Bank of Estonia forecasts recession at 2.2 percent

€200 bill.
€200 bill. Source: Siim Lõvi/ERR

The Bank of Estonia's fall economic forecast suggests Estonia will have a recession of 2.2 percent this year before returning to growth of 1.4 percent in 2024. Recovery is believed to be slow.

The central bank finds that the period of rapid price advance has ended, with inflation forecast at 9.4 percent for this year and 3.4 percent next year. Inflation slowed to 4.6 percent in August and is forecast to remain around 4-5 percent until the end of the year.

In June, the Bank of Estonia forecast a recession of just 1 percent for 2023 and growth of 2.4 percent for 2024.

The economic situation is subpar, while not all sectors are struggling equally. Major setbacks have been delivered in the field of industry that has been grappling with supply issues, falling export markets, unfavorable exchange rate and production expenses.

Unemployment is forecast to reach 8 percent next year in the wake of industrial downturn, while wage growth will slow to around 6 percent in the next two years.

Growth is forecast to return at 1.4 percent next year and reach 4 percent in 2025.

Lingering deficit to hamper competitive ability

The Bank of Estonia remarks that should the government fail to take decisions to notably and stably improve fiscal balance, future state budgets will continue to be deep in the red. Interest expenses will grow in line with the public sector loan burden, while interest rates might become less favorable should Estonia's rating be downgraded.

Growing interest and other expenses (including social protection and national defense, healthcare and education) will make it increasingly complicated to return to a near-balanced budget in the foreseeable future. A lingering deficit also creates price hike pressure.

The central bank finds that the government should aid sectors that suffered as a result of the war in Ukraine by helping them establish new contacts. Efforts to improve the business environment and remove administrative hurdles will achieve more than fiscal stimuli in terms of the long-term growth potential of the economy, the report finds.


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Editor: Barbara Oja, Marcus Turovski

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