The latest forecast from the Bank of Estonia finds that after two years of recession, conditions have improved so that the economy can return to growth. Prices for energy and other commodities have fallen, inflation is coming down, and people’s purchasing power in Estonia and Europe is improving.

Conditions for a return to growth in the economy have improved. The economy is expected to revive during this year, though the figures for the whole year will still be below those of last year. The central bank is forecasting growth of 3% for the following two years.

Although the Estonian economy has been shrinking for two years in a row, which makes the current recession longer and more persistent than earlier episodes, economic activity will be given a boost by commodities becoming cheaper, prices for fuel and energy coming down from their peaks, supply problems being eased, exchange rates becoming more favourable, inflation falling, and interest rates being cut by the European Central Bank.

The strong resilience that the labour market has shown to the current difficulties has laid a firm floor for economic growth, as high employment and low unemployment mean that the increase in purchasing power and the capacity to consume will be spread more evenly throughout society.

Economic activity will increase, but slowly. The impact of the energy crisis fading and inflation falling will increase the purchasing power of people in Estonia. The same factors will also improve the purchasing power of consumers in foreign markets, which will make an important contribution to reviving the export opportunities that have been suffering badly. The European economy is equally expected to start growing more strongly from next year.

Estonian economy anticipated to see strong growth starting in 2025

An additional issue for Estonia is that the traditional export markets, especially Scandinavia and Germany, are faring worse than Europe as a whole. A large part of the production capacity of Estonian businesses has been standing idle because demand has been weak, which means there is potential in the economy to accelerate growth very powerfully. This, though, would require a leap in exports in a weak external environment, and so it is still more probable that the new cycle of growth will unroll in a restrained manner and that strong growth in the Estonian economy can be expected from 2025. Entry into new markets will help increase export opportunities, and companies are increasingly emphasising this, though it takes time to open up those opportunities.

Estonian companies are working hard to become more competitive. The price-based competitiveness of businesses is no longer under the same strain that it was a year or two ago, though the cost bases of companies are higher than they were. This will nudge production in Estonia to become more efficient and innovative, though not all companies will be able to keep up with that, so production resources will continue to be reallocated between different sectors and different companies.

The trend has continued for people to be very active in changing jobs, and there has been a movement to sectors that have been doing relatively better. This indicates that businesses are adapting and are able to create new and attractive jobs. It is also one reason why employment has held steady despite the recession. Employment has also been maintained by reduced working hours, which has mainly happened at the instigation of workers, and employers will, in the future, have to cope with different expectations from their staff.

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