Energy and other raw materials prices have fallen, rises in price have slowed, while people's purchasing power is improving,

The central bank has forecast an approximately 3 percent economic growth rate over the next two years in Estonia.

According to this forecast, Estonian firms are actively working on improving competitiveness. Economic revitalization is expected this year, but the annual result will still fall short of that of the previous year.

The central bank in its forecast predicted an economic growth for the next two years of slightly over 3 percent, namely 3.2 percent for 2025 and 3.1 percent the following year.

Prices are also projected to rise by 3.2 percent this year, while the figure for 2025 is forecast at 2.4 percent.

The average gross monthly salary in Estonia is expected to reach €2,049 by then, the central bank stated.

Prices are forecast to rise by 1.9 percent in 2026, while the average wage is estimated to reach €2,147 per month gross in that year, according to the Bank of Estonia.

The central bank also reported that conditions for economic growth have improved. The Estonian economy has been contracting for two consecutive years now; this represents a longer and more protracted decline compared with previous downturns, caused by a snowballing of compounding obstacles.

However, the easing, or the likely easing, of these obstacles can now be seen, the bank added.

The forecast suggested that a fall in prices for raw materials and energy carriers from their previous high levels, reduced supply problems, a more favorable euro exchange rate, slowed inflation and an expected fall in European Central Bank (ECB) interest rates will all serve to contribute to rising economic activity.

An improvement in people's purchasing power, which stimulates consumer spending and economic growth, will be ongoing, the central bank reported.

The labor market's strong resilience to past difficulties provided a strong foundation for economic growth, since high employment and low unemployment distribute the increase in purchasing power and consumption capacity more evenly across society.

Economic activity is expected to gradually improve, according to the Bank of Estonia. The fading impact of the energy crisis and slowing inflation will boost people's purchasing power in Estonia.

These factors will also improve the purchasing power of consumers in foreign markets, significantly contributing to the recovery of severely affected export opportunities.

However, stronger economic growth in Europe is expected from next year.

Estonia is also impacted by conditions in its traditional export markets, Scandinavia and Germany particularly, being more complex than those for Europe as a whole, the Bank of Estonia stated.

A significant portion of Estonian companies' production capacity has remained idle, due to weak demand.

This means the economy has the potential for a strong acceleration in growth.

While this would all necessitate a jump in exports despite a weak external environment, the forecast is more likely that a new growth cycle will develop moderately, with stronger economic growth expected in Estonia from 2025.

Entering new markets, which companies are increasingly focusing on, will gradually open up more opportunities, the central bank said.

Estonian companies are actively improving their competitiveness, the bank added.

Firms' price-based competitiveness is no longer under as much pressure as it had been a year or two ago, but their cost base remains higher than before.

This serves to push production in Estonia towards greater levels of efficiency and innovation, a transition not all companies may be able to make, and which will lead to a reallocation of production resources between sectors and companies, the Bank of Estonia reported.

There has been a trend for people actively changing jobs, moving to sectors that are doing relatively better. This demonstrates that entrepreneurs have adapted and can create new and attractive jobs.

This is one reason why employment has remained despite the economic downturn. Additionally, the preservation of jobs has also been aided by a reduction in working hours, mainly at the request of employees, while employers will continue to have to deal with changed work time preferences.

Need to cut the budget deficit increasingly on the agenda

The Bank of Estonia believes the state has softened the economic downturn, but this has increased the budget deficit.

The government sector has boosted the budget deficit, adding more money to the economy, part of which has stimulated demand and so exerted a mitigating effect on the economic downturn.

If the government coalition continues with the tax changes legislated so far and at the previously established level of expenditure, the state budget deficit and the extent of stimulation are expected to deepen next year.

Economic growth in 2025 is envisaged to be quite rapid, meaning additional budget support for the economy is no longer needed.

Troubled export markets, supply difficulties, expensive energy, the termination of some business models due to the Ukraine war, and loss of price-based competitiveness are the major issues that have hindered economic growth.

Additional government spending will not alleviate these problems particularly, the Bank of Estonia said.

The central bank is also increasingly stressing the need to reduce the structural or permanent budget deficit.

The challenge in the coming years is not to exceed the 3 percent deficit limit, which, in addition to the need to guide state finances back to a sustainable path, would in any case also contradict common EU rules.

Restoring fiscal discipline is vital to avoid accumulating debt, while it is also crucial that exiting the deficit, or the removal of fiscal stimulus, is done in a way that does not harm economic growth prospects, the Bank of Estonia concluded.

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