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Head of the Bank of Estonia, Madis Müller: conditions for economic recovery improve, interest rates set to fall 

We are overcoming the worst in economy, and the prerequisites for reaching an economic growth trajectory have improved, said Madis Müller, President of the Bank of Estonia. Photo: Maido Parv

Although the economic situation in the Euro area, including Estonia, remains weak this year, the prerequisites for economic recovery have improved. Consequently, it is expected that growth can be seen in the next year, said Madis Müller, President of the Bank of Estonia, at the Estonian Employers’ Confederation’s economic conference “Tuulelohe lend 2024”.

A clear positive trend is that the overall inflation rate has slowed down primarily due to the global market’s decline in energy prices and monetary policy interventions. In the euro area, inflation is close to reaching the central bank’s two percent target of GDP. “This gives reason to believe that further interest rate hikes are no longer necessary,” said Müller. However, he declined to specify the exact time when the European Central Bank might lower interest rates. He emphasized that while Estonia may be ready, the situation should be considered from the euro area’s perspective as a whole.

“To allow interest rates to start declining, we still await more concrete confirmation from the European Central Bank that the downward trend in prices continues. This reassurance may come from economic indicators in the coming months,” noted Müller.

Last year, Estonia’s economy experienced the most significant decline among EU countries. This was due to the more severe impact of the Ukrainian conflict on the industry and transportation sector compared to other European countries. Additionally, Estonia’s main export markets have been among the weakest in Europe.

Competitiveness in exports has also been undermined by faster wage cost growth compared to competitors and an unfavorable exchange rate with Scandinavian and Central European currencies, explained Müller. Domestic consumption has also decreased compared to the previous year’s peak when both pandemic-related and pension system savings were spent.

To allow interest rates to start declining, we still await more concrete confirmation from the European Central Bank that the downward trend in prices continues. This reassurance may come from economic indicators in the coming months.
Madis Müller, President of the Bank of Estonia

“However, we can say that we are overcoming the worst, and the prerequisites for reaching an economic growth trajectory have improved,” said Müller. He highlighted that companies are adapting, seeking new markets, and finding alternatives to disrupted supply chains. Several input prices have decreased, and their availability has improved; energy prices have almost normalized.

Foreign markets are also recovering, although a more robust recovery is expected in the second half of this year and next. While industrial production and goods exports have not yet clearly turned to growth, services exports have been in a better position, setting a record in the fourth quarter of last year.

Despite a prolonged economic downturn, the labor market has remained relatively strong, and the increase in unemployment has been smaller than predicted. People’s incomes have not decreased; on the contrary, they have grown by nearly a third when measured in euros over the past three years.

Purchasing power declined significantly due to rapid inflation, but it has recovered substantially and is approaching pre-decline levels. This supports consumption, although consumers remain cautious. Additionally, since incomes in euros have not decreased, managing increased debt obligations during rising interest rates has been successful. The volume of overdue loans remains small. The recovery of purchasing power is expected to continue this year, albeit at a slower pace.

The short-term outlook for the Estonian economy largely depends on the fortunes of our export partners and how well Estonian companies can find new target markets and adapt to higher cost levels. Equally important is maintaining a business-friendly economic environment by policymakers, noted Müller.

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