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Bank of Estonia governor: Winter economically harder, but no crash likely

Madis Müller.
Madis Müller. Source: Siim Lõvi /ERR

While the Bank of Estonia (Eesti Pank) forecast somewhat more trying economic times in the upcoming autumn and winter, in nominal terms the economy will continue to grow, due to increasing wages and prices, the central bank's director, Madis Müller, said, and no crash is on the way.

The situation is a very complex confluence of influences, primarily from outside Estonia in the current security situation, but also influenced by political decisions made domestically.

Appearing on ETV politics discussion show "Esimene stuudio" Tuesday evening, Müller said that while overall the economy will contract, the picture is complicated by the rapid inflation, whose consequences have also filtered through to private sector companies.

Müller said: "Over the first half of the year, it could be stated that Estonian companies were doing quite well; even if input prices rose, it was generally possible to pass that on to sales prices.

"If inflation became a problem for consumers, companies' profits remained healthy. Now, however, we feel that we are seeing the first signs that that cannot last forever, while the situation for companies has become more difficult in the second half of this year," he said.

Of hopeful signs, Müller pointed out to: "Very strong tax receipts. In general - if a price increase is very fast, tax receipts also initially grow faster than expenditures, and this has temporarily created a healthy situation for the government when putting together the state budget.

That being said, the state budget will run at a deficit for the foreseeable future, he said.

"A point of concern, in my opinion, is that if you look ... at the perspective of the state budget for 2018, which is visible today, it seems that the deficit in state revenues, with clearly more spending, it is quite permanent in nature," Müller said.

"It seems that we are there at the three percent budget deficit level, which is difficult to climb out of. If it lasts this long, then this is where additional pressures for price increases come in. If interest rates rise, that will soon be a considerable additional cost to the Estonian state," he went on.

Purchasing power will eventually diminish, the Bank of Estonia director went on.

When price inflation outstrips wage inflation, the result would be that the purchasing power of Estonians will now fall back to the level of 2018-2019, he added. "Given our outlook, by the end of 2024 we could be back to where we were last year (in terms of purchasing power)."

Inflation over 20 percent (August's figure was nearly 25 percent – ed.) results from factors outside Estonia's domestic economy and consumption, Müller said, with soaring energy prices contributing about half the total and commodity market prices relating to food also contributing a large chunk, while around a quarter of the total relates to the management of the Estonian economy – namely state budget policy and also the liberalization of the Estonian pension system from 2020.

With the wise use of economic policy levers, such high rates of inflation need not be a norm, he added, though a higher tax take will only cause a short-term positive effect among continued high prices, economic cooling and state spend on energy support measures, defense spend and also expenditure on hosting those fleeing the conflict in Ukraine.

As to autumn and winter, while difficult times are ahead, Müller said, there will be no crash as such, and economic growth will hover around the zero percent mark, while growing company revenues and incomes will take place, but may be eroded altogether by inflation – which in turn will prevent consumption remaining at its present-day rate, particularly once savings, comparatively buoyant in recent years, are being used up.

The ongoing conflict in Ukraine following the Russian Federation's large-scale invasion starting in late February will continue to exert effects also.


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Editor: Andrew Whyte

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