After witnessing the first wave, Estonia saw the number of positive cases of Covid-19 increase, facing a crisis that has affected the economy, which is heavily dependent on foreign trade. The reduction in foreign demand was responsible for two-thirds of the 2020 recession, with exports of goods and services (representing around 70% of GDP) down nearly 14%, driven by declining exports of transport equipment and mineral products. However, according to Coface, Estonia returns to growth, and exports should recover and increase by 10% this year (GDP +3.4%), whether the European Commission is more cautious and expects GDP growth to be 2.6%. Private consumption (46% of GDP) is estimated to have fallen by 8% over the past year due to lockdown measures, lower incomes (unemployment rose from 4.5% in 2019 to 6.5% in 2020, while wages fell by 1%), and greater precautionary savings by households. It is expected to increase by 10% in 2021 thanks to the National Recovery Plan, whose objectives include support for household consumption, but also for the recovery in employment. The collapse in investment was the main reason for the decline in domestic demand: after an estimated decline of 11%, it is expected to grow only moderately in 2021 (5%), due to the decrease in the rate of capacity utilization. This will be offset by an increase in public investment (+25% in 2020), particularly in infrastructure. These investments will be financed by the National Recovery Plan and the €1.5 billion in aid received by Estonia under the European Recovery and Resilience Facility, 70% of which will be disbursed by 2022.

On the supply side, agriculture, which accounts for less than 3% of GDP, has barely been hit by the crisis. The secondary sector saw a sharp decline in 2020 (around 7%), due to declines in the automotive and oil shale sectors, but is expected to relaunch later this year (around 7%). Services have decreased by about 5% and are expected to grow by about 3% thanks to the ICT sector (10% of GDP).

Estonia has sound public finances: in mid-March 2020, the government was able to free up €2 billion (7% of GDP) to combat the crisis. This stimulus package has increased the country’s debt, but still well below that of its European partners. In any case, the government deficit, which increased with the crisis, is expected to improve in 2021. Public finances will also benefit from EU support, as Estonia has been allocated €6 billion under the 2021-2027 multiannual financial framework, of which 14% will be disbursed in 2021. Estonia has also been authorized by the Commission to reduce its co-financing of the framework, which will save the country €1 billion.

After a slight deficit in 2020, the current account is expected to return to a slight surplus this year. In 2020, while exports of goods were affected by falling international demand, imports were most affected by the sharp decline in domestic demand. The balance of goods will remain in deficit in 2021, although the increase in exports (wood, metal, transport equipment) is expected to support an improvement. The surplus of services remained relatively stable, driven by the ICT sector, despite the decline in transport and tourism. Dividend repatriations by foreign investors have exceeded the proceeds of Estonian investment abroad, leading to an income deficit. Large foreign direct investments (3% of GDP in June 2020) are combined with portfolio investments by Estonian pension funds and insurance companies, while the capital account surplus consists of transfers from EU structural funds. Gross foreign debt, which accounts for around 80% of GDP in 2020, is more than offset by assets held abroad.