Uncertainty is hampering post-crisis economic recovery, which makes it important to restore businesses' and households' confidence to consume, invest and make forward-looking decisions, said Tõnu Mertsina, chief economist at Swedbank Estonia.
"Although restrictions on movement are gradually being reduced and economic activity is gradually recovering, the impact of this crisis on the economy and public finances is severe and costly," Mertsina said on the bank's blog. "The longer and stricter restrictions on movement we maintain or would have maintained, the stronger the blow would be to the economy." Finding a balance between economic impact and health risk, he added, is not easy.
He noted that the easing of movement restrictions will have a positive effect on the domestic economy, but as the external environment has been severely damaged and external demand has weakened significantly, this will deal a strong blow to Estonia as an open economy country.
"Confidence has also deteriorated, which is holding back investment and business decisions," he added.
According to the economist, it is now very important to restore companies' and households' confidence.
"Another question is whether or how much the government dares to take responsibility here, because a new wave of the virus cannot be ruled out," he warned.
Mertsina noted that most countries have responded to the economic shock with very large aid packages.
"Comparing the size of the additional economic rescue package to GDP, Estonia's packages have been larger or the same as those of our immediate neighbors," he said. "I hope everyone has already understood that the economic rescue package is designed to mitigate the effects of the crisis, but it will not prevent a recession. This is also the case in other countries."
According to Mertsina, the price of a large aid package at a time of a large decrease in tax revenues is a huge budget deficit and an increase in public debt.
"Fortunately, Estonia's public finances were in relatively good shape before the crisis," he highlighted. "The budget should not have been in deficit in the conditions of strong economic growth, but in nominal terms it was only 0.3 percent of GDP last year. Estonia's very low public debt is also known."
Mertsina said that the deterioration of the public finance situation will inevitably limit government spending, which, in turn, may slow down the recovery of economic growth.
"In addition, it must be borne in mind that if the state fails to meet its obligations under its new conditions, we may also face tax increases," he said. "Rapidly growing state budget deficits and public debt make countries vulnerable to new shocks that, as we have already seen, hit us unexpectedly."
Editor: Aili Vahtla