Issuu

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Estonia The economy will weaken considerably as the impact of Russia’s war of aggression against Ukraine becomes more broad-based. Real GDP growth is projected to slow to 0.5% in 2023 due to weaker domestic demand and a deteriorating external environment, despite support from fiscal policy. Growth will rebound in 2024 to 3.2%. Inflation should peak by the end of this year but remain elevated in 2023 and decrease only as spare capacity in the economy increases. To avoid boosting inflationary pressures further, fiscal policy support should be temporary and targeted towards the vulnerable and support for refugees. In the medium term, effective integration of refugees and reskilling policies could help to alleviate tensions in the labour market. Additional investment in energy infrastructure and security will strengthen resilience. The economy is slowing Following a strong recovery in 2021, when GDP grew by 8.1%, the Estonian economy started to slow in the first half of 2022 with growth hindered by high energy prices, supply chain disruptions and labour market pressures. Headline consumer price inflation is among the highest EU-wide and stood at 22.5% in October. Sustained by lower saving, private consumption increased in the first half of the year. Ukrainian refugees have eased some of the labour market pressures, and unemployment reached 5.7% in September, but companies nevertheless continued to cite labour shortages as the biggest obstacle to increasing production, notably in services and construction. Business and consumer confidence have declined since the beginning of the year and export orders are down.

Estonia

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 112 database. StatLink https://stat.link/g4d7zp

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

116 

Estonia: Demand, output and prices 2019

2020

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) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition³ (% of GDP) Current account balance (% of GDP)

27.7 13.9 5.4 6.9 26.3 0.3 26.6 20.5 19.4 1.1 _ _ _ _ _ _ _ _ _

2022

2023

2024

Percentage changes, volume (2015 prices)

Current prices EUR billion

Estonia

2021

-0.4 -1.1 2.9 20.6 5.8 0.3 5.1 -5.3 0.2 -4.0

8.1 6.7 3.9 7.0 6.9 0.9 6.6 20.0 21.4 -0.9

0.8 2.2 0.1 -14.6 -3.3 3.9 0.5 -1.1 -0.8 -0.2

0.5 -0.4 0.6 5.2 1.2 0.0 1.0 3.3 3.6 -0.2

3.2 4.1 1.6 4.1 3.6 0.0 3.2 5.0 5.0 0.0

-0.6 -0.6 0.0 6.8 10.5 -5.5 24.8 18.6 -1.0

5.8 4.5 2.8 6.2 8.3 -2.4 24.4 17.6 -2.3

15.2 20.2 10.1 5.0 2.7 -2.7 29.0 17.8 -1.4

7.2 10.8 6.6 5.3 0.6 -3.5 33.2 19.1 -1.4

2.9 2.8 2.4 6.0 -6.2 -2.3 35.8 19.7 -0.3

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. 3. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value. Source: OECD Economic Outlook 112 database.

StatLink 2 https://stat.link/yurhjf

Spillovers from the war in Ukraine have been relatively contained, helped by a resilient domestic financial sector, and the full impact of sanctions on Russia is expected to be reflected in trade only in the second half of the year. Russia’s share in Estonian exports was below 2% before 2022. Some 56 000 Ukrainians have settled in Estonia to date, corresponding to around 4% of the population, with children being just over a half of the migrants. High energy prices explain around half of headline inflation and have passed through quickly to the rest of the economy. Gas demand has been covered by LNG procured from Lithuania and a new central storage unit purchased at a Latvian terminal. Further investments to increase storage capacity are under way. Fiscal policy has cushioned some of the impact of high energy prices with a supplementary budget adopted in mid-year that increased social benefits and support for refugees and added extra resources for defence.

Balancing adequate support to the vulnerable with the need to tame inflation Fiscal policy will continue to support households and firms facing the impact of the cost-of-living surge in 2023. The minimum wage will rise by 11% and certain public sector salaries by 15% (including teachers and the police). The government is increasing spending on social welfare support and lowering the income tax burden in 2023. These measures come on top of agreed temporary energy price caps for households and small enterprises. Moreover, Estonia is receiving EU cohesion funds. Higher euro area interest rates will dampen growth but remain low relative to the underlying growth of the Estonian economy, making the case for the tighter fiscal stance.

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The economy is projected to slow amid high inflation and uncertainty Real GDP growth is projected to slow to 0.5% next year before picking up to 3.2% in 2024. High uncertainty and lower consumer and business confidence will slow domestic demand growth considerably in 2023. The deteriorating economic outlook in Estonia’s main trading partners will lead to lower external demand growth. Nevertheless, fiscal policy will help to cushion the downturn during 2023. Inflation will fall as spare capacity increases, reaching 2.8% in 2024. Considerable uncertainty and risks to the outlook remain, tilted to the downside. Further escalation of the war would increase uncertainty and exacerbate inflation. Disruptions to energy supply in Europe could hit activity both in Estonia and its trading partners. Inflation could be more persistent than projected if wage pressures gather momentum. On the upside, a quick resolution of the war would reduce uncertainty and inflationary pressures.

Policies need to maintain incentives for energy savings, strengthen the energy network and facilitate the green transition Fiscal policy should continue to shield the most vulnerable from inflation, but better targeting is needed to avoid adding to considerable inflationary pressures. It should also maintain incentives for energy savings. Diversifying energy imports and upgrading the energy network and security, as planned, would improve the resilience of the economy and increase the capacity for greener growth. Effective integration of refugees could help to ease persistent skills shortages.