Central Bank: If COVID-19 regime stays same, GDP to fall 4 percent in 2020

Bank of Estonia coat of arms.
Bank of Estonia coat of arms. Source: Siim Lõvi /ERR

The Estonian economy is expected to contract by 4 percent in 2020, to be followed by a growth of 0.2 percent in 2021, the Bank of Estonia says. This forecast assumes that any coronavirus restrictions remain less strict than they had been in spring, the bank adds, meaning there is plenty of uncertainty about the prognosis, with the contraction possibly being as low as 2 percent and as high as nearly 6 percent.

2022 will in any case see further growth, though clear messages delivered in advance would help alleviate uncertainty and allow the private sector to plan better, meaning swifter recovery, the central bank added.

The coalition government has faced criticism about a lack of clarity or communication over recent coronavirus restrictions, including a ban on late night alcohol sales, the imposition of travel restrictions and the basis on which these would be issued, and the start of the new academic year at schools and universities.

The resurgence of the coronavirus at the end of summer and concomitant measures has led to uncertainty, however, which has caused the bank to give a range as its up to date forecast: Between -5.7 percent in the worst-case scenario and -2.0 percent in the best.

Additionally, gross domestic product could grow by as much as 4.5 percent in 2021, best case scenario, but in the most pessimistic assessment could see a contraction comparable with 2020's, at -4.2 percent.

While the initial forecasts for contraction in the second quarter of 2020 proved more negative than what actually happened, a potential second wave of COVID-19 will delay recovery.

At the same time, the bank said, the economy bounced back faster than had been expected in corporate surveys in spring, after the government's emergency situation, declared in response to the pandemic, ended in mid-May.

The government's wage support package provided impetus for this, the Bank of Estonia reports, and periods of grace on loan repayments also eased the situation, as did Estonia's generally open economy, which saw exports hit less severely than expected at first, due to destination countries not suffering as much as initially forecast.

This meant that Estonia's exports were less heavily impacted than those in some other European countries.

Labor-intensive branches of the economy, and low-paid jobs, are most threatened by the crisis, the bank says, and the wage compensation package – which saw up to 70 percent of an employee's salary or €1,000 per month, whichever was lower, paid via the Unemployment Insurance Fund (Töötukassa) to firms which could prove they had been hard hit by the pandemic – has not stopped unemployment in Estonia growing at one of the highest rates in Europe in Q1 2020.

The service sector, already hit hard, could continue to suffer as a result.

Fiscal policy needs to be flexible, including by removing obstacles to economic growth for 2021 if the virus abates and emerging out of a fiscal deficit which predates the pandemic by some years is also key, the central bank said, with the target for a balanced state budget by 2023, be it by cutting spending or raising taxation, being ideal.

On the other hand, should COVID-19 rates take a turn for the worse, temporary and well-targeted support measures will be necessary.

Clear communication from central government about what will be done in the various scenarios would thus help alleviate uncertainty, the bank added.

Other recent forecasts for Estonia's economy include the finance ministry's prediction that a -5.5 percent downturn in 2020 will be followed by a 4.5 percent recovery in 2021, and forecasts of downturn up to -5 percent followed, again, by 4.5 percent growth, from two of Estonia's major high street banks.


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Editor: Andrew Whyte

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