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Forecast Swedbank: What are the prospects of Estonia’s economy in thenewyear?

Прогноз Swedbank: каковы перспективы экономики Эстонии в новом году?

According to the published today forecast of Swedbank economists Tynu Mertzin, Liis Elmik and Marianna Ryabinska, the coming year will bring further reductions in interest rates, an improving economy, but also

increases in the cost of life. Office Swedbank. Office

Swedbank. Photo: Svetlana Aleksejeva / Postimees

28 January 2025, 12:20

According to a published today prediction by economists Swedbank Tynu Mertzin, Liis Elmik and Marianna Rjabinska, The coming year will bring further reductions in interest

rates, an improving economy, but also increases in the cost of living.

According to the forecast, the new presidential term of Donald Trump has increased political uncertainty in the world. There is still most uncertainty about the implementation of new customs duties in the relationship of European countries and China. Although increasing protectionism is damaging the global economy, its impact is likely to remain small in the next years.

Economic growth in the Eurozone in different countries is uneven. Because of decreasing productivity of labor in the industrial sector, increasing competition, relative high prices for energy and possible tariffs of the United States economists have reduced the forecast of eurozone growth for this year to 1%, and for the next year to 1.1%.

These indicators are below the average of the Eurozone over the last ten years.exports could recover quickly. On the other side, the prospects for domestic consumption are better. The labor market is stable, inflation is slowing, interest rates are reducing, and the purchasing power of households is improving, which allows consumption to increase.

Despite relatively high prices for energy, inflation in the eurozone continues to slow. Since economic growth also remains wilted, economists expect the European Central Bank to reduce the deposit rate to 1.75% by September of this year and, after a brief pause, to 1.5% at the beginning of 2026 year.

Economy Estonia is improving, despite a increase in taxes

According to current estimates, the eight-quarter recession in Estonia will end in the first quarter of 2024 year, but in the gross domestic product (GDP) for the year decreased by 0.8% in constant prices. In our forecast, Estonia’s economy will return to growth in this year, increasing by 1.5% in constant prices and by 2.5% in the next year.

In this year economic growth will be supported first first by increased exports and investment, while the impact of consumption by households will be significantly less. The volume of production of processing industry and exports has began to increase again. Although economists revised the growth forecast for trade partners of Estonia downward, foreign demand as a whole should improve slightly, which allows a moderate increase in exports in 2025 and 2026 years.

The long decline in retail sales came to a halt at the end of last year, and before the introduction of the tax on vehicles at the beginning of this year. Sales of automobiles increased strongly, but household confidence remained low. Swedbank payment cards also show that private consumption is still weak. The slowdown in growth in the number of employed and the average wage has slowed the growth of the total labor fund, which also led to a decrease in private consumption.

The tax hike increases inflation

The rise in prices in Estonia was one of the highest in the Eurozone, due largely to the tax hike in 2024 year. Although consumer prices increased by 3.5% last year, economists project inflation at 4% this year and 3.5% next year. Inflationary expectations of households increased in the second half of last year. An increase in taxes in this year will increase inflation even more, with the biggest impact will be on prices of food and transportation.

Despite the long lasting economic downturn, the labor market has been sufficiently resilient. The unemployment rate has increased moderately, while the employment rate is high. An improvement in economic activity in Estonia should lead to a reduction in the unemployment level in the next two years.

Although in last year the unemployment rate increased to 7.6 percent, economists expect that this year it will decrease to 7.2%, and the next to 6.5%. Although the number of employed people in this year will slightly decrease, the share of the economically active and inactive population will still high. The employment rate in Estonia (over 69%) is one of the highest in Europe.

High employment will help the business sector to respond faster to the Economic Active and inactive population in Europe. the expected improvement in demand. This could could cause an strengthening of the situation in the labor market in Estonia and, consequently, delay the increase in wages . The growth in expenditures of enterprises for labor force has been because of decreasing profitability, in the public sector the growth of wages is delaying the planned reduction of expenditures. Growth of wages is slowed, but still relatively high. Our forecast, last year’s growth in wages of 7.9%willslowto6% inthisandnextyear.

Because of thecumulativeeffectoftheincometaxincreaseandinflationrealnetwageswilldecreasethisyear.At the sametimethereductionininterestratesisincreasinglyaffectingthepurchasingpowerofhouseholdswithcreditandleasingliabilities.Wethinktheconfidenceofhouseholdsshouldgraduallyimprove,whileconsumptionofhouseholdswillincreasesignificantlythisyear.Butinthenextyear,theremovalofthetaxhumpwillleadtoasignificantincreaseintheaveragenetwage,whichshouldhavemoresignificantpositiveimpactonconsumption.

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