According to Luminor's autumn economic forecast,

The Estonian economy is forecast to grow by only 1 percent next year, Luminor says; far from its potential and due to low investment in addition to the twin austerity measures of cuts and tax hikes being put in place as a part of the 2025 state budget.

The prognosis highlights that while the economy is finally in recovery after several years of decline, this is happening more slowly than expected, and is accompanied by high inflation.

More than that, the fall in borrowing interest rates will provide less relief than expected, while all this will leave both families and businesses still in austerity mode.

Luminor chief economist Lenno Uusküla said the recession in Estonia came to a halt in the second quarter of this year, accompanied by a fractional rise in working-day adjusted terms.

Uusküla said: "On a quarter-on-quarter basis, growth can be forecast for the final quarters of the year, though nevertheless this year will end with a one percent contraction."

Uusküla added that households are still in savings mode, bearing in mind the upcoming tax rises and the fact that next year's minimum income tax rate will not apply to everyone, at least as things stand.

Also, businesses are making plans to cut costs and hike prices next year.

While Estonia's main external markets have started to do better, recovery will not spring first from the industrial sector, meaning exports and foreign trade will continue to contract next year.

Because of the too little investment and slew of state, government and public sector cuts, plus tax hikes, for 2025, the net result will be a slowing of growth.

Consequently, Luminor forecasts a GDP growth of 1 percent next year, compared with the 3 percent outlined in its spring forecast.

At the same time, Uusküla said, Estonia continues to face many challenges in terms of the green transition, an ageing society, healthcare, education, social sectors and many other areas with long-standing problems that the current tax reforms have not taken into account.

Falling Euribor will not bring much relief

The Luminor chief economist added that along with the contracting economy, the main focus in Estonia has been on inflation, noting that compared with December 2019, prices in Estonia have risen by 40 percent, or exactly twice the rate for the entire eurozone.

"With this Estonia in the past year reached a level of consumer prices 97.9 percent higher than the EU average, where there are now fewer more expensive countries than cheaper ones," Uusküla continued.

"While we have come down from the inflation peaks, the outlook for prices here remains an upwards one. Prices were pushed down by high electricity prices over the summer, but businesses are much less willing to lower prices in anticipation of new tax increases. Rising wage costs are also contributing to higher prices," he added.

For this year, Luminor forecasts a 4 percent rise in prices, again a revision of its spring outlook, and one percentage point higher.

As for 2025, Luminor has raised its inflation forecast to 5 percent, this time from 1 percent.

During the summer just ended, lending rates, including the six-month Euribor, which many home loans are based on, have fallen significantly and are expected to continue to do so. The Euribor is projected to reach 3 percent by year-end.

"This is one percentage point lower than last summer," Uusküla noted.

"For a family taking out a €100,000 home loan, this means a €50 reduction in the monthly mortgage payment. At the same time, inflation has eroded await all the wage growth in recent years. As prices also continue to rise, reducing interest rates will not bring as much relief as previously expected."

While the average wage in Estonia exceeded €2,000 in the second quarter of this year for the first time ever, wage growth has slowed considerably over the past year, plus it is very unevenly distributed across sectors.

For this year, Luminor forecasts nominal wage growth of 7 percent.

Uusküla said: "Looking ahead, we will likely see continued wage growth, but at a stronger pace. In particular, we expect wage growth in services. As for manufacturing, we may see higher wage growth only if new export markets open up or the workforce is reduced in number."

Unemployment in Estonia has remained moderate, though it is now higher than the eurozone average, at 7.6 percent at the end of the second quarter, Luminor notes.

"The last time we had higher unemployment than the eurozone average was in early 2012, when we recovered from a 20 percent unemployment rate in the previous major crisis. Once again, our recession is worse, plus the unemployment rate has also risen above the eurozone average," Uusküla said.

"To a greater extent, our joblessness figures are boosted by the incorporation of Ukrainian war refugees in the overall labor market statistics, though some rise in unemployment can also be observed among local people," Uusküla noted.

This year's unemployment rate will be higher than expected, at 8 percent. It will remain higher in the coming years too, as a result of lower economic growth, he added.

Uusküla also stated that there has seldom been the degree of uncertainty in Estonia's recent history as there is now, though at least low unemployment and rising wages mean that there are some silver linings to the clouds, and that there is cause for some hope for the future.

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