Estonia’s GDP is expected to decline significantly later this year, however, it is set to recover and is expected to return to its 2019 level by the end of 2022. While the unemployment rate rose in the spring and then stabilized, deflation in 2020 reflects a significant drop in energy and tourism-related prices. Fiscal stimulus measures will extend until 2021 while keeping the budget deficit at a high level, although the European Commission expects public debt to remain the lowest in the EU (from 8.4% of GDP in 2019 to over 26% of GDP by 2022). Estonia experienced one of the most significant deflations in the Euro Area in the first half of this year, due to falling fuel and service prices, amplified by the temporary lowering of excise duties on diesel from 1 May 2020 for two years. Overall inflation is expected to average -0.5% for this year to rebound following around +1.5% in 2021 and then more than 2% the following year when higher excise duty on diesel will be reapplied.

In the second quarter of 2020, GDP fell by about 7% compared to the previous year: private consumption and investment suffered the most, down 8% and 15% respectively. However, the reduction in activity and imports was softened by intervention by public expenditure: imports were stalled due to the decline in investment in motor vehicles and machinery, but also due to the fall in fuel consumption. In the summer, when the restrictions were lifted, the economy recovered with retail sales and exports recovering to 2019 levels. Investment, on the other hand, has resumed more cautiously. In terms of industry, tourism and entertainment suffered the heaviest consequences, and losses increased further due to travel restrictions restored in September. Economic activity has resumed mainly in the production and exchange of IT services, contributing greatly to exports. And while household and business confidence has improved, it remains well below long-term averages.

Short-term indicators of economic activity indicate a slight rebound in the third quarter followed by a flattening: overall, GDP is expected to decline by 4.5% this year, while in 2021 the Estonian economy is expected to recover, with an expansion of 3.5% mainly due to the rebound in private consumption and investment. The recovery is also expected to continue the following year at a rate of 3.5%, related to the recovering EU performance and the gradual normalization of the degree of business confidence. The downside risk due to the perpetuation of the pandemic is mitigated by the well-known resilience of the Estonian economy, as was shown in the summer of this year, not forgetting the prospects opened up by the Next Generation EU program.

Estonia’s labor market has rapidly adapted to falling demand, just as it has done in recent recessions. Unemployment rose from 4.7% in the first quarter of the year to 7% in the second quarter: year-on-year, it is expected to reach 7.5% in 2020 and almost 8% in 2021, before falling below 7% in 2022. Given the decline in the working-age population and specific labor shortages, wages are expected to rise, albeit to a fairly uneven extent across sectors: wages are expected to rise more in the ICT sector, while only modestly in government. Down for hotels, food, and services.

Estonia is facing a sharp decline in the labor force due to sustained emigration, falling birth rates, and gradual aging. However, Coface points out that the relatively low unemployment rate and wage growth will continue to ensure an increase in household purchasing power. Combined with more moderate inflation, household consumption accounts for 50% of GDP, while private investment, although less dynamic after very rapid growth in 2019 (+25% in the second quarter of 2019 compared to 2018), remains an important contribution thanks to high business confidence and favorable financing conditions thanks to the ECB’s accommodative monetary policy. The private investment focuses on machinery and other capital goods, ICT, and intellectual property. However, in the current scenario, GDP growth will be hampered by more timid external demand, particularly in the eurozone (50% of trade), which will damp exports. This will have a particular impact on the industry (25% of GDP), as it is 70% concentrated in export-oriented sectors such as telephony, furniture, and cars.