According to preliminary calculations from Swedbank's economic forecast published on Tuesday, Estonia's gross domestic product (GDP) contracted by 1.4% in the first half of this year, and although the second half of the year is expected to be stronger, the bank forecasts a 0.6% contraction in GDP. /nginx/o/2011/01/02/492656t1h2c0b.jpg)
Eurocents. Photo: Margus Ansu BNS August 27, 2024, 12:35
According to preliminary calculations from Swedbank's economic forecast published on Tuesday, Estonia's gross domestic product (GDP) contracted by 1.4% in the first half of this year, and although the second half of the year is expected to be stronger, the bank forecasts a 0.6% contraction in GDP.
Swedbank economists Tõnu Mertsina, Liis Elmik and Marianna Rybinskaja noted in a press release provided to BNS that the Estonian economy, although still weak, is showing signs of improvement.
According to experts, in the next couple of years, economic growth will be supported mainly by external factors – increased external demand and lower interest rates.
However, the Estonian government's planned tax package and spending cuts are accelerating inflation and holding back growth. Strengthening confidence is becoming increasingly important for boosting domestic demand.
"The decline in manufacturing output and exports of goods and services is easing. At the same time, the weakening competitiveness of companies may hold back export growth," economists warn.
At the same time, lower interest rates will increasingly support the growth of domestic demand. In Estonia, the 6-month Euribor, which is the basis for concluding loan agreements, peaked in October last year, and the highest interest rates on local loans for businesses and households continued in the first quarter of this year.
Lower interest rates are gradually easing financial constraints on businesses and households, but a more significant impact on the overall economy is not expected until next year.
Despite the slow recovery of the Estonian economy, confidence in sectors remains weak. This is holding back economic activity and slowing consumption growth.
Although Swedbank forecasts that net wages adjusted for prices will increase since the middle of last year, retail sales will continue to decline. Swedbank card payments also indicate weak private consumption. Therefore, the growth of household consumption will depend on an increase in their confidence.
Swedbank estimates that the new tax package proposed by the ruling coalition will accelerate inflation to an average of 4.4% next year. Prices will rise by 3.5% next year.
Wage growth is expected to slow from 7.4% this year to nearly 6.5% over the next two years. Economists say the demand for labor has fallen and businesses are struggling to raise wages as much as they have in the past. The tight state of government finances is limiting public sector wage growth.
"The combination of postponing the introduction of the single tax-free minimum until 2026 and accelerating inflation will lead to a decline in net wages, taking into account price increases, next year. This could worsen the already weak household confidence, which will have a negative impact on private consumption. We do not expect private consumption to grow next year. Since private consumption accounts for about half of GDP, this will have a strong impact on the economy as a whole," Swedbank experts said.
The bank estimates that the new tax package and cuts in public spending will reduce GDP growth by more than one percentage point in 2025 and by almost half a percentage point in 2026, compared with a scenario that does not include the new fiscal policy adjustments mentioned above.
The postponement of the abolition of the uniform minimum income tax threshold to 2026 will significantly accelerate the growth of real net wages. Despite the acceleration of private consumption growth, tax increases and cuts in public spending, as well as the postponement of weaker growth rates to 2025, will restrain GDP growth in the coming years. However, the negative impact of the new tax package and spending cuts will be partly offset by improved exports and lower interest rates.
According to Swedbank's forecast, Estonia's GDP will grow by 1.5% next year and by 2.5% in 2026. Slower-than-expected GDP growth will delay the peak of Estonia's economic recovery from the pre-crisis peak by about six months, until early 2027.
Although the Estonian labour market has weathered the long recession relatively well, the unemployment rate still exceeds long-term averages.
Swedbank forecasts that the unemployment rate will be 7.6 percent this year. As the economy starts to grow, demand for labor will increase, and the unemployment rate will gradually decrease over the next two years.
The bank forecasts the unemployment rate to be 7.3% next year and 6.5% the following year. Although the number of people employed will fall slightly next year, employment will remain high and the labour market will remain strong overall.
