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Analysts: Slow correction period ahead in economy, no rapid improvement

Euro bills.
Euro bills. Source: Siim Lõvi/ERR

The Estonian economy will be slowly recovering in the first half of next year – but there will be no quick improvement, experts say.

Estonia's gross domestic product (GDP) decreased by 3.9 percent in the third quarter relative to the corresponding period last year, as reported by Statistics Estonia. This decline is greater than that of the first half of the current year.

Heido Vitsur, an economic analyst at LHV, isaid that it was clear that rapid price rises would have a rather negative impact on the economy in the long run.

"This means that industries such as manufacturing and construction have been under constant pressure. And the impact of that, no matter how much better trade or any other sector does, dominates the overall difficulties in manufacturing and the real economy," Vitsur said.

"So the prices, the energy problems are going to still have a dreadful impact on our economic growth for several more quarters," Vitsur said.

The Estonian economy is heavily dependent on foreign partners, but Estonia's competitiveness was not addressed in time, and the key markets declined. "On top of that, these markets – Sweden, Finland, Germany – are all in bad shape. If you add to this miserable situation the fact that Estonia became quickly more expensive than other countries, we have a double whammy," he said.

Vitsur said that Estonia failed to realize in time that the energy price hike was temporary, and so the effect of it was passed on to all prices. "Including wages – and the real economy can no longer screw back high wages," he said.

The first half of next year will be a difficult period of corrections, Vitsur said. "We need to regain our competitiveness so that when our partners' markets recover, we will be competitive there."

According to the analyst, this means investing in product development. "To offer a product that can be sold at our cost level," he said.

Lenno Uusküla, chief economist at Luminor, said the sharp decline is not surprising. He said that industrial production had dropped significantly and that Estonia's exports to its main markets had suffered.

"A fifth of production has been lost, the transportation sector is suffering as manufacturing produces and exports less, and Russian transit is also declining month on month. Third, our start-ups are contributing to the ICT sector's decline because it is difficult to attract external capital, thus they are forced to do with their own resources," Uusuküla said.

According to Uusküla, the fourth quarter will not see a rapid change as the main factors influencing the economic downturn are still in place.

"Families' purchasing power is slowly increasing as price increases have eased and interest rates have stabilized. At the same time, there are still up to 50,000 people in the manufacturing sector who are underemployed and being paid by their owners out of reserves," he said.

Uusküla said that not all countries are faring as poorly as Estonia; for example, Latvia and Lithuania are doing considerably better, while Estonia experienced a significant increase in consumption both the year before and the year prior to that.

Merchants are raising prices in preparation for the upcoming VAT increase in the new year, which will eat up several percent of Estonian household budgets, Uusküla said.

Uusküla said that the first half of the new year is unlikely to see any rapid change as the Swedish economy remains in the doldrums and China's entry into electric cars catches up with the German industry. Interest rates will fall slightly, but probably not significantly.

"We don't want them to fall fast, because that would mean a big recession in Europe and ultimately we would be even worse off," he said.

Uusküla also said that Estonia's population has since increased due to war refugees, which means that GDP per capita has fallen more than expected, which "may explain a bit why companies are a little more optimistic about the situation than we are," he said.

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Editor: Barbara Oja, Kristina Kersa

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