The economy is likely to contract by 5 percent this year in the due to the effects of the coronavirus pandemic and the current emergency situation, according to a forecast by Swedbank. However, if the shock remains temporary, recovery is possible in 2021.
Swedbank chief economist Tõnu Mertsina that the present crisis has not been caused by economic mistakes, adding the economy had been in good shape on the eve of the coronavirus outbreak.
"The Estonian economy began the year [2020-ed] with decelerated growth," Mertsina said.
"At the same time, our economy was much better balanced last year than prior to the previous economic crisis; our current account was in surplus, household income exceeded expenses, and business and household debts were smaller compared with 12 years ago," he added.
While during January and February, economic activity still met expectations. A few sectors, such as transport and accommodation, felt the early effects of the coronavirus pandemic. In March, as the coronavirus spread, the economic situation deteriorated rapidly.
The emergency situation declared on March 16 by the government was the right decision, Mertsina said. However, it brought a large part of the economy to a halt, exerting the greatest effects on accommodation and catering, transport, entertainment and retail.
"It should be taken into account, however, the stricter the measures to curb the coronavirus outbreak, the stronger their decelerating effect on economic activity will be. Managing the economic crisis should also include ensuring various risks in the economy should not escalate or accumulate," he said.
The global economy had already declined last year and Estonia's key trade partners decreased their imports, Mertsina said.
"The global economic shock caused by the coronavirus will further weaken foreign demand, and that will particularly adversely affect Estonian exporters."
Prognosis following emergency situation
Provided the emergency situation in Estonia lasts only until the start of May and the coronavirus outbreak is brought under control within the next few months, Gross Domestic Product (GDP) in Estonia can be expected to decline 5 percent this year, Swedbank forecasts.
Economic activities depending on domestic demand should gradually recover after the emergency situation ends; however, improvement in foreign demand will take longer.
According to this scenario, the sharpest economic decline will occur in the second quarter of 2020 and will subsequently begin to ease, before reaching growth again next year.
"We expect a surge in economic growth next year as a result of the government's support measures as well as due to the base effect. According to our estimation, Estonia's economy will then grow 5 percent," Mertsina said.
This depends on the depth of the economic downturn this year and the speed of recovery next year, as to whether the Estonian economy exceeds again the level achieved in the fourth quarter of 2019, based on GDP at constant prices, Mertsina said.
"Based on our calculations and according to the baseline scenario, this [recovery] should happen in the first quarter of 2022," he added.
Forecasts come with a caveat
Economic conditions in Estonia as well as globally are changing rapidly, which makes all forecasts preliminary and largely an estimation, Mertsina went on.
Moreover, economic forecasts have become increasingly negative with the further propagation of the virus and imposition of various movement restrictions by the government.
"If bringing the virus under control in the world and in Estonia takes longer than has been estimated in our baseline scenario, for instance should the emergency situation last longer, with economic activities suspended for a longer period in order to curb the virus' spread, we're looking at a much deeper economic downturn," Mertsina said, adding that GDP will recover slower to exceed its previous peak, entailing a more severe impact on the labor market.
Labor costs will need to be cut
Merstina added the decline in demand and supply restrictions will reduce business sector revenues, which means that enterprises will need to substantially reduce their labor costs and the number of closures will grow.
The rate of unemployment will rise to over 8 percent in that case; the number of employed people will concomitantly decline, and wage growth will decelerate abruptly, which will in turn also reduce private consumption.
The present need for government support prompted by the economic shock demonstrates the importance of conservative and well-maintained public finances and accumulation of reserves, which currently equal close to 5 percent of GDP, Mertsina continued.
The situation also shows how rapidly the need for additional expenses may arise. If public finances are in a good state, the government can spend more to boost the economy; currently they are almost 7 percent of GDP.
"The government's substantial cash injection into the economy at a time when tax inflow is reduced greatly increases public deficit. While the proportion of public debt in GDP will rise, it will nonetheless remain relatively low - significantly below the public debt levels of most EU member states," Mertsina said.
The newly agreed economic support package should be affordable in terms of public finances and should not significantly deplete these over the medium term, he added.
Editor: Andrew Whyte