Laadi alla uus Eesti Raadio äpp, kust leiad kõik ERRi raadiojaamad, suure muusikavaliku ja podcastid.

Aivar Hundimägi: Economy doing better than feared

Aivar Hundimägi.
Aivar Hundimägi. Source: Erik Prozes

It seems to be the consensus among experts that the new year will be a difficult one for the Estonian economy and that we're headed into persistent recession. Aivar Hundimägi disagrees in Vikerraadio's daily comment.

People's perception of how the economy is doing can be compared to a pendulum, while it is always a few months behind actual change. Households or companies tend to have a very good overview of how they're doing at any given time. For example, a trader sees how many customers they get, what the latter buy and how it compares to earlier periods, giving them a pretty good idea of what is in store for the near future.

However, it takes time for this data to reach statistics that reflects the overall situation of the economy. This is why economic turns take a few quarters to hit the public consciousness. The last quarterly report being deeper in the red than anticipated has created an air of doom and gloom.

Negative expectations might work to deepen the recession and slow down recovery. People will dial back consumption and try to save more because their confidence has taken a hit. The opposite happens when economic growth ends. People continue consuming in recent volume as the realization that the situation has changed takes time to hit home.

Dark clouds rolled in around the second half of 2022. The media started writing about a downturn in the timber industry, disappearing Scandinavian demand and disputes with customers there. "Sales disappeared virtually overnight," a sector participant said at the time.

By the final quarter of last year, we had reached a situation where no ray of sunshine could be seen. One would be hard-pressed to find a sector where things are going well today.

I also believe the first half of 2024 will be difficult for Estonian businesses, while this does not mean the glass is half-empty. Rather, it is half-full.

Allow me to propose a few hypotheses for why I believe the recession will end sooner than forecast.

Politicians and households are inert when a recession starts as they cannot yet feel the icy breath of the crisis. But entrepreneurs behave in the opposite manner. They do not base decisions on history, or economic statistics that reflect the past. They know what is happening at any given time and the outlook for the next few months.

Estonian businesses and their employees have been working toward ending the downward trend in sales and growth for the last two years. New markets have been found, ventures sporting low profitability abandoned and the focus set on more effective activities.

Not every new business model or attempt to conquer new markets succeeds, but as I said, the glass is already half-full. Efforts made, changes in course and reorganization undertaken during the recession will start to bear fruit sooner or later, which will help the Estonian economy return to growth sooner than is forecast in today's icy conditions.

Changes caused by the recession will increasingly start to support growth. Unemployment started growing last year. This means that labor market competition is also going up. If an employee does not wish to join the ranks of the recently laid off, they will have to make an effort and improve on their work. Salary growth will slow, relieving one major source of pressure on companies. The period of interest rate hikes is over, which will also have a positive effect on costs.

I agree that the first half of the year will be difficult, while expectations of a lasting and onerous recession seem too pessimistic after two years of crisis. Happy new year!


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

Editor: Marcus Turovski

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: