SEB, Swedbank: Economy to shrink around 5 percent in 2020, recovery follows

Euros. (photo is illustrative)
Euros. (photo is illustrative) Source: ERR

Estonia's gross domestic product (GDP) is set to decline by 4.7 percent this year but in 2021 the economy is estimated to grow 4 percent, SEB Bank says. Swedbank's analysts put the figure at 5 percent decline this year, with 4.5 percent growth coming next year.

"The growth in infection cases both in our country and elsewhere continues to make the preparation of economic forecasts very difficult. However, based on today's knowledge, the decline of the Estonian economy this year will be significantly more subdued than we feared in spring," SEB analyst Mihkel Nestor said on Tuesday.

"The fact that the spread of the coronavirus in Estonia has been lower to date than in many other countries gives hope to our economy as well," he said.

While export continues to occupy an important place in the Estonian economy, the unprecedented monetary political situation allows for smaller corrections to be made to domestic consumption than during the crisis of 2008-2009, Nestor said.

SEB main building. Source: Priit Mürk/ERR

"Common efforts by central banks and governments in reviving the economy will bring with them broad-based economic growth next year, which Estonia will not be deprived of either. In 2021, the Estonian economy will grow by 4 percent according to the forecast, whereas in 2022 growth will slow down to 3.5 percent," Nestor said. 

According to Nestor, a normalization of the situation in the world economy is difficult to imagine as long as the spread of the virus has not been stopped.

"The only realistic possibility for this is the putting of a functioning vaccine on the market. As things stand, six different candidates for the vaccine have reached the final phase of clinical trials," he said.

Nestor said that even though testing is estimated to take two to three months, it's very difficult to estimate today which of the vaccines will pass the trials first and when the massive vaccination of people could start. According to more optimistic scenarios, this could happen already in the first half of 2021.

Swedbank: Five percent contraction in 2020 followed by 4.5 percent growth in 2021

Meanwhile, Swedbank has forecast similar figures both for this year and 2021.

Swedbank says the latest economic indicators point towards faster recovery that forecast in May, causing it to revise its outlook for growth in the Baltic States as a whole.

After a woeful second quarter, the economy seems to be on the path of gradual recovery, Swedbank says.

Retail trade rebounded quickly, and in June was already 7.3 percent up on year.

The manufacturing sector is also recovering, albeit at a slower pace, but will continue be dragged down by weaker external demand, the bank said.

Swedbank logo. Source: Priit Mürk/ERR

All three Baltic States will experience better growth in 2021 than Swedbank forecast in May, on the back of improved expectations for industrial production, exports and the services sector. The real estate market is also picking up, the bank said.

Uncertainty and reduced opportunities for spending have also caused households to set aside more, Swedbank says.

Unemployment will continue to rise, however, as coronavirus wage-support packages expire, and exports and tourism do not pick up, estimated to hit 8.1 percent for the whole of 2020, according to Swedbank.

Again, this will improve in 2021, with unemployment falling 7.4 percent, the bank said.

Wage pressure and inflation will be lessened this year, however.

The average gross wage inclusive of wage support will rise by just 2.2 percent this year, though again, as economic growth picks up, wage growth will accelerate to 3.3 percent next year.

Swedbank forecasts prices to rise by just 1.1 percent in 2021, the result of educed demand, low oil prices, a decline in rentals, and excise duty cuts made last summer.

As for continued recovery, this should be faster than that experienced after the last major downturn over 10 years ago. Whereas pre-crisis levels were not met for eight-and-a-half years after the last downturn, the process should only take two-and-a-half years this time, according to Swedbank, meaning by the second quarter of 2022, the economy will have returned to the same level as the peak in the first quarter of 2019.

Of neighboring countries' economies, those of Finland and Latvia, as well as Swedbank's home country of Sweden, will contract by 5 percent, whereas Lithuania's will only shrink by 1.7 percent, the bank says.

The bank's forecast for the entire eurozone has not changed much since May, however, revising GDP growth forecast for 2020 downwards to -8 percent, from -7 percent in May, followed by a recovery of 6 percent in 2021.

Recovering demand for exports, state support measures and a more stimulating fiscal policy will further contribute to recovery in Estonia going forward, Swedbank said, though this has to be tempered by the risk of a return of a major COVID-19 pandemic, as well as uneven rates of recovery across Europe despite the EU-level recovery fund and European Central Bank (ECB) policies.


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Editor: Helen Wright, Andrew Whyte

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