SEB forecasts 4.5 percent economic growth for Estonia for 2022

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Tallinn skyline. Source: Siim Lõvi /ERR

The economy has adapted to the coronavirus, therefore there's no reason to be too pessimistic about economic growth, and SEB expects the Estonian economy to grow 3.3 percent in 2021 and 4.5 percent in 2022, Mihkel Nestor, economic analyst at SEB, said on Tuesday.

As recently as in January this year, the bank predicted Estonia's gross domestic product to grow 3.5 percent in 2022.

Nestor noted in a press release that optimism is also underpinned by the fact that the restrictions in place over the past month and a half have not significantly worsened the situation of the economy. 

"Economic growth is guaranteed solely by the fact that the first half of 2020 was more than poor for the economy - it is not difficult to grow from that," he said. 

For the second half of the year, Nestor forecasts a sharp acceleration in growth caused by the lifting of restrictions and money from the second pension pillar that is about to flow into the economy in the autumn. The same factors will boost the economy in 2022. 

"Household consumption is the main driver of economic growth. The decline in private consumption to date has been driven not by people's declining incomes, but by scarce opportunities to spend the money they have earned," Nestor said. If vaccination proves successful enough and restrictions on travel and entertainment services disappear, Nestor estimates that a large proportion of consumers are willing to spend more than before.

He said that consumption will be boosted by savings accumulated in bank accounts during the crisis and pension money to be freed up for people leaving the second pillar.

"As a result of a shopping boom in the fall, private consumption will grow by 4.5 percent already this year, with growth accelerating to 5.5 percent next year," Nestor said.

The final spurt, the analyst said, will be made by the real estate market.

"Widespread narratives about the future of the economy and the real estate market have boosted demand for residential real estate. For its part, the resources of the second pension pillar, which will open in the autumn, are likely to give it a boost," he said.

However, Nestor acknowledged that the age group most active in the real estate market is rapidly decreasing, which may lead to a longer period of low tide following the current spurt.

Nestor said this is a good time for investment.

"The lax monetary policy of central banks, intense competition in the banking landscape and active interest of investors have made raising both loan and equity capital favorable for Estonian companies. At the moment, companies have been rather conservative, but investment activity is expected to increase in 2022," he added.

Nestor noted that major investments are also planned by the state, including through using funds of the European Recovery Facility.

"It is worthwhile both for the corporate and public sectors to look more closely at digital technologies and the environmental impact of activities when planning new investments. It is in these areas that the highest returns are expected in the coming years, but also the most favorable opportunities for raising capital," he said.

Nestor underlined that smart investments will allow the Estonian economy to continue to grow rapidly even after the consumption party heated up with retirement savings is over.

Economic recovery does not happen at the same pace in different countries, however, he said.

"Recovery is impacted by the situation on the virus front, the vaccination rate, but also by the scale of the stimulus programs of governments. Therefore the economic growth of Europe this year will be significantly smaller than in the United States, where economic growth as big as 6.5 percent is expected this year, whereas the GDP of euro area countries is about to grow by just  3.3 percent," Nestor said.

He added that the economy will grow by 4.6 percent in the euro area and 4 percent in the United States in 2022, but as a result of the spurt made in by the US economy in the meantime Europe will lag behind the United States in economic cycle.

"At the same time, it is the government's very generous monetary policy that stands behind the rapid growth of the United States, which also involves a number of risks," the analyst said.

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Editor: Helen Wright

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