The Bank of Estonia vows optimism on the conditions for a return to growth. The economy has been shrinking for two years in a row, which makes the current recession longer and more persistent. Economic activity will supposedly be given a boost by cheaper commodities and energy, supply problems being eased, money exchange rates becoming more favorable, inflation falling, and interest rates being cut by the ECB. Purchasing power is expected to improve, which will encourage consumer spending and economic growth. A view too good to be true.

The impact of the energy crisis fading and inflation falling is expected to increase the purchasing power of Estonians. This should also improve the purchasing power of consumers in foreign markets, making an important contribution to reviving export opportunities. The European economy is equally expected to start growing more strongly, but only from next year.

In fact, here the issue for Estonia is that the traditional export markets, especially Scandinavia and Germany, are faring worse than Europe as a whole. A large part of the production capacity of Estonian businesses has been standing idle because demand has been weak. A new cycle of growth therefore can be expected only from 2025.

Reportedly, the price-based competitiveness of businesses is no longer under the same strain that it was a year or two ago, though the cost base of companies is higher. This should nudge production in Estonia to become more efficient and innovative, though not all companies will be able to keep up with that and so production resources will continue to be reallocated between different sectors and different companies.

The trend has continued for people to be very active in changing jobs: this indicates that businesses are adapting and can create new jobs. It is also one reason why employment has held steady despite the recession. Employment has also been maintained by working hours being reduced, and employers will in the future have to cope with different expectations from their staff.

Additional problems arise when the state has softened the recession, widening the budget deficit with additional money into the economy. If the governing coalition maintains its earlier expenditure levels with the tax changes that have been legislated, the budget deficit and the stimulus to the economy will increase even further in the coming year.

The rosy forecast expects the economic growth to be quite fast in 2025. The nature of the key problems that have hindered growth so far of difficulties in export markets, supply problems, expensive energy, some redundant business models, and a loss of price-based competitiveness means that government spending will not particularly ease them.

In both the US and Europe, central banks have taken advantage of the supply boost from fading pandemic dislocations to pursue continued – even if partially camouflaged – monetary inflation. Consumer prices would fall back towards pre-pandemic levels only under sound money.

The euro by end-2023 had lost 15 percent of its end-2019 internal purchasing power. The need to reduce the structural and lasting deficit in the budget in favor of sound market competitiveness is becoming ever more apparent.