Expert: 2022 fall in Estonia's PPP compared with EU average no big surprise

Money counter (photo is illustrative).
Money counter (photo is illustrative). Source: Siim Lõvi /ERR

The news that Estonia's PPP in comparison to the European Union average fell slightly last year was to be expected, according to one expert, and heralds a slower growth and convergence towards European Union averages, though not the end of that growth.

Peculiarities in the economies and demographics of some EU states, in particular nearer the top of the PPP list, also skew the picture further.

As reported by ERR News, Eurostat initial forecasts put Estonia as 17th richest country in the EU in terms of purchasing power parity (PPP) in 2022, while Estonians' standard of living stands at 13 percent below the EU average

This slight drop on the preceding year came as not big surprise, Tõnu Mertsina, chief economist at Estonia's largest bank, Swedbank, said.

"Falls like this have happened in Estonia in the past, for example in 2008, 2009 and 2015," Mertsina said.

Some other countries, including some of the wealthiest in the EU, had seen an even larger fall, he added.

"Estonia was not the only EU country where the PPP in relation to the average EU level fell. Whereas in Estonia, the drop stood at two percentage points, in Germany for example the figure was over three percent; in Luxembourg even more than seven percent; four percent in Sweden, and approximately three percent in Finland," he went on.

Also, the trajectory towards convergence with the EU average, tends to slow up as it approaches, Mertsina added. "It is difficult to say how quickly or to what level Estonia's [PPP compared with the average] will rise in the coming years."

"If you examine the existing forecasts, for the price forecasts - consumer prices are not the only factor that affect it - in Estonia, Latvia, Lithuania, the growth forecast here is essentially the same with all three countries, somewhere close to nine percent , while on average in the EU it is a little over six percent for this year," he went on.

"If we look at GDP growth in current prices, then in Estonia, at least according to the current forecast, this may be lower compared with Latvia and Lithuania, and even compared with the EU average. The question is what the population will do in response to this."

Nonetheless, the convergence has been rapid; 10 years ago, Estonia's GDP per capita at current prices stood at 76 percent of the EU average; 20 years ago, this figure was 48 percent.

Latvia and Lithuania's proportion as compared with the EU average increased at the same time, Mertsina noted.

"In fact, if we look at how much the GDP per person grew in terms of PPP, in Estonia the figure was 6.2 percent last year, while in the EU it grew by 8.5 percent on average. This was influenced by the fact that Estonia's growth in current prices was very rapid last year, though there were countries with even higher rates."

In terms of real growth, Estonia was the only EU country to see a contraction, he said, though at the same time, the country has overtaken several "old" EU countries in PPP parity. "For example, Spain, Portugal, not to mention Greece;" Mertsina listed.

In the coming years, according to Mertsina, Estonia's economic growth should, on average, be somewhat faster than the economic growth on average in the EU, though "a lot also depends on what happens with inflation."

Over the mid-term, while the parity should grown compared with the EU average, it will as noted still slow down.

In all three Baltic states, democraphics also plays a role.

Estonia and Lithuania have both seen slight population rises, but if this continues in Estonia at the same time as high inflation and lower GDP growth, it leaves the country slightly behind the other two Baltic States, he said.

Estonia's GDP last year, taking into account PPP stood at 87 percent of the EU average, down from 89 percent the year before.

The fact that Luxembourg and Ireland top the table is related to the exceptional number of non-resident foreign employees (in the case of Luxembourg) and the high presence of major multinational firms' headquarters (in the case of Ireland).

Ultimately, situations like this "Somewhat skew the picture of how GDP per person is calculated in other countries," in any case, the expert said.


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Editor: Andrew Whyte, Barbara Oja

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