Shoppers have started to prefer Estonian e-stores more in recent years, and in the fourth quarter, 58% of all e-purchases were made from Estonian e-stores. An average of 138 million euros a month was spent in local e-stores in the fourth quarter, which was 70 million more than in the fourth quarter of 2019. E-purchases by residents of Estonia averaged 6 million euros a month in the fourth quarter of last year, with a total turnover of 249 million euros. There were 31% more e-purchases than there were in the same quarter of the previous year, while the turnover was up by 59%. The e-commerce market was already expanding in previous years, but it has seen sharp growth since the Covid-19 pandemic started. This is partly a consequence of the pandemic crisis and the restrictions imposed. However, innovation can free us from the constraints of circumstances. People started to turn to online traders for goods that would only rarely have been bought over the internet before, such as food and medicines. People had to move over to work from home and remote studies at the start of the pandemic, which increased online purchases of computers and other technical equipment, as of household fittings and furniture.

At the start of the pandemic, people were looking to buy large supplies of essential goods and food, but merchants say that online shopping has now become more rational. Some sectors, however, such as culture, tourism and transport, remain unfortunately unable to provide all of their services in full, and the sales figures for those sectors, including their online sales, fell dramatically at the start of the pandemic and have not yet recovered.

This change has probably been caused by a combination of the restrictions and changes in people’s habits, together with the improvement in the options for shopping online. Although shops in Estonia have now opened their doors again, many people continue to buy food and other basic necessities from online stores as it is convenient and it works well, especially in the larger towns. Shops adapted quickly to the new circumstances, and many set up their e-channels right at the start of the pandemic.

The most common way of buying in Estonia is through bank link payment orders. Bank link payment orders and open banking payments were used for 53% of all the e-purchases made in Estonia in the fourth quarter, and they accounted for 76% of turnover. The options for paying in e-stores in instalments have become more varied. An average of 11.6 thousand purchases with instalments were made each month in the fourth quarter from e-stores, with a total turnover of 6.7 million euros. Although instalments are used less often than other forms of payment, it is becoming increasingly popular as a way of paying. Alongside the traditional way of paying in instalments, service providers are offering the purchasers the option of buy now, pay later, and they say that this is becoming increasingly popular. This option allows the client to receive the goods immediately and pay for them over subsequent months in interest-free instalments. A further advantage of this for the purchaser is the legal right to return goods within 14 days that allows them to test the goods out before they have to start paying for them.

In this scenario, authorities keep assuring that the current extraordinarily high inflation is a temporary phenomenon because financial markets expect that the rise in commodities prices will slow this year, while further growth in the Estonian economy, which is doing very well, will be notably slower. Inflation rose in Estonia throughout the whole of last year, reaching 12.2% by December. The primary reason was the rise in prices for energy and commodities on global markets and blockages in supply chains that have also pushed inflation up elsewhere around the world. Inflation rose to 7% in December in the USA, and 5% in the euro area. “Extraordinarily high inflation like this tends to remain temporary”, said Deputy Governor of Eesti Pank Ülo Kaasik. Financial markets estimate that the prices of commodities will rise more slowly this year, and that the rate of inflation will come down in the second half of the year. Speaking at the annual conference of the Estonian Economic Association, Mr Kaasik noted separately that it would be wise for the government to keep the total size of its energy support package smaller than the additional revenues it is earning from high energy prices through taxes, emissions quotas and the profit of state-owned energy firms. “If the energy support package becomes much larger than that, there is a danger of the government pouring fuel onto the fire of already high inflation, and so the subsidies would become counter-productive”, he said.

Data from Statistics Estonia show that consumer prices in December were 12.2% higher than a year earlier. Inflation averaged 4.6% in 2021. Inflation in December was the highest seen in the past 20 years. It was high for both goods and services. Half of the total rise in prices in the consumer basket came from energy, as prices for electricity and gas were more than 120% higher in December than a year earlier, while heat prices were up 40% in consequence. High energy prices mean that inflation will not come down in the near future. More expensive energy increases the production costs of companies and will in the coming months be passed through into the prices of other goods and services. If a temporary spike in inflation were to lead to higher labour costs for companies, that would push them to adjust their own prices and so cause a wage-price spiral. This would make the economy less competitive and so would threaten jobs.

At the same time, high inflation limits people’s purchasing power. Although wage growth is quite fast at 7-8% because of labour shortages, it will still remain temporarily slower than inflation, and so real purchasing power will decline. Price pressures are supposed to weaken and purchasing power to recover in the second half of 2022. Eesti Pank forecasts that the average inflation for Estonia this year will be 6.9%. Still not enough though.

Inflation in Estonia has been boosted even further by the good performance of the economy. The Estonian economy measured in euros was already 14% larger than it was before the crisis in the third quarter of last year. Most sectors of the economy are doing well, and production capacity is running at its maximum. Businesses are ready to pay their employees more in all sectors. Forecasts show unemployment falling to 5.5% this year and the trend remaining downwards in the years ahead. “The problem is though that people with the necessary skills cannot be found in the labour market for the jobs that are available, and there is equally no sign that labour has moved into more productive sectors”, noted Mr Kaasik. Strong demand for labour is keeping up the rate of wage rises, with wages rising on average by more than 8% this year and next. Mr Kaasik said that a rapid rise in the costs to business could threaten the competitiveness of Estonian companies, on which job creation and long-term wage growth depend. And what if the example of e-commerce would switch the focus to a more efficient allocation of resources among sectors instead of the generic stimulus of demand? After an initial painful step, it would cool down inflation and boost both the purchasing power of consumers and the competitiveness of economic activities, thus thriving the labour market.

Growth in the economy is expected to slow this year. Reportedly, this is partly because production capacity has come close to its limits, and partly because rapid inflation will slow growth this year. The rapid rise in energy prices will cause additional uncertainty. It is expected that the pandemic will have less impact than before on economic activity, but the impact in some sectors will still be considerable. Estonian exports of services, for example, especially those related to tourism, have not yet recovered from the crisis.

Rapid rises in the incomes of residents of Estonia and high levels of confidence have promoted strong demand in the housing market. The capacity to borrow has been increased during the pandemic by increases in savings and withdrawals from the second pension pillar. Prices for residential space are in some places already rising faster than the average wage, and Eesti Pank estimates that the real estate market is showing signs of overheating. The central bank follows such trends closely and is ready if necessary to tighten the conditions for issuing housing loans. “Lending growing too fast could be dangerous, as a fall later on in incomes or a rise in interest rates on loans could cause some people difficulties in repaying their loans”, warned Mr Kaasik.