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The Estonian Economy is Forecast to Grow by 4.5 per cent in 2021

7. September 2020 - 17:27

According to the economic forecast published by the Ministry of Finance today, the bottom of the crisis has been overcome, and a recovery of the economy can be expected from the next year.

The economic impact of the COVID-19 outbreak will remain smaller in Estonia and Northern Europe than the average of the European Union. The impact of the crisis is very unevenly distributed among the different sectors of the Estonian economy. 

"This year, the crisis in the Estonian economy has not been as severe as expected in the spring during the deliberations of the supplementary state budget. We have managed to soften the economic downturn with the measures funded by the supplementary budget", said Minister of Finance Martin Helme. "The Estonian economy is doing better than EU countries on the average. Developments in our economy follow the same pace as those in our neighbours, Latvia, Lithuania, Finland and Sweden. The recovery of economic activity to last year’s level will, however, have to wait until the year after the next.”

So far, the Estonian economy has done better than expected but further progress will be determined by the containment of the virus outbreak. According to the forecast, the economy will start to recover in 2021 but the consumption of some services may still be hindered. GDP is forecast to contract 5.5 per cent in 2020 and increase by 4.5 per cent in 2021, 3.5 per cent in 2022, 3 per cent in 2023 and 2.3 per cent in 2024.

Reduced incomes of businesses will induce redundancies and reductions in salaries. Without the salary remuneration paid by the Unemployment Insurance Fund as a crisis relief measure, the situation on the labour market would be significantly worse. The crisis has been most severe to the employees of the tourism sector with lower than average salaries. A real increase in salaries can be expected in 2022 as the gradual recovery takes hold. Unemployment will remain higher than precrisis levels for a long time. 

The average salary in 2021 is forecast to be 1428 euros against 1422 euros in 2020, amounting to a reduction in real salaries of 0.9 per cent. A 2.3 per cent real growth of the average salary is expected in 2022, as nominal average salary will increase to 1493 euros. 

Consumer prices will decline slightly in 2020 due to the effect of the corona crisis and reductions in excise duties. The fall in the price of oil as well as the lower prices of some services will contribute to the decline. Inflation will gradually recover next year and will accelerate to 2.2 per cent in the year 2022 as the cuts in the excise duties of fuel, gas and electricity will expire and prices of services will increase.

The forecast of the Ministry of Finance serves as a basis for the Cabinet’s negotiations on the state budget for 2021 and the state budget strategy from 2021-2024. The forecast is based on the premise that current policies will be continued throughout the forecast period.

According the forecast, the crisis is expected to bring about a reduction of tax revenue. This in combination with the government’s current extensive relief measures increase the general government budget deficit in 2021. In the following years, the deficit will start to decline somewhat but the 2024 budget will still show a deficit. 

The increase of tax revenue will remain below economic growth in the coming years. However, government expenditures planned before the crisis will be less affected by the crisis and therefore a corresponding decrease in expenditures is not forecast even after the expiration of the crisis measures. A general government structural deficit will mean a considerable stimulus for the economy, which will help reduce the negative economic impact of the crisis. 

General government debt burden will increase to 18.2 per cent of GDP in 2020 as compared to 8.4 per cent in 2019. The debt level is expected to increase to 31.3 per cent of GDP by 2024. A nominal deficit of the state budget will not create the conditions for increasing government reserves in the treasury. The cash flow of the treasury will be negative in the years 2020-2024 mostly due to the budget deficit caused by the crisis. The negative cash flow of the state budget is expected to be financed with bond issues and loans.

The tax burden will continue show a downward trend as the recovery from the crisis will not restore tax receipts to the previous level. The growth of the average salary will be significantly slower than that of the GDP in the period from 2020-2024. Government revenue from selling greenhouse gas emission allowances is forecast to decrease. A technical reduction in the tax burden will be caused by the resumption of the government’s contributions into the state funded pension scheme (‘the second pillar’). Value added tax and fuel excise duty will lead the growth in consumption taxes whose share will be 40.6 per cent by 2024. Meanwhile, the share of labour taxes will drop to 53 per cent and the share of capital taxes to 6.3 per cent of the tax take.

 

Ministry of Finance, 2020 summer forecast

2019

2020

2021

2022

2023

2024

GDP real growth, per cent

5.0

-5.5

4.5

3.5

3.0

2.3

GDP nominal growth, per cent

8.4

-5.6

6.4

6.0

5.8

4.6

Exports of goods and services

6.2

-8.5

5.8

4.5

3.2

3.0

Consumer price index change, per cent

2.3

-0.2

1.4

2.2

2.1

1.9

Average salary, euros

1407

1422

1428

1493

1565

1626

Real growth in average salaries, per cent

5.1

1.3

-0.9

2.3

2.6

2.0

Nominal growth in average salaries, per cent

7.5

1.1

0.4

4.5

4.8

3.9

Employment growth, per cent

1.0

-2.9

-0.3

0.8

0.8

0.7

Unemployment rate, per cent

4.4

7.5

8.0

7.3

6.6

5.9

General government structural budget deficit,
per cent of GDP*

-2.7

-5.7

-5.9

-4.9

-3.3

-2.0

Government debt, per cent of GDP*

8.4

18.2

24

27.4

29.6

31.3

* forecast on the basis of decisions made before the 2021 budget negotiations

           

 

Veel uudiseid samal teemal

13.04.2020|Ministry of Finance

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