The European Commission has estimated that Estonia will have experienced the largest recession of any European Union Member State, with a contraction of 2.6 percent.
In 2024, however, the commission says in its recently published autumn forecast that the Estonian economy should grow, by 1.9 percent, while inflation will fall, the commission says.
The main factors in the shrinking economy will be weak private consumption, a fall in investments, a worsening situation with Estonia's primary trade partners, and the depletion of reserves, the report says.
While VAT is to be hiked two percentage points to 22 percent from the new year, inflation is forecast at 3.5 percent for 2024, down from this year's 9.4 percent, among the highest rates in the EU.
The commission puts this slowing of inflation down to a peaking of prices and a fall in some of the main drivers of these price rises, namely in energy and foodstuffs.
The state budget deficit will also fall, slightly, to 2.4 percent of GDP next year, the commission says, though from 2025 this is forecast to deepen again, to 3.6 percent of GDP – following the coalition's planned elimination of the "tax hump," or bracket creep.
This year's state budget deficit is forecast to be 2.9 percent, the result of some public sector wage increases, including for teachers, as well as increases in defense spending and child benefits, at a time when economic activity and tax growth are slowing.
National debt is forecast to grow from 19.2 percent of GDP this year, to 23.2 percent of GDP by 2025, still one of the lowest rates in the EU, the commission says.
The commission says the Estonian labor market is worsening also – whereas up to now, many firms had held on to the staff and workers, offering them part-time work where possible, now unemployment is rising and replacing some of this under-employment.
There will still be a growth in employment in the service sector, however, the commission says, while that growth will decline in construction, manufacturing and retail.
EU-wide, the commission estimates that the economy may grow by 0.6 percent this year, rising to 1.3 percent next year.
Inflation in the EU as a whole is forecast at 6.5 percent for this year, falling to 3.5 percent next year.
This time last year, the commission had forecast growth for Estonia of 0.7 percent in 2023, and 6.6 percent inflation this year.
Editor: Andrew Whyte, Huko Aaspõllu