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Bank of Estonia chief: Continuing decline in exports not a hopeful sign

Bank of Estonia Governor Madis Müller.
Bank of Estonia Governor Madis Müller. Source: Ken Mürk/ERR

The continued decline in exports does not bode well for the future, Bank of Estonia (Eesti Pank) governor Madis Müller says.

Müller said that any growth in Estonia's wealth hinges on whether Estonian firms and the domestic economy can remain competitive, since the exit route from previous crises had largely come via exports.

Yet, exports from Estonia have been declining.

The current recession has left Estonian companies operating in circumstances whereby the cost base has been growing faster than that of competitors, exacerbated by the fact that supply chains connected to Russia have been broken, and demand remains weak in the main markets for exports.

Speaking at a public seminar on competitiveness earlier in the week, the central bank's governor said, via a Bank of Estonia press release, that: "Prices rising more quickly than those of competitors does not automatically mean that competitiveness is being lost, as long as better goods and services can be provided for those higher prices."

At present, however, the rapid rise in prices has been accompanied by a steep drop in export volumes, and the figures for Estonian GDP in the third quarter show exports falling further. "This is not a good sign", Müller noted.

Consumer prices in Estonia are 35 percent higher than they were in 2019, the last full year before the pandemic, while producer prices for manufacturing are 40 percent higher.

The EU average for these is 21 percent and 33 percent respectively.

Labor costs per employee are around 30 percent higher in Estonia than they were in 2019, compared with an EU average of only half that.

The average electricity price paid by Estonian companies in the first half of this year was a little below the EU average, but above the price in Finland or Sweden.

The Estonian economy has been shrinking for almost a full two years now and society is becoming increasingly concerned about how competitive the economy is.

"A competitive economy is one which can successfully introduce new technologies and invest in innovation, which attracts new investment and skilled labor, allowing the state to create an environment in which businesses can thrive", Müller continued.

The Bank of Estonia chief observed that another hallmark of a competitive economy is rising productivity; still another is the overall wealth of the populace.

Labor productivity in Estonia when expressed as real GDP per employee fell by almost 5 percent last year, and has not improved this year, the central bank reports.

Müller addressed several reasons why the Estonian economy has performed less well than those of many other EU nations. One factor is that Russia's military aggression and its consequences has been, on average, hitting the Estonian economy more than most others.

Higher energy prices and interest rates have had a more immediate impact in Estonia than elsewhere, while Estonia's main trading partners have been performing worse than the average.

"It does appear though that wood processing and metalworking, which are the sectors that have been hit hardest, are past the steepest part of their fall, and so the next question is what their recovery will be like," Müller continued.

The Bank of Estonia says it will prove harder to recover if the recent crises have any lasting impact on the economy and if the competitiveness of companies, and of the whole economy more broadly, has actually suffered more seriously.

There have also been changes in the external environment, which need to be considered.

Geopolitical tensions have necessitated the reorganization of many supply chain, which in turn may change the outlook for Estonian firms.

Subsidies and industrial policy measures have been introduced in several EU states, and elsewhere, making it harder still for Estonian firms to compete.

"We need to ask how much things have changed for businesses in recent years," added Müller, initiating a debate about what success factors might be for Estonia in the current, changed circumstances.

"The question is whether we should just continue to hope that our exporting companies will bring growth to the Estonian economy, as other economies in Europe recover, or whether we should look for other ways to become more competitive", he concluded.

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Editor: Andrew Whyte

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