central to long-term efforts to reduce dependence on high-emitting oil shale extraction and use, a cornerstone industry in the north-east of the country.

The government’s plans to allow individuals to opt out and withdraw savings accumulated in the mandatory private individual pension scheme should be reconsidered. A significant share of households, notably those with relatively low incomes and high propensity to consume, are expected to tap into pension savings, supporting consumption from 2021, but this risks feeding macroeconomic volatility in the short term and increasing old-age poverty from already high levels in the long term.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

 121 Residential investment growth has been very strong lately, but pressures in the construction sector are easing, house prices are growing in line with incomes, and macroprudential tools have improved resilience.

Luminor Group’s reorganisation of its Latvian and Lithuanian subsidiaries into branches increases substantially the size of banking assets under Estonian responsibility. Ongoing money laundering investigations implicating several Estonian lenders call for a stronger legal framework with higher fines.

The weak global outlook weighs on exports and investment The economy is set to slow over the coming two years, driven by weak foreign demand and sapped business confidence and investments. Consumption growth is expected to show some resilience, as households are bolstered by a decade of steadily growing incomes and employment and the proposed pension reform. Employment and labour force growth are projected to level off, while the unemployment rate will start to increase. As the economy slows, and wage pressures abate, inflation will stabilise.

Previous gradual losses of price competitiveness have done limited damage so far, but could pose extra challenges to Estonia in the context of a European slowdown and weakening global demand.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019