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Forecast: Estonia's economy loses more than four years to recession

Swedbank building in Tallinn.
Swedbank building in Tallinn. Source: ERR

Estonia's GDP growth will not exceed 2021's until 2026, Swedbank wrote in its January forecast. The current "mild" recession will end in the middle of 2024.

Estonia's GDP declined 3.4 percent in constant prices last year but will return to growth of around 0.3 percent in 2024. This will rise to 2.8 percent in 2025.

"The Estonian economy is expected to rebound to quarter-on-quarter growth in the first half of this year [2024], but for the full year, a decline will be seen," the report (link in English) says.

The bank is expecting "moderate growth" in 2025, which will based on "stronger domestic demand and the return of export growth". GDP will rise by 2.8 percent.

"Only in 2026 is Estonia's GDP volume expected to exceed the pre-recession peak of the fourth quarter of 2021 – thus, the economy will lose more than four years," the bank wrote.

Additionally, Inflation will continue to decelerate this year and next. Although the bank forecasts an average price increase of 3.7 percent in 2024, roughly half of that will come from tax increases. Next year, prices will increase by an average of 2.7 percent.

The forecast points out the economy has been in recession since the start of 2022 and by the third quarter of 2023 "GDP had fallen by 5.7 percent below the pre-recession peak".

The biggest causes were energy production, which became more expensive, and the situation with the transportation sector, which was affected by weaker demand and by discontinued transit from Russia.

Exports and services also declined, but Swedbank believes the situation will pick up by the end of the year as Estonia's trading partners' economies gradually recover.

The bank said the labor market has been resilient so far, but unemployment is expected to rise from 6.5 percent to 8.1 percent. Wages will slow down and grow by an average of 7.3 percent this year and 6.9 percent next year. However, the forecast does not foresee "anything very dramatic".

"Although income tax will be increased next year, we forecast a strong pick-up in net wages in real terms, given that the minimum for non-taxable income will be raised for a large share of households. We forecast a modest increase in private consumption this year, while next year households will be able to consume considerably more," the forecast said.

Despite tax hikes in 2024 and 2025, the government will not be able to clear its deficit, Swedbank said.

"As a result, the government will have limited options to expand spending and to stimulate the economy. Government debt will pick up, although as a share of GDP, it will remain one of the lowest in Europe," it said.

Estonia's current debt ratio is 18.2 percent of GDP while the EU average is 89.9 percent.

Glimmers of hope for the global economy

Inflation has fallen around the world faster than expected, which has also brought down market interest rates. However, the bank does not forecast a rapid improvement in the global economy.

The tightened monetary policy of central banks works over a long period, and the effects are still felt in the real economy. Geopolitical risks have also increased, and tensions in the Middle East pose a threat to the recovery of the global economy. Although the supply disruptions resulting from the situation in the Red Sea cannot be compared to those after the coronavirus, it can slow down the decline of inflation.

The forecast says the European Central Bank (ECB) will start cutting interest rates in April, while the U.S. Federal Reserve and the Swedish Central Bank will start cutting interest rates in May, followed by interest rate cuts this year and next. 

Swedbank believes the interest rate on the ECB's fixed deposit option will reach 2.5 percent by the end of this year and 1.5 percent by the end of next year.

The Eurozone economy was most likely in decline in the second half of last year, and confidence indicators suggest that economic activity is decreasing in many countries.

Although interest rates will start to be lowered soon, monetary policy will remain restrictive in the near term and will only provide support to the economy at the end of the year and next year. 

Swedbank said the Eurozone economy will slow down from 0.5 percent last year to 0.3 percent this year, and growth will accelerate to 1.5 percent next year. The main reason for the weakness of the Eurozone economy is the decline of the industrial sector.


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Editor: Karin Koppel, Helen Wright

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