It’s a long way, with no rapid way out. Estonian GDP shrank by 2.9% over the year in Q2, and by 0.2% over the quarter. This was the sixth consecutive quarter that the Estonian economy was in decline. Reportedly, companies have spare production capacity that they are not using. Price pressure is assumed to be weaker than it typically is, and that should help bring down overall inflation. However, the poor performance of the economy means that fewer new employees are being hired, and so unemployment is likely to climb.
The Estonian economy is indeed very open and about 40% of the value created by companies is intended for export. In the current scenario, the demand for Estonian output has been low in non-euro area markets: the euro has strengthened and Estonian products have become more expensive.
The contraction in the economy is believed to ease in the coming quarters, but there will be no rapid recovery. Competitiveness started to be lost last year, and so it is hard to increase business activities in old markets while entering new ones takes time.
The challenge for the government is how to use the state budget to boost the economy. Fiscal policy in recent years has increased the fixed spending of the state, meaning the government will have to choose between cutting spending and raising taxes.
The average gross monthly wage was 12.4% higher in the second quarter of 2023 than it was a year earlier at 1873 euros. Wage growth accelerated in the public sector as new collective agreements for healthcare workers came into force in Q2. The wages of education staff had risen in Q1, boosting public sector wage growth for the year as a whole. Wages also rose in the private sector, though at a lower rate.
Sales and exports fell for companies in manufacturing, which is the main exporting branch of the Estonian economy, by more than 10% in the second quarter. This is partly because demand from Estonia’s trading partners was weak, but it may also have been partly because of wages previously rising fast. Bank of Estonia admits that may have made Estonian companies less competitive, which in turn means a struggling recovery in the future.
The number of jobs has fallen in several branches of industry, and also in some branches of the service sector. This all suggests that growth in wages will slow. Indeed, the purchasing power of employees has been reduced by inflation, but there is a little less chance of them now being able to move to a job with a higher wage than there was before. The chances of employees receiving a pay rise in their current job are also consequently lower than before as well.