The Estonian economy will grow by 3.3% this year and 2.1% next. Growth in the economy will slow as export markets are weaker than before and there are still shortages of labour in Estonia. Wages will continue to rise despite the slower economic growth, but they will do so at a lower rate. Rising wages and low unemployment mean that intake of tax revenues for the state will be good, and so the budget should be in surplus to support the economy if needed during harder times.

The cooling in the economy will be seen in the labour market indicators. As demand for the output of companies will grow in future at a slower rate both in Estonia and in Estonia’s main export markets, businesses have shown less desire to take on new employees than last year. The number in employment will remain at the same level and wage growth will slow from 8.1% this year to 5.2% by 2021. As incomes rise fast, people would do well to continue saving as they have been so far.

As there is little unoccupied labour available in Estonia, employers have been active in hiring from abroad. The amount foreign workers contributed is estimated at up to 1.3 percentage points of last year’s GDP growth of 3.9%. Workers from abroad have been employed most in construction, agriculture and manufacturing in recent years. The hiring of foreign labour has both boosted economic growth and slowed the growth in wages. Rapidly rising wages have been a headache for exporting companies, as higher labour costs make it harder for them to compete in foreign markets.

Inflation will fall in Estonia from 3.4% last year to 2.1% in 2021. It will mainly be driven by rising labour costs, while the fall in energy prices and the reduced impact of alcohol excise will apply the brakes.

As the Estonian economy continues to do well, tax revenues will be higher than usual in the years ahead. Unemployment is extraordinarily low by its usual standards and wage growth is consequently very fast. Despite growth slowing in the economy, unemployment will remain very low in the coming years and there will be more workers than ever before. This will encourage people to consume, which will temporarily increase the state’s tax revenues. In this case it would be appropriate for the government to run a budget surplus for the coming years. A budget surplus in the coming years would not require spending cuts, just that spending grow more slowly than revenues.

A responsible fiscal policy of keeping the budget in surplus in good times and supporting the economy in bad times by running a deficit would soften any rise in unemployment at times of economic difficulties and would support stable growth in the incomes of people in Estonia. If a budget deficit is used during the current good times to fund additional spending, the government will be encouraging inflation and will make businesses want to hire more labour from abroad. Growth in the economy would be slowed though by a reduction in competitiveness, and this would hurt the growth in people’s incomes.

Publication

Estonian Economy and Monetary Policy 2/2019

Infographic

For further information:
Eva Vahur
Public Relations Office
Eesti Pank
668 0965, 5330 0619
press@eestipank.ee