Swedbank forecasts ECB rates to come down in spring

Central Tallinn high-rises housing the headquarters of several banks that operate in Estonia.
Central Tallinn high-rises housing the headquarters of several banks that operate in Estonia. Source: Siim Lõvi/ERR

While the ECB will probably hike its base interest rates again in September, the process might be reversed come spring, Swedbank Estonia finds in its economic forecast. The near-term outlook of the Estonian economy is poor and recovery will likely be slow.

The forecast finds that while countries' economies and labor markets have stood up to previous years' shocks, the global economy will slow down this fall, which effect will also be transferred to 2024.

"We have probably not seen the full effect of soaring interest rates on our economy yet. The rising cost of living and tighter monetary policy are increasingly having an effect on the global economy. Industrial outlook is still deteriorating as is the service sector," the bank concludes.

Swedbank believes that the European Central Bank will hike the deposit facility rate by another 0.25 percentage points to 4 percent. However, the bank believes rates will come down in the wake of slower inflation and a cooler economy in the spring of 2024.

The bank believes growth is slowing in the Eurozone, while the labor market remains robust and slower inflation is seeing purchasing power return. Still, export demand and the processing industry are down, which effect might transfer to other sectors.

Swedbank forecasts the Eurozone economy to grow just 0.5 percent this year and 0.6 percent next year.

Estonia's economic outlook poor

The Estonian economy has been in recession on year since the second half of last year. The economic outlook remains poor and recovery is likely to be slow.

"The Estonian economy will contract by 2 percent at constant prices according to our forecast, while it will grow by 2 percent next year and 3 percent the year after. While growth will continue this year and next in current prices, it will fall below the long-term average," the forecast reads.

Foreign demand is seen to be weak in the near future. Export is forecast to contract in constant prices, while next year's return to growth will be modest. Price competitiveness of Estonian companies has deteriorated, which could slow down Estonia's recovery.

Inflation has been coming down in the wake of cheaper energy and last year's high reference base. Weakening demand is also holding back prices. Export, import and manufacturing prices are falling, while construction price advance is slowing.

Swedbank forecasts average price advance for 2023 at 9.8 percent, with inflation believed to slow to 4.3 percent next year and 2.4 percent in 2025.

While this and last year's double-digit nominal salary advance is forecast to slow in the future, the average wage will grow by 11.2 percent this year, 7.8 percent next year and 7.4 percent the year after that.

With nominal wage growth outpacing inflation, the average real salary has started to inch upwards. Swedbank finds that this will drive private consumption after a certain delay. At the same time, solid growth of deposits courtesy of the coronavirus crisis and pension reform has slowed, with deposits now well below the pre-pandemic trend considering inflation.

The relative importance of fixed-term deposits is up, meaning that the effect of deposits on consumption is reduced. Private consumption is set to fall this year before bouncing back in 2024, while growth will fall short of the long-term average.

Unemployment to remain low

Despite lingering recession, the labor market has held firm. Estonia's record employment rate is set to grow this year and next, even though growth will slow.

High employment, structural labor shortage and growth in current prices will keep unemployment from spiking. Swedbank's forecast puts the average unemployment rate at 6.5 percent this year and 6.7 percent next year, before coming down to 5.4 percent in 2025.

Robust labor market and wage growth have helped households cope with soaring interest rates. Bad loans still make up a very small part of banks' portfolios. While high interest rates constitute a considerable additional expense for the economy, their negative effect is less than that of rapid inflation. But Swedbank adds that the effects of high interest rates for Estonia's trade partners and the Estonian economy are mounting.

Weak demand, recession, waning confidence and high interest rates have impacted investments. New housing and business loans are down and growth of total loan balance has slowed.

Industrial investments are held back by reduction in engaged production capacity. Even so, a Swedbank industrial companies' survey suggests that manufacturing businesses plan to ramp up investments this year to maintain or improve profitability.

Companies must invest more in efficiency to remain competitive or increase their competitive ability for when demand returns, which suggests investments will start growing again next year, the bank forecasts.


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Editor: Karin Koppel, Marcus Turovski

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