The growth in wages slowed for the second consecutive quarter and data reported by Eesti Pank show it was a little over 10% in the third quarter. Consumer prices were up by around 5% in the third quarter, and so the purchasing power of the average wage was 5% more than a year before.

Wages in Estonia have so far been flexible in comparison to those in other countries of the EU. Collective negotiations over wages mostly happen in the public sector in healthcare and education but are generally not encountered in the private sector. This means that if the position of the labor market deteriorates and unemployment rises, growth in wages is expected to slow. The minimum wage, which covers all workers, will however rise next year by 13% to 820 euros. This will push companies to raise their lowest wages notably faster despite the difficult economic climate.

Estonian GDP in the third quarter was 3.9% smaller than a year earlier and 1.3% smaller than in the second quarter. This meant that GDP had been shrinking for seven consecutive quarters. It last peaked in the fourth quarter of 2021 and has since declined by 5.7%.

The downturn in the economy was seen most in the exporting sector in the third quarter. The reduction in export volumes that followed the loss of the Russian market and raw materials happened mainly in 2022, and the current decline in exports is more a reflection of the weakness in foreign markets and the problems with competitiveness. Although private consumption was down too, exports at constant prices were 12.1% less than a year previously. Imports were down by a lot less.

Given the extent of the decline in manufacturing as the exporting sector, the recession has been relatively mild in the context of the earlier volatility in the Estonian economy.

Local industrial output has now fallen by 20% from its peak in the current recession, while the economy has contracted by around 6%, thanks to the buffers that were accumulated before it started. The Estonian economy has so far performed like the economies in Western European countries.

Now Tallinn needs to make decisions that would bring growth back to exports and the economy. Earlier advantages like cheap raw materials, cheap labor, and a location between Russia and Western Europe could no longer support exports. Estonia needs to focus on what its competitive advantages will be and what policies will help the industry benefit from those advantages.