Gross Domestic Product (GDP) will see a real decline of -5.5 percent this year, the finance ministry says, as the effects of the coronavirus pandemic make themselves known. At the same time, real GDP is predicted to grow 4.5 percent next year, with wage growth expected to recover the year after, in 2022, after a fall next year. In short, the economy has lost two years, due to the pandemic, the ministry says.
The ministry made the announcement officially at 11.00 a.m. Monday, affirming figures previously reported by ERR News which also set nominal GDP to fall by 5.6 percent this year, followed by a 6.4 percent growth in 2021.
The coronavirus crisis' impact in Estonia has been lower than the EU average, the ministry says, and is also unevenly distributed across different sectors.
"So far, we have done better than previously feared, but the future of the economy will be dictated by getting the virus under our control. We expect the economy to recover from next year, but consumption of some services may still be hampered," the ministry says.
Average salaries are forecast to grow this year by 1.3 percent, but will be followed by a -0.9 percent decline next year. In 2022, it will move back into growth, at 2.3 percent, the ministry says, and will grow even further at 2.6 percent in 2023. Average wages will increase by 2 percent in 2024, the ministry added.
Again, the decline in 2021 is linked to the coronavirus crisis.
"Declining corporate incomes resulting from the crisis are forcing workers to be laid off and wages to be reduced. Lower-paid people linked to tourism have suffered the most," finance minister Martin Helme (EKRE) said, adding that, without wage compensation, the labor market situation would be significantly worse than it already is.
A government scheme has seen up to 70 percent of an employee's wage, to a maximum of €1,000, provided to companies large and small, via the Unemployment Insurance Fund (Töötukassa). Companies involved in tourism and transport, such as Tallink, have leaned heavily on the scheme, which was originally intended to run for two months when it was rolled out in April.
Economic growth 3.5 percent from 2022
The finance ministry is forecasting real economic growth of 3.5 percent in 2022, 3 percent in 2023 and 2.3 percent for 2024.
Prices have also fallen, mainly due to a combination of the pandemic, and the slashing of fuel excise duties this year, and alcohol excise duties last year, the ministry says, though this will be replaced by a rise in prices next year.
The ministry forecasts a 0.2 percent drop in prices this year and a 1.4 percent rise next year; the consumer price index is expected to increase by 2.2 percent in 2022, by 2.1 percent in 2023 and by 1.9 percent in 2024, the ministry says.
General government debt burden to nearly double to 31.2 percent of GDP
The general government debt burden will more than double to 18.2 percent of GDP this year, the ministry says, and by 2024 it will rise to 31.1 percent of GDP. The negative cash flow of the state budget in the period 2020–2024 is to be financed through bond issues and the raising of loans, the ministry says.
"In essence, we are talking about having two lost years. We are back at the level of prosperity at the beginning of this year by 2022," Helme said.
Helme added he does not rule out the state having to find more budgetary cuts in the coming years, though these need not be huge. "It is possible that we will find reasonable savings in the state budget, but I do not consider a major massive cut to be possible, because it will slow down the economic recovery," he said.
As the crisis recovers, the tax burden will fall, since the average wage grows at a much slower pace than GDP, while allowance sales revenue and recoverable pension payments fall.whereas this year the tax burden is 33.8 percent of GDP, then next year it will be 32.4 percent, and in 2022 31.3 percent, the ministry says.
The 2020 GDP forecast represents an improvement on those at the height of the coronavirus crisis in spring, where figures of 10-14 percent contraction were mentioned, not only for Estonia, but other countries such as the U.K.
The EU introduced a €750-billion recovery package in the wake of the pandemic; Estonia unveiled its own supplementary budget worth over a billion euros in April, and has also issued its own €1.5-billion bond issue. Major bailouts include those provided to Tallink (€150 million), fuel company Alexela (€37 million) and construction site Porto Franco (over €39 million).
Editor: Andrew Whyte