Estonia's economic growth stalling or even dipping slightly into the red for 2022 falling purchasing power due to rapid price advance, growing uncertainty and lack of major one-off deals, the Bank of Estonia finds in its spring economic outlook.
The Bank of Estonia forecasts the economy to shrink by 0.4 percent in this year.
Even though the economy is forecast to swell in terms of current value, by more than 9 percent, growth will fall flat or even dip slightly into the red when price advance is factored in, the central bank noted.
As the Estonian economy had come close to its output potential last year, growth was forecast to slow in any event. Altered geopolitical conditions and their economic effects only added to this outlook.
While income and tax revenue are both forecast to grow, the former will fall short of price advance, meaning that real wages will fall, Bank of Estonia Vice President Ülo Kaasik told ERR.
Still, better than expected tax receipt should help cover additional defense spending and refugee accommodation. Kaasik nevertheless urged the government to be cautious when planning major one-off expenses.
"Expenses tied to national defense and refugees are understandable, while fiscal deficit should be kept in check. Growing domestic demand could add to the pace of inflation," he warned, adding that custom benefits should be preferred to blanket support.
The Bank of Estonia forecasts rapid price advance to end in the next few years, provided raw materials prices hit a ceiling. The basket of goods is forecast to become 10 percent more expensive, with energy counting for much of the advance. The prices of gas, electricity and motor fuels in the coming years are extremely difficult to forecast at this time, the overview admits.
Price advance should hover around 1-2 percent in the coming years.
The spring outlook puts the average salary at €1,670 this year and €1,786 next year. The national average salary is forecast to grow by 7 percent, falling well short of inflation of 10 percent. Real wages are forecast to shrink by 2 percent this year.
Effect of Russian sanctions on economy 2 percent
The loss of the Russian export market due to sanctions is forecast to cost the Estonian economy 2 percent, Kaasik said, adding that the development will place in jeopardy some 10,000 jobs.
"It is not a major problem looking at the big picture and one we should be able to weather. Supply chains constitute a more serious concern. There are disruptions in certain areas – energy and food production as both Ukraine and Russia are major cereals exporters, the Bank of Estonia vice president remarked.
Editor: Marcus Turovski