Economic research

Economic Research Institute: Estonian economy is cooling | Economy

EKI Director Marje Josing noted that very fast barometers seem slow to assess and measure the current economy. A week-by-week overview is necessary, because what happened in December has already changed dramatically.

“There has never been a more difficult time to forecast than right now. Forecasts are only valid in a situation where nothing out of the ordinary is happening, it’s just steady economic development,” Josing said. “Experts say the economy is cooling down, which makes sense, because the economic growth of the last year is not sustainable for Estonia.”

Compared to September, the institute’s economic results fell below satisfactory.

Private consumption should be more modest in six months, given the price increases that have taken place. Investments are however at a good level.

71% of experts think the economy will be in a similar situation in six months, 21% think things will get worse as the Estonian economy enters a cooling phase. The main problem for the economy is the shortage of skilled labor, followed by social stratification. Incomes have grown at very different rates, but price inflation affects everyone.

Business confidence in Estonia remains high, but consumer confidence is on a downward trend. The tourism sector is struggling the most as no growth is expected for the sector over the next six months. Trade and industry weathered the crisis relatively well.

Forecasts for the first quarter of 2022

The turnover of industry, commerce and construction should grow or remain stable in the first quarter of 2022. The turnover of the hotel industry, on the other hand, will continue to fall.

Generally, if the industry is doing well, so is the country. The industry is doing well in Estonia, Finland and Sweden, where Estonian industries are active. The sector is mainly affected by a shortage of skilled labor, the availability of materials and equipment is improving slightly.

Inflation expectations are highest in trade, industry and construction. “It’s going to be a crazy season in the food business,” Josing said.

Businesses see rising input prices, labor shortages caused by the virus, additional costs for acquiring production inputs, cleaning and rearranging, and missed business trips as main concerns.

Hotels and restaurants have been the hardest hit by the coronavirus crisis, followed by industry, construction and tourism as a whole. There are several reasons – although there is a lack of demand for the first two, the others are struggling with price inflation, production inputs and labor shortages.

Companies are optimistic about their six-month outlook and expect the situation to improve by summer. There are few sectors affected by a lack of demand, mainly hospitality and tourism. Restaurants are struggling with labor shortages, supply chains have also been disrupted leaving raw materials unavailable.

Supply chain issues are most common in construction and industry. Input prices have soared for the construction sector, although the availability of materials has improved compared to last fall.

Consumer confidence was at a good level in August and September. People started saving, investing and spending. At present, confidence has dropped significantly, mainly due to energy price inflation and price shock. Only the wealthiest consumers have improved their confidence.

The decline in consumer confidence is particularly noticeable among women. “Women do most of the shopping,” Josing said.

Compared to December, the price of the so-called basic grocery basket rose 6% to an all-time high. “The major hike in food prices is yet to come. 6% is just the start,” Josing noted.

Price increases are affecting all countries, but inflation in Estonia was the fastest in the EU – 12% YoY for December. Estonia is followed by Lithuania at 10.7% and Latvia at 7.7%. Eurozone average inflation in December was 5%.

EKI estimates economic growth of 3% for 2022 and a consumer price increase of 6.5%, but economic development will be affected by the coronavirus pandemic and complicated international relations.

International security has an effect on the economy

“On average, the Estonian economy has done quite well. The hospitality sector is clearly in the worst situation. Recovery will unfortunately take time in this sector,” said the Minister of Entrepreneurship and Technology. Information Andres Sutt (Reform).

He said the global security situation had not been this bad since the Cold War and added that the world was facing three crises at once: the coronavirus pandemic, energy prices and international security.

The main problem, according to the Minister, is the shortage of skilled labor and which is getting worse over the next five years, as the working-age population is expected to decline by at least 31,000 people.

Sutt said the government should discuss solving the foreign labor problem. But it is always important to also work on solutions to the energy crisis. “It is important that we discuss nuclear energy as an alternative. Also everything related to accelerating the development of inland and offshore wind farms,” the minister said.

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