The central bank forecasts economic growth of 8% | Economy
According to the central bank, economic growth will also be constrained by unusually rapid price growth, which could start to slow in the second half of next year at the earliest. However, several local reasons may prolong the period of rapid price increases in Estonia, the central bank added.
While the average price increase this year is less than 5%, in 2022 the rate of price increase will approach 7%. However, the rapid rise in consumer prices is temporary and is expected to subside in the second half of next year.
The consumer basket is becoming more expensive, mainly due to various energy vectors, the reasons for which lie mainly outside Estonia. The pass-through of energy costs to the final price of other products and services will continue to drive inflation over the coming months. The rapid rise in prices will peak in the first half of next year, when short-term effects on various prices are expected to wear off. However, for a number of reasons, the price increases may be faster than expected.
Price increases in Estonia are forecast to slow to less than 3% in 2023-2024. For similar reasons, price growth temporarily accelerated in the euro area. If the price increase in the euro area definitely exceeds the 2% target, monetary policy in the euro area will be tightened, which will also control price growth in Estonia.
At the same time, there is a risk that the period of rapid price growth in Estonia will last longer than expected and this is mainly due to local reasons. The growing shortage of employees in Estonia is forcing companies to raise wages anyway, but this could be further boosted by a temporary increase in the cost of living. In such a situation, a spiral of wage and price growth may occur, which will adversely affect both the purchasing power of the people and the competitiveness of the export sector, on which long-term wage growth depends and job creation in Estonia.
The Estonian economy is at the forefront of European countries in terms of the speed of recovery from the crisis, but the rapid growth seen so far will pass, according to the central bank. Growth is hampered by global supply challenges, but labor shortages increasingly hamper development in most areas of activity. Existing production resources are also already at an all time high. Continuing economic growth will therefore be more difficult and next year’s growth will be slowed by exceptionally rapid price growth.
The central bank has claimed it is closely monitoring the rate at which house prices and the debt burden are rising. Due to the limited consumption possibilities and the savings taken from the second pension pillar, the amount of free money has increased sharply. The demand for goods and services is high. In addition, interest in residential real estate remains high.
In view of the current strong demand, new real estate is not arriving in sufficient quantity on the market, which is fueling the growth in real estate prices. If house prices continue to rise very rapidly and the increase in the debt burden of people accelerates significantly, the central bank is ready to tighten the conditions for granting housing loans to stem it.
According to the central bank, the exit of the state budget from a deficit would help to curb the rapid rise in prices. The sectors most affected by the restrictions – tourism, recreation, accommodation and food services – have not yet fully recovered, but most sectors are doing well or very well. The rapid growth of public spending and the stimulation of demand further reinforce the rise in prices in a situation where it is already rapid.
As wages are increasing rapidly in Estonia, this inadvertently puts pressure on the state to increase wages in the public sector as well. But in addition, the government has forecast an increase in fixed costs, the most important of which are an increase in pensions and an increase in the income tax exemption for pensions. Given the increase in spending, it is difficult to balance the state budget in the coming years if there is no change on the revenue side, the central bank said.
In absolute terms, the central bank forecasts an economic volume of 30.37 billion euros at current prices this year, 33.02 billion euros next year, 35.48 billion euros in 2023 and 37.82 billion euros in 2024. At constant prices, economic growth is forecast at 2.8%. in 2022, 3.9% in 2023 and 2.9% in 2024.
Expected price growth is 4.4% this year, 6.9% next year, 3% in 2023 and 2.6% in 2024. However, according to central bank forecasts, the average wage growth will be faster – 6.8% this year, 8.3% next year, 8% in 2023 and 7.4% in 2024. The average gross salary will thus reach € 1,547 in 2021, € 1,676 in 2022, € 1,810 in 2023 and € 1,944 in 2024.
The unemployment rate is expected to fall to 6.2% this year, 5.5% next year, 5.3% in 2023 and 4.7% in 2024.
The budget balance will also improve, which is expected to be in deficit of 3.6% of gross domestic product (GDP) this year, but next year the deficit will decrease to 2% of GDP, in 2023 to 1.6% of GDP. GDP and in 2024 to 0.7% of GDP.
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