Institute of Economic Research: Estonia's economy cooling

Construction work in Tallinn.
Construction work in Tallinn. Source: Siim Lõvi /ERR

People's confidence has been dealt quite a blow over the last three months and companies are dealing with soaring input prices, a labor shortage and raw material availability, an overview by the Estonian Institute of Economic Research (EKI) shows.

EKI director Marje Josing noted that very rapid barometers seem slow to assess and measure the current economy. A week-by-week overview is necessary, because what took place in December has already changed drastically.

"There has never been a tougher time to forecast than right now. The forecast is only valid in a situation where nothing extraordinary happens, it is just regular economic development," Josing said. "Experts say the economy is cooling down, which makes sense, because the economic growth last year is unsustainable for Estonia."

Compared to September, the institute's economic assessment has fallen below satisfactory.

Private consumption is likely to be more modest in six months, considering the price increases that have taken place. Investments are at a good level, however.

71 percent of experts think the economy will be in a similar situation in six months, 21 percent think things will worsen as the Estonian economy enters into a cooling phase. The main problem for the economy is a shortage of skilled labor, which is followed by social stratification. Incomes have grown in very different paces, but price inflation hits everyone.

Entrepreneurial confidence in Estonia remains high, but consumer confidence is in a downward trend. The tourism sector is in the most trouble as there is no growth forecast for the sector within the next six months. Commerce and industry have gotten through the crisis relatively well.

2022 first quarter forecast

Turnover for industry, trade and construction is expected to grow or remain stable in the first quarter of 2022. Turnover for hotels will, however, continue to decrease.

The rule of thumb says that if industry is doing well, the country is, too. Industry is doing well in Estonia and Finland and Sweden, where Estonian industries are active. The sector is mostly hit by a skilled labor shortage, the availability of materials and equipment is slightly improving.

Inflation expectations are highest in trade, industry and construction. "It will be a crazy season in the food sector," Josing said.

Companies see increased input prices, virus-caused labor shortage, additional costs for the acquisition of production input, cleaning and reorganization and missed business trips as main concerns.

Hotels and restaurants have been hit hardest by the coronavirus crisis, followed by industry, construction and tourism as a whole. There are several reasons - while their is a lack of demand for the first two, the remaining are struggling with price inflation, production input and labor shortages.

Companies are optimistic in their six-month outlooks and believe the situation will improve by the summer. There are few sectors affected by a lack of demand, mostly hotels and tourism. Restaurants are struggling with labor shortages, supply chains have also been disrupted, which leaves raw materials unavailable.

Supply chain issues are most common in construction and industry. Input prices have ballooned for the construction sector, although material availability has improved compared to last autumn.

Consumer confidence was at a good level in August and September. People started saving up, investing and spending. By now, confidence has fallen significantly, mostly due to the energy price inflation and price shock. Only the wealthiest consumers have improved confidence.

The drop in consumer confidence is especially noticeable for women. "Women do most of the grocery shopping," Josing said.

Compared to December, the price of the so-called basic groceries basket has increased by 6 percent to an all-time record. "The major price increase for food is still to come. 6 percent is just the beginning," Josing noted.

Price increases are affecting all countries, but Estonia's inflation has been the fastest in the EU - 12 percent year-on-year for December. Estonia is followed by Lithuania at 10.7 percent and Latvia at 7.7 percent. The average eurozone inflation for December was 5 percent.

EKI estimates 3 percent economic growth for 2022 and a consumer price increase of 6.5 percent, but economic development will be affected by the coronavirus pandemic and complicated international relations.

International security has an effect on economy

"On average, the Estonian economy has done rather well. The hospitality sector is clearly in the worst situation. Recovery will unfortunately take some time in that sector," Minister of Entrepreneurship and Information Technology Andres Sutt (Reform) said.

He said the worldwide security situation has not been this bad since the Cold War and added that the world is dealing with three crises at once: the coronavirus pandemic, energy prices and international security.

The main problem, according to the minister, is a lack of skilled labor and that is deepening in the next five years, because the working-age population is set to decrease by at least 31,000 people.

Sutt said the government should discuss solving the issue of foreign labor. But it is still important to also work on solutions for the energy crisis. "It is important that we discuss nuclear energy as an alternative. Also everything regarding accelerating mainland and off-shore wind farm developments," the minister said.


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Editor: Kristjan Kallaste

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