Experts: Estonian economy will take time to return to previous levels

According to experts, Estonia's economy can be expected to begin its recovery next year. However, it will take some time to return to pre-recession levels.

Heido Vitsur, economic analyst at LHV, said that the Estonia's current economic situation is stable but poor.

"This 2.9 percent has to be understood as the whole economy. If we look at the real economy, industry and other productive sectors of the economy, then there was a four percent decline. The small improvement in terms of GDP came from the government sector, because the value added there increased and affected the size of (Estonia's) total GDP," Vitsur said.

According to Vitsur, the main reason for this is still high inflation, which, in real terms, takes away 5-6 percent of GDP. "If it were not for that, we would be in the black."

A second factor is the amount of economic stress across both Europe and the rest of the world. Demand on the markets is low and producers have nowhere to sell their output, Vitsur said.

Vitsur also pointed out that people have more money in their pockets, but its value is being eroded by inflation. "People are spending more money, but they are able to buy less for it. Fortunately however, price increases have slowed down and so the gap that we had last year was much bigger than it is this year."

In their latest forecasts, the central bank and other major banks predicted that the economy should start to improve next year. According to Vitsur, every downturn is followed by an upturn. However, as things stand it will take a long period of improvements before Estonia gets back to the level it was at before the recession.

According to Mihkel Nestor, economic analyst at SEB, there were no signs of encouragement when it comes to the economy in the second quarter (Q2) of this year. "Estonia's exports and manufacturing output were in sharp decline. Private consumption through retail trade has also declined. To be honest, the picture did not look particularly good in any sector of the economy."

Nestor added, that as inflation slows, things will start to look better.

"Estonia's GDP measured at constant prices has been falling since the second half of last year. However, that has been somewhat hidden in the past by the fact that when measured in nominal prices, in ordinary euros, everything has been growing really quickly due to inflation, including corporate profits and people's incomes. Even though that money buys far less goods than a year ago," he said.

SEB's is the most pessimistic of the economic forecasts, suggesting economic growth will be just 1.5 percent next year, Nestor said.

"If you look at the current state of the Estonian economy, it is really difficult for me to see where to expect strong growth next year. The root cause is mainly manufacturing, Estonia's exports and Estonia's main trading partners Sweden and Finland. There is not expected to be any improvement in demand there next year. Above all, the construction and real estate markets there will be in worse shape than they were this year," Nestor added.

The downturn in the Swedish and Finnish markets will also affect Estonia's major industries and lead to an increase in unemployment, with knock-on effect on other sectors of the economy.

Nestor expects wage growth to continue next year, at a lower rate than in recent years, though still by more than 6 percent. "Wage growth next year, at least on the basis of our forecasts, should be higher than inflation, which means that people's purchasing power could improve, as a result of that at least."


Follow ERR News on Facebook and Twitter and never miss an update!

Editor: Michael Cole

Hea lugeja, näeme et kasutate vanemat brauseri versiooni või vähelevinud brauserit.

Parema ja terviklikuma kasutajakogemuse tagamiseks soovitame alla laadida uusim versioon mõnest meie toetatud brauserist: