SEB Bank forecasts 1.8 percent contraction for Estonian economy this year

Bank headquarters in Tallinn.
Bank headquarters in Tallinn. Source: Siim Lõvi /ERR

According to SEB Bank's latest economic forecast, Estonia's economy is set for a second consecutive year of contraction. The bank's experts predict that Estonia's GDP will contract by 1.8 percent this year, though they also expect 1.5 percent economic growth in 2024.

Mihkel Nestor, economic analyst at SEB said, that the outlook for the Estonian economy has deteriorated in recent months, while the global economy has only improved.

"The most positive news is coming from the United States, which is considered to be the beacon of the global economy, where the expected recession seems not to have occurred on this occasion," Nestor said. Inflation in the U.S. has slowed due to interest rate rises and the economy is now growing slowly.

According to SEB's latest economic forecast, gross domestic product (GDP) in the United States will increase by two percent this year. Next year however, growth will be limited to 0.9 percent.

SEB forecasts stagnation for the euro zone over the next few quarters, with Germany,  which has the largest economy in the euro zone, facing more serious difficulties. SEB expects the euro zone to grow by 0.6 percent this year and 0.8 percent in 2024.

"In the meantime, higher interest rates will finally have the expected effect, with average annual inflation next year expected to be just 1 percent. This will allow the European Central Bank to change course and start lowering interest rates," said Nestor.

One of the major challenges facing Estonia are the slumps in the economies of its main trading partners. According to SEB's latest economic forecast, Finland's GDP will shrink by 0.3 percent this year, and there is no sign of a recovery for 2024. Estonia's second-largest export partner, Sweden, is expected to be even weaker this year, with a 1.2 percent decline. SEB forecasts that to remain the same in 2024.

Nestor said that, considering all the negative factors impacting its economy, Estonia has coped well up to now. "Although real GDP has fallen four quarters in a row, that has been almost invisible, as it has been masked by rapid nominal income growth. Now that inflation is clearly slowing however, the true state of the economy is starting to become more visible in society."

The biggest problem for the Estonian economy, according to Nestor, is the sharp fall in demand for manufacturing output. "As this is largely linked to the current economic situation in the Nordic countries, which will not improve next year, the timber, construction and furniture industries in particular are facing the need for major restructuring. For Estonian exports, however, this means volumes will not reach their previous levels until 2025."

The fall in exports and production volumes will also lead to higher unemployment, This is expected to be short-lived however, as there has been a persistent labor shortage in Estonia. SEB forecasts the average unemployment rate to be 6.5 percent this year, rising to 6.9 percent in 2024.

SEB expects the Estonian economy to contract by 1.8 percent this year, to grow by 1.5 percent next year, and then return to its normal pace in 2025.

In its economic forecast published last week, the Estonian Ministry of Finance predicted a two percent recession in Estonia this year. The ministry also expects there to be 2.7 percent economic growth next year.


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Editor: Michael Cole

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