Swedbank: Exports to grow this year as household confidence remains weak

Swedbank's latest economic growth forecast for Estonia this year remains unchanged at 1.5 percent. The bank anticipates moderate export growth for both this year and next, but expects household confidence to remain weak.
Swedbank's economic growth forecast for next year also remained unchanged from its fall forecast at 2.5 percent.
The bank has lowered its forecast for eurozone economic growth to 1 percent for this year and 1.1 percent for next year, citing falling productivity in the industrial sector, increased competition, relatively high energy prices and potential U.S. tariffs.
Swedbank chief economist Tõnu Mertsina noted that external demand as a whole is improving, but more slowly than expected.
"We believe that although global trade is becoming more protectionist, this shouldn't have a very big negative impact in the near future," Mertsina explained. "There is an impact, but according to our current estimates, it shouldn't be very significant."
The bank's analysts consider a rapid recovery of production and exports in the European industrial sector to be unlikely.
Among Estonia's biggest trade partners, Swedbank has revised down its economic growth forecasts for Germany, Latvia, Sweden and Finland.
"The economic growth of Estonia's main trading partners will be somewhat weaker than expected," the economist said.
The outlook for domestic consumption, on the other hand, is better. Estonia's labor market is strong, inflation is slowing, interest rates are falling and household purchasing power is improving, allowing for more consumption.
Despite relatively high energy prices, inflation in the eurozone continues to slow, and since eurozone economic growth is also slowing, Mertsina expects the European Central Bank (ECB) to lower its key interest rate to 1.75 percent by September and, after a brief pause, to 1.5 percent in early 2026.
"This will also affect the six-month Euribor rate, which serves as the main basis for loan agreements in Estonia," he continued. "So, the decline in the six-month Euribor should continue as well."
The economist pointed out that, compared with European interest rates, the economy in the United States is stronger, which means interest rates will remain higher there.
Household confidence falling, general confidence improves
The decline in retail trade, meanwhile, is gradually easing.
"In terms of overall private consumption, unfortunately, private consumption remains weak," Mertsina acknowledged, adding that this is evident in Swedbank's card payment statistics as well.
According to the chief economist, the long-term economic downturn has created a negative feedback loop and people are worried about their employment and financial situations worsening.
"Looking at the economy as a whole, we can see that general confidence has started to gradually improve," he said. "It's still weak, but it no longer shows signs of worsening."
Household confidence continues to fall, but general economic confidence is slowly starting to improve.
Price increases accelerating
According to Swedbank's latest forecast, inflation in Estonia is expected to accelerate to 4 percent this year before slowing again to 3.5 percent next year, i.e. returning to last year's level.
Swedbank senior economist Liis Elmik noted that about one-third of this year's price hikes come from tax hikes.
"The biggest contributor to this year's inflation is food, which has the largest share in our consumption basket — food makes up about a quarter of all spending," she explained. "The other significant contributor is transportation."
Elmik believes wage growth will slow down, expecting it to remain around 6 percent for both this year and next.
"Private sector companies are no longer seeing their turnover and profits grow as quickly, and they can't raise wages as much," she said. "The public sector is cutting back as well."
Unemployment on the decline
In 2021 and 2022, prices grew faster than average wages. In 2023 and 2024, purchasing power improved.
"This trend will reverse this year — prices will grow more than the average net wage, and the gap will be about 1.5 percentage points," Elmik said.
"Next year, the average net wage should rise sharply again, and the purchasing power of average wage earners should return to pre-inflation levels," she continued, adding that this expectation is based on the elimination of Estonia's tax hump.
Pensions and the minimum wage, however, will grow significantly faster than prices this year. "This continues a multi-year trend — pensioners' purchasing power has grown rapidly, and in the last five years, pensioners' purchasing power has gone up," Elmik noted.
According to the senior economist, Estonia's labor market is in good shape, and the number of employed people is high.
"Although the last few years have been economically difficult, companies are still holding onto their employees," she said.
With an improving economic environment, unemployment is expected to decline both this year and next.
Elmik also mentioned that the primary change compared with Swedbank's previous forecast is that the bank is now anticipating a larger drop in the Euribor than previously expected.
--
Follow ERR NEews on Facebook and Twitter and never miss an update!
Editor: Barbara Oja, Aili Vahtla