Lenno Uusküla, Luminor's chief economist said that although the Estonian economy is recovering from a downturn, there will be no spontaneous rapid growth in the long term that significantly improves the well-being of society as a whole.

"In Estonia, we are somewhat like Vladimir and Estragon, the protagonists in Samuel Beckett's play 'Waiting for Godot,' who keep waiting for Godot, but who, despite their great expectations, never arrives. It seems to be the same story with Estonia's economic growth," said Uusküla.

Uusküla added that to talk seriously in the public debate about a significant increase in the size of the Estonian economy, tough choices are needed, risks are required and wise decisions are necessary.

"Instead of waiting, this is a journey better described in Homer's 'Odyssey' – a path full of quests, discoveries, adventures, courageous decisions and overcoming difficulties, towards which everyone contributes together."

Estonia's GDP has been falling for eight consecutive quarters, and is down by 5.6 percent from its peak at the end of 2021.

Uusküla said that considering the population growth due to the influx of Ukrainian war refugees, the decline in GDP per capita has been even greater – 8.1 percent.

"The consumption that grew rapidly after the COVID-19 crisis turned into decline in the face of significant price increases, directly affecting domestic demand and jobs. At the same time, Estonia's industrial production has fallen by a fifth from its peak level, and unfortunately, there is still no certainty today that the bottom has been reached," he said.

Uusküla highlighted the rapid growth of Estonian service exports as a positive sign, including those to the United States, which, due to the U.S. economy being on a very strong trajectory, mean those companies involved can expect good results this year.

The start of this year has been weak in terms of both consumption and manufacturing, with Luminor forecasting a one percent decline in GDP for 2024 as a whole. However, more positive developments can be expected in the second half of the year.

"By way of comparison, in the case of a one percent decline, we can see that fourth-quarter GDP exceeds that of the same period last year, and looking ahead to 2025, we can be more optimistic and forecast up to a three percent economic growth," said Uusküla.

"Considering the weak indicators of the previous three years, growth may even be greater, as we have a lot of production potential."

Purchasing power falls

The incomes of Estonian individuals and businesses alike have been heavily affected by the overall increase in prices since the end of the COVID-19 crisis. Compared to pre-pandemic levels, Estonian consumer prices have increased by 38 percent. This means that for every €100 in someone's bank account, only €72.50 remain in terms of actual purchasing power.

"Home-related prices have increased particularly strongly, rising 79 percent by February this year. Food prices have increased by 45 percent," said Uusküla. "By now, the price increases have stopped, but this year's VAT increase and the incoming car tax will create a situation again where prices can be raised more than the economic situation would otherwise allow."

Luminor forecasts a three percent increase in consumer prices for this year and one percent for 2025.

Over the past two years, a significant amount of household expenditure has been affected by additional costs due to the rise in interest rates. For example, for a 20-year home loan of €100,000, a one percentage point increase in the interest rate, results in a monthly loan payment increase of €50. When the base interest rate reaches four percent, the monthly payment amount increases from €500 to €700.

"The financial markets have been expecting interest rate cuts for some time, but it now appears that this may only reach loan clients in the second half of the year. However, if we do see a cut in interest rates, its impact on people's pockets will be very clear and provide additional disposable income for families with large home loans. Nevertheless, it should be noted that interest rates will remain higher than they were in 2021," Uusküla said.

The labor market is characterized by continuing wage growth as well as increasing unemployment, according to the bank's chief economist. Luminor forecasts a seven percent wage increase in 2024.

"Wage growth exceeds inflation by four percent, but the recovery is still slow. We will likely return to the pre-recession levels of 2021 somewhere in the middle of 2025," Uusküla said.

Luminor forecasts a seven percent unemployment rate for this year, which is slightly higher than in 2023.

"In fact, we have been doing well with employment so far, and the increase in the unemployment rate has largely been due to the addition of Ukrainian war refugees to those statistics. Excluding this impact, the increase in unemployment has been marginal," Uusküla said. "Behind the low unemployment rate is largely Estonian companies, who have decided to retain employees as much as possible at the expense of their other resources, including investments."

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