Real GDP is forecast to decrease marginally in 2022. Positive private consumption and net exports growth are expected to be offset by the unwinding of temporary foreign intangibles’ investments. Economic growth is forecast to resume in 2023, as inflationary pressures ease and investment rebounds, and to continue at a moderate pace thereafter. Consumer price inflation is set to soar to 19.3% this year, on the back of substantial increases in the prices of energy, food and industrial commodities. A price cap on electricity and other policy measures are set to steadily reduce headline inflation over 2023-2024. The government deficit is projected to expand to 3.7% of GDP in 2023 before falling again in 2024, while public debt is expected to increase mildly, to 21.9% of GDP in 2024
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||8,0||-0,1||0,7||2,1|
|Inflation (%, yoy)||4,5||19,3||6,6||2,6|
|General government balance (% of GDP)||-2,4||-2,3||-3,7||-3,3|
|Gross public debt (% of GDP)||17,6||18,7||19,3||21,9|
|Current account balance (% of GDP)||-1,8||0,4||0,7||1,1|
The economic engine started sputtering
Economic growth is forecast to stall in 2022 at 0.1%, after a robust expansion. In the first half of the year, gross fixed capital formation reflected the unwinding of some large foreign intangible investments initiated in late 2021, while construction activity slowed in the wake of higher prices and supply bottlenecks. On the upside, households continued spending their savings accumulated during the pandemic-related lockdowns and augmented by the withdrawal of second-pillar pension assets. However, consumption is expected to recede in the second half of 2022, as purchasing power falls due to the surge in consumer price inflation. While the global trade slowdown caused by Russia’s war of aggression against Ukraine has dragged down exports of goods, imports were kept elevated by the need to build up stocks. Exports of services have continued rising this year, after the strong 2021 performance. With imports of services falling sharply, due to the foreign disinvestment, net exports are forecast to provide a positive growth impulse in 2022.
As Estonia’s flexible economy reacted early to the surge in energy prices, it is also expected to adapt quickly to their stabilisation and eventual decline. Real GDP is forecast to increase to 0.7% in 2023 – supported by all demand components, including a robust fiscal stimulus – and to pick up to 2.1% in 2024. Private consumption is projected to increase in parallel with rising real disposable incomes. Investment is set to rebound in 2023 and to further expand in 2024, despite tightening financial conditions, thanks to the previously accumulated corporate savings. Investment in equipment is expected to pick up strongly, in a drive to diversify to less energy-intensive manufacturing. Construction activity is expected to focus on infrastructure projects, also supported by EU funds, while residential construction is forecast to be held back by softer demand for new dwellings, due to relatively high house prices and less favourable mortgage rates.
Foreign trade is forecast to contribute positively to output growth in 2023-24, with lower firms’ demand for imported inputs and exports of services continuing to perform very well, particularly in information technologies and in transport and logistics.
Labour market stays tight
Employment is forecast to expand sizeably in 2022 as past GDP growth translated into job openings. The resulting labour market tightness fuelled robust wage rises, although still below inflation. It also stimulated an increase in the labour force, already swelled by the inflow of people fleeing the war in Ukraine. The unemployment rate is thus estimated to rise to 6.1% this year and 6.6% in 2023, before falling again in 2024. Wages are still expected to grow strongly in 2023, driven by the public sector, and more moderately in 2024.
Inflation falling rapidly from the 2022 peak
Consumer price inflation is projected to have peaked in the summer at 25.2% and to start declining in the fourth quarter of 2022, thanks to newly introduced measures capping retail electricity prices and limiting the increase in gas and heating prices from October 2022 until 2026. Overall, HICP inflation is forecast to reach 19.3% this year. With prices of oil and non-energy commodities, as well as of imported foodstuffs, already below their peak and not expected to rise again in the forecast horizon, headline inflation is projected at 6.6% in 2023 and 2.6% in 2024. Core inflation, however, is set to slow down less quickly, as firms pass persistently higher input costs onto final prices.
An expansionary budget adds to the 2023 deficit
The general government deficit is forecast to reach 2.3% in 2022, a similar level to 2021. Tax revenue is projected to grow by about 12% in 2022 compared to the previous year, buttressed by the strong labour market and an inflation-related boost for VAT revenue, while consumption is still buoyant. However, expenditure growth is set to be likewise high, reflecting spending on measures to mitigate the impact of high energy prices (around 0.9% of GDP), defence, integration of people fleeing the war in Ukraine and social benefits.
The deficit is forecast to increase markedly to 3.7% of GDP in 2023, as revenues are projected to be negatively impacted by the slowing economy and by the increase in the tax-free allowance in personal income tax. At the same time, expenditure is set to rise as a share of GDP, due to the announced substantial wage increases for many public employees (teachers, internal security), as well as to plans to spend more on defence, education and child benefits. These expenditure measures are expected to be permanent. The deficit is projected to decrease only gradually to 3.3% of GDP in 2024, when economic activity is set to pick up.
Public debt is expected to increase from 17.6% of GDP in 2021 to 21.9% in 2024, still the lowest ratio in the EU.