The Estonian economy has recovered well from the coronavirus crisis, but if inflation pressures and overheating continue, the government should take steps to cool the economy and cut financial subsidies more sharply than planned, a new report by the Organisation for Economic Co-operation and Development (OECD) says.
"Given the notable strength of the recovery, policies should be tightened if inflation pressures and overheating continue. Fiscal support should be withdrawn more rapidly than planned if necessary, while rapid developments in the housing market should be monitored and macro-prudential policy instruments adjusted if prices diverge excessively from fundamentals," the report reads.
"The recovery is also exposing some entrenched imbalances in the labor market, where the lack of suitable labor despite a substantially higher unemployment rate than before the pandemic underscores skill mismatches, putting pressure on wages and inflation. Strengthening upskilling and reskilling programs in line with employers' needs will be key to addressing labor shortages," the OECD says.
The OECD forecasts 9.6 percent economic growth for Estonia this year. Next year, GDP is expected to grow by 4.5 percent, while in 2023, growth is expected to slow to 3.8 percent.
Private consumption, driven by a gradual decline in the household saving ratio, the absorption of EU funds and investment will be the main drivers of growth. Inflation is expected to remain high in 2022.
Inflation in Estonia is expected to accelerate to 6 percent next year and fall to 3.2 percent in 2023. The unemployment rate will be 5.4 percent next year and 5.3 percent in 2023, the report says.
Editor's note: This article was corrected to clarify it was an OECD report and not an OSCE report.
Editor: Helen Wright