According to the latest economic forecast by the Bank of Estonia, economic growth will be 8 percent this year, while next year economic growth will slow down to below 3 percent.
According to the central bank, economic growth will also be reduced by exceptionally fast price growth, which may start to slow down in the second half of next year at the earliest. However, several local reasons may prolong the period of rapid price increases in Estonia, the central bank added.
While this year's average price increase is less than 5 percent, then in 2022 the rate of price increase will approach 7 percent. However, the rapid rise in consumer prices is temporary and is expected to ease in the second half of next year.
The consumer basket is becoming more expensive mainly due to various energy carriers, the reasons for which are mostly located outside Estonia. The pass-through of energy costs to the final price of other products and services will continue to boost inflation in the coming months. The rapid rise in prices will culminate in the first half of next year, when the short-term effects on various prices are expected to recede. However, for a number of reasons, price increases may be faster than expected.
According to the forecast, the price increase in Estonia will slow down to less than 3 percent in 2023-2024. For similar reasons, price growth has temporarily accelerated across the euro area. Should the price increase in the euro area permanently exceed the target of 2 percent, the monetary policy of the euro area will be tightened, which will also control price growth in Estonia.
At the same time, there is a risk that the period of rapid price growth in Estonia will last longer than expected and this is mainly due to local reasons. The deepening shortage of employees in Estonia is forcing companies to raise wages anyway, but this may be further boosted by a temporary jump in the cost of living. In such a situation, a so-called wage-price growth spiral may occur, which will damage both the purchasing power of people and the competitiveness of the export sector, which Estonia's long-term wage growth and job creation depend on.
The Estonian economy is at the forefront of European countries in terms of the speed of recovery from the crisis, but the rapid growth seen so far will pass, according to the central bank. Growth is hampered by global supply challenges, but labor shortages are increasingly hampering further development in most areas of activity. Existing production resources are also already at an all-time high. Further economic growth will therefore be more difficult and next year's growth will be slowed down by exceptionally fast price growth.
The central bank affirmed that it is closely monitoring how fast real estate prices and people's debt burden are growing. Due to limited consumption opportunities and savings taken out of the second pension pillar, the amount of free money has grown strongly. Demand for goods and services is high. In addition, interest in residential real estate remains high.
Given the current high demand, new real estate is not entering the market in sufficient quantities and this is fueling real estate price growth. If real estate prices continue to rise very rapidly and the increase in the debt burden of people accelerates significantly, the central bank is ready to tighten the conditions for granting housing loans to curb it.
According to the central bank, the exit of the state budget from a deficit would help curb the rapid rise in prices. The sectors most affected by the restrictions - tourism, leisure, accommodation and catering - have not yet fully recovered, but most sectors are doing well or very well. The rapid growth of public spending and the stimulation of demand are further boosting the rise in prices in a situation where it is already fast.
As wages are growing rapidly in Estonia, this inadvertently puts pressure on the state to raise wages in the public sector as well. But in addition, the government has planned an increase in fixed costs, the largest of which are an increase in pensions and an increase in the income tax exemption for pensions. Considering the growing expenditures, it is difficult to balance the state budget in the coming years if there is no change on the revenue side, the central bank said.
In absolute terms, the central bank forecasts an economic volume of €30.37 billion at current prices this year, €33.02 billion next year, €35.48 billion in 2023 and €37.82 billion in 2024. At constant prices, economic growth is forecast at 2.8 percent in 2022, 3.9 percent in 2023 and 2.9 percent in 2024.
The expected price growth is 4.4 percent this year, 6.9 percent next year, 3 percent in 2023 and 2.6 percent in 2024. However, according to the central bank's forecast, the growth of the average salary will be faster -- 6.8 percent this year, 8.3 percent next year, 8 percent in 2023 and 7.4 percent in 2024. The average gross salary will thus reach €1,547 in 2021, €1,676 in 2022, €1,810 in 2023 and €1,944 in 2024.
The unemployment rate is projected to fall to 6.2 percent this year, 5.5 percent next year, 5.3 percent in 2023 and 4.7 percent in 2024.
The budget balance will also improve, which is forecast to be in deficit by 3.6 percent of gross domestic product (GDP) this year, but next year the deficit will decrease to 2 percent of GDP, in 2023 to 1.6 percent of GDP and in 2024 to 0.7 percent of GDP.
Editor: Kristjan Kallaste