Forecasts: Consumption growing despite inflation

Shopper in a grocery store.
Shopper in a grocery store. Source: Ken Mürk/ERR

While wages will continue to grow in 2022, prices will balloon faster still, the Bank of Estonia and commercial banks SEB and Swedbank find in their recent forecasts. Retail trade and services are nevertheless forecast to continue growing in volume, suggesting that consumers remain confident.

Even though economic forecasts are rather a formality in the currently complicated geopolitical situation, with indicators having changed considerably in a few months' time – as forecasting the Estonian economy tends to fall into the category of esoterica rather than science even in the calmest of times – bank's spring forecasts are nevertheless quite similar.

Economic growth for 2022 is forecast at between -0,4 and 1.5 percent, with the Bank of Estonia the most pessimistic and Swedbank, that published its forecast on Wednesday, the most optimistic.

Unlike GDP, prices are forecast to continue climbing. Banks' price advance forecasts fall between 10 and 11 percent, enough to negate the growth of average salary. Salary advance is forecast between 6 and 7 percent, with real wages set to shrink.

That said, neither Swedbank nor SEB forecast private consumption to suffer. Savings and second pension pillar withdrawals are seen as the main drivers of continued consumption. Wage growth is also forecast to maintain consumer confidence.

The Bank of Estonia forecasts that people will withdraw €150 million in second pension pillar assets in May alone.

Analyst for SEB Mihkel Nestor said that households have been ignoring high inflation for a long time and consumption has continued to grow despite the consumer price index spiking. The economy shrinking and inflation make for abstract indicators, with consumer perception increasingly divorced from the economic climate. "From the ordinary person's point of view, the state of the economy remains encouraging. Revenues and salaries will continue to grow and economic activity remain high," Nestor said.

But real wages falling is forecast to hit savings.

 Nestor pointed out that private savings have been growing by 15 percent on year on average. "What households will have to settle for is not being able to save as much as previously," he suggested.

The Bank of Estonia overview notes that households spend 15 percent on energy and 28 percent on food on average. "Essential expenses ballooning will also leave households with less money for recreation and traveling," the outlook finds.

Inflation forecast to fall as if by magic in 2023

While inflation is forecast at 10-11 percent for this year, it is expected to fall sharply next year, both the Bank of Estonia and Swedbank find. The latter forecasts it at 4.5 percent next year, with the central bank only suggesting 1-2 percent. This would see real wages start to grow again next year.

Unpredictable hikes of energy and raw material prices that have added to inflation in recovery from the pandemic cast doubt on whether such optimistic forecasts can be taken without a pinch of salt.

World market food prices are also growing rapidly, this in a situation where the full effect of Russia's invasion of Ukraine is not yet clear.

The Bank of Estonia forecasts food price advance at 10 percent in 2022 and 5 percent in 2023, while actual prices will be affected by the duration of the war in Ukraine.

The central bank also continues to speak out against retaining wide-ranging support measures for individuals and companies as the economic situation is solid.

It is to be believed that the forecasts will be adjusted and new figures presented a few months from now. Swedbank has already warned that April forecasts might be optimistic.

Finance ministry forecasts growth of -1 percent

The spring economic forecasts of the Ministry of Finance puts 2022 growth at -1 percent, compared to 4 percent forecast last September. The ministry highlights Russia's invasion of Ukraine as the main factor governing estimated growth of GDP.

The ministry forecasts growth to return at 1.2 percent in 2023.

The ministry forecasts faster price advance than the central bank and its commercial counterparts at 12.7 percent in 2022, and suggests both real wages and private consumption will take a hit.

Minister of Finance Keit Pentus-Rosimannus said that price advance is almost completely imported or due to external factors – energy prices and food imports becoming more expensive. Nevertheless, the finance ministry also forecasts inflation to come down to 2.1 percent in 2023.

Government sector loan burden is forecast to grow to 19.2 percent of GDP and to 27.1 percent of GDP by 2026.


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Editor: Marcus Turovski

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