Private consumption will give a powerful boost to short-term economic growth
Estonian economy had reached its pre-crisis level earlier this year and the recovery is one of the fastest in Europe
Estonian economy will grow 5-8% this year and 4-5% next year
The growth of the economy this year will be strongly affected by the way people divert their savings to consumption
Economic improvement in Estonia and other countries will temporarily accelerate inflation. Inflation will be 2.5-2.7% this year and 2.8-3.3% next year
Unemployment will drop below 5% in 2022, which is close to what it was before the crisis
The average wage will continue to increase by more than 5% in the coming years due to labor shortages
Faster-than-expected economic growth will increase tax revenues, reduce the need for private sector support and allow the government to control its finances
Eesti Pank’s latest economic forecast predicts that the removal of restrictions will be followed by rapid economic growth in the second half of the year, as a recovery is expected in export markets, while growth in Estonia will be boosted at short term. because the savings made during the pandemic and the funds withdrawn from the second pension pillar are oriented towards consumption. The very rapid growth of private consumption will make economic growth volatile in the years to come.
Once the restrictions are lifted, the economy will regain its pre-epidemic strong position. Advances in immunization have made the economic outlook more secure and after the pullback caused by the restrictions in the spring, economic growth will have a solid foundation in the second half of the year. The growth of the Estonian economy will benefit in the short term not only from improving foreign markets, but also from the use of savings built up during the crisis and funds released from the second pension pillar in the fall. Driven mainly by growth in private consumption, the economy is expected to grow in the order of 5-8% this year and 4-5% next year. The speed of growth this year will depend very much on how much of their savings people choose to spend on consumption. Around 1.3 billion euros will be withdrawn from the second pillar, or around 4.5% of the size of the economy. If more savings than expected are spent on consumption, there will be a risk of the economy overheating which will hamper its recovery to a stable growth path.
Strong economic growth will boost the labor market. The desire of companies to hire additional workers began to increase with employment, the number of vacancies and perceived labor shortages. The economic recovery and increased demand will lead to a further rise in employment, while unemployment will fall below 5% in 2022, which is close to what it was before the crisis. The return of labor shortages will boost labor spending in the years to come and the average wage will continue to rise by more than 5%.
The real estate market will remain active. The involuntary savings caused by consumption restrictions during the pandemic have, in many countries, increased the demand for residential goods. This has been amplified in Estonia by strong wage growth, and prematurely withdrawn retirement savings will soon be added as well. As there could be a sharp increase in demand for loan-financed real estate, Eesti Pank is ready if necessary to tighten the requirements on home loans if there are signs that an overheating in the real estate market could constitute. a danger for the financial sector.
To maintain the stability of the economy, it would be wise to consider restraining the growth of government spending during good times. The Estonian economy had surprisingly reached its pre-crisis level earlier this year and the recovery of the Estonian economy has been one of the fastest in Europe. The faster-than-expected improvement in the economy means that state aid will be less needed than previously thought, and it also means that tax revenues will be higher than expected. The good position of the economy allows the state to avoid living beyond its means, and to do so the better tax revenues than expected should be used to reduce the budget deficit faster than expected.
Inflation will increase in the short term as global demand increases. As production volumes cannot keep up with global demand, the prices of many commodities will increase in the short term, and this will trickle down to consumers. Consumer prices in Estonia will rise 2.5-2.7% this year and 2.8-3.3% next year due to blockages in supply chains during the pandemic, some product shortages, the resumption of services after their trough, and the growth in labor costs. For the same reason, inflation will temporarily increase across the euro area, but if inflation remains consistently higher in the euro area, the European Central Bank may respond by tightening monetary policy, which will also slow price increases. in Estonia.
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Bank of Estonia published this content on June 16, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on Jun 17, 2021 07:01:01 AM UTC.