In Estonia employment rose by 5.1% in the first quarter of this year than the year earlier, and also participate in the labour market increased. According to the Bank of Estonia, there were more people at work than immediately before the pandemic started. The recovery was particularly strong in the labour market among young people and those of retirement age, who had been pushed out of the labour market during the pandemic. However, growth in demand for labour is expected to slowly move forwards because of the blow to the economy delivered by Russia’s war in Ukraine. The effects of the war have so far only been visible in the employment expectations of companies in construction and manufacturing, which were more pessimistic in March and April than previously. The high level of uncertainty has also reduced to some degree the share of companies that see labour shortages as the worst problem they face. The impact of the war on corporate employment expectations has so far been much less than that during the early stage of the pandemic two years ago. The labour supply is expected to be increased by refugees from the war in Ukraine arriving in Estonia. Therefore, productivity can be easily seen as the real stimulus for economic growth.

Governor of Eesti Pank Madis Müller reported at a joint seminar for the European Investment Bank (EIB) and the Baltic States: “A strong economic stimulus was needed during the pandemic from both the central bank and the government for the rapid recovery from the crisis, but it is now wiser to change the approach because Russia’s invasion of Ukraine and very high inflation have altered the economic circumstances substantially”.

The major difference between the pandemic and the current crisis is that inflationary pressures have risen significantly. In consequence, the European Central Bank, which moved actively to support the economy during the pandemic, is currently expected to withdraw its monetary policy support measures. The factors causing the current high inflation went beyond the control of the Central Bank, as prices rise for energy and fuels, raw materials, and food. “The circumstances are completely different from what they were during the pandemic, and the central bank needs to take firm steps to bring down inflation in the euro area”, added Mr Müller.

In this scenario, demand from households for housing loans remains large. There were 168 million euros of housing loans issued in April, and the housing loan portfolio of the banks was 10% larger than a year earlier. The Russian invasion of Ukraine at first made households in Estonia cautious about borrowing, but demand for loans recovered quite quickly. The housing market remains active, and prices continue to rise. The average housing loan issued in April was 12% larger in size than the average a year earlier, reflecting the rise in prices in the real estate market. Demand has been maintained by the savings that households have built up and by strong growth in incomes, a sign of a growing wage-price spiral. The amount taken by households in car leases in April was the same as a year earlier at around 32 million euros. The limited supply of new cars is raising their prices and increasing the size of the average lease for them.

A total of around 200 million euros in consumption loans was taken from banks and other creditors in the first quarter of the year, which was 25 million euros more than a year earlier.  Loans issued by banks for consumption totalled 87 million euros in April, which was about the same as a year earlier. This indicates that the general decline in confidence and the rise in prices have not yet particularly reduced the demand for consumer credit. The price of bank loans has become lower and lower for households. The average interest rate on new housing loans with a mortgage in April held at its record low level of 1.9% from March. A year earlier it was 2.0%. The lower interest rate means that the loan servicing costs of households are smaller. However, the current average interest rate consists mainly of the interest margin of the banks, and analysts warn that interest rates may rise in future.

The pandemic was considered to be a temporary problem. Unfortunately, the consequences of all demand stimuli were mistakenly assumed to be temporary too. Now the war has simply highlighted the permanent changes in supply chains and in economic relations. Russia’s war on Ukraine has equally brought attention to the importance of becoming more independent of energy supplies and of increasing spending on defence. “Support should be temporary and targeted at those who need it the most”, Madis Müller emphasised. “Broadly based subsidies run the risk of inflation in Estonia being very high for even longer”. Recent data on employment give hope on the ability of the real economy to absorb the shock of fiscal and monetary tightening. First, whether these will be seriously implemented. Second, depending on how much efficient and competitive the labour market really is.