Rapid wage pressure is affecting business and will lead to a rise in joblessness, Bank of Estonia (Eesti Pank) Vice President Ülo Kaasik says.
The Estonian economy has been contracting for the last four quarters in a row and is currently the worst-performing in the EU, with, Kaasik adds, uncertainty resulting from the Ukraine war leaving the economy in a worse state.
Appearing on ETV news show "Aktuaalne kaamera" (AK) Monday, Kaasik said: "It is quite understandable that when our neighboring country initiates a major war and all the supply chains associated with that are essentially being broken – and second, a major downturn in the Scandinavian real estate and construction sectors – all of which diminishes demand for our products, then it is foreseeable that the exports sector will see difficulties.
"Inevitably, it is precisely those companies which cannot raise prices themselves, especially the exporting sector, which is more of a price adopter, which will have more issues, plus we can also see individual companies which have already shut down their production," he went on.
At the same time, wage growth in Estonia has been rapid, he said.
This is driven by rapidly rising price inflation, which in turn has also been moved forward by the war, Kaasik went on.
"I also think that we will see that unemployment will start to increase. Currently, the average prognoses still bring us hope that we will not see a very sharp rise in unemployment, but there is still a lot of uncertainty there. I would prefer to state that it is better to live with a salary that is a few percentage points lower, while the main point is that there is work available," Kaasik added.
Employees should take into account that if they ask for a wage rise, their job may not then survive, Kaasik said.
"It should certainly be taken on board, especially in companies in those sectors that are not doing so well, that the higher the wages requested, the higher the probability that this work may not be very prolonged," Kaasik added.
According to some forecasts, the Estonian economy could begin to improve in the third quarter of this year, however.
Kaasik said that while there was still a lot of uncertainty, adding that the exporting sector may not improve quickly, at the same time, he remains highly hopeful. "Since the downturn already started last year, by the year-on-year comparison, hopefully the rate of contraction will still not be of the same magnitude as we have seen up to now."
"However, at the same time, this uncertainty has also delayed domestic decisions massively – both investment decisions made by companies and those made by households. When more confidence arrives, households will actually have the funds to get the economy going a little better," Kaasik said.
Estonian entrepreneurs have demonstrated that they are flexible and able to adapt to this new situation, he said, adding export companies could start to do so right now.
"Should it prove to be no longer so easy to sell to the Scandinavian market, certainly some new markets can be found. If price competitiveness is inadequate, then hopefully opportunities will be found to increase the added value of production, so that this price can actually be asked for. My belief is that in the long term, we still have such a situation which is not all that bad."
Editor: Andrew Whyte, Merili Nael
Source: 'Aktuaalne kaamera', interviewer Margus Saar.