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Estonia With a milder contraction than initially feared, GDP is set to fall by 4.7% in 2020, before rebounding by 3.4% in 2021 and 3.3% in 2022. Consumption is expected to strengthen as households regain confidence and draw down large savings set aside at the peak of the pandemic. Investment will also regain momentum on the back of improved expectations for industrial production, exports and the services sector. Inflation will remain subdued in 2021 before stabilising somewhat above 2%. The various employment support measures put in place have helped to cushion the hit to the labour market, but unemployment is expected to remain well above its pre-crisis level in the next two years. As a result, the large group of low-skilled workers recently integrated in the labour market may have difficulties finding new jobs. Interventions should be maintained as long as unemployment remains high, while training and active labour market policies should be strengthened to avoid losing the social benefits of reforms made in recent years. Efforts have been made to bring the epidemic under control Estonia has managed to slow the spread of the virus throughout its territory, avoiding so far a resurgence. The infection rate remains the second lowest in Europe, and on average fewer than 10 patients have been in intensive care since the end of September. As a result, domestic confinement measures have been fully relaxed. However, international travel restrictions remain in place, with mandatory quarantine for all travellers upon arrival on Estonian soil with exception of those coming from the Baltic States and Finland, for which less strict rules apply.
Estonia GDP is set to recover Index 2019Q4 = 100 104
Unemployment and employment rates will not return to their pre-crisis levels
Real GDP
% of working-age population 70
102 100
% of labour force 10
68
9
66
8
64
7
62
6
60
5
98 96 94 92
← Employment rate
58 2019
2020
2021
2022
0
56
4
Unemployment rate →
2019
2020
2021
2022
3
Source: OECD Economic Outlook 108 database. StatLink 2 https://doi.org/10.1787/888934218311
OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020
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Estonia: Demand, output and prices 2017
Estonia GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)
2018
2019
2020
2021
2022
Percentage changes, volume (2015 prices)
Current prices EUR billion
23.8 12.0 4.7 6.0 22.7 0.2 22.9 18.1 17.1 1.0
4.4 4.6 0.6 3.3 3.7 0.5 4.0 4.0 5.6 -1.0
4.9 3.4 3.1 11.1 5.4 -0.3 4.9 6.2 3.8 1.9
-4.7 -5.5 2.4 -9.5 -5.0 -1.7 -6.7 -10.3 -12.7 1.2
3.4 1.2 2.7 3.6 2.1 -0.3 1.9 6.2 5.1 1.1
3.3 2.8 1.3 5.5 3.1 0.0 3.1 5.1 5.9 -0.1
_ _ _ _ _ _ _ _ _
4.2 3.4 1.7 5.4 6.2 -0.5 13.0 8.2 0.8
3.4 2.3 2.4 4.4 9.6 0.1 13.4 8.4 1.9
-1.2 -0.7 -0.1 6.8 17.2 -7.3 23.8 18.8 5.7
1.3 1.3 0.8 7.6 17.8 -6.5 29.5 24.5 7.5
1.5 2.1 1.9 7.3 16.2 -4.0 33.9 28.9 7.1
1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 108 database.
StatLink 2 https://doi.org/10.1787/888934218330
Activity has rebounded quickly The decline in activity in the second quarter of 2020 was less sharp than expected, not least due to containment measures being less strict than elsewhere and an early control of the COVID-19 outbreak. Retail trade rebounded quickly and in June was already 7.3% higher than a year earlier. Manufacturing, which did not have time to recover from a pre-crisis slump in external demand, suffered the largest hit but was well on its way to recovery after the summer. The tourism sector has been particularly impacted, with 78% fewer overnight tourists compared with last summer, although hospitality services account for a small share of the economy. High-frequency indicators signal that consumption has not yet fully recovered, with card spending and cash withdrawal frequencies remaining five percentage points below last year’s level in the third quarter.
Large and effective economic support has now stopped The pandemic-related fiscal stimulus, containing state guarantees, loans, income support and tax measures, has been large, at 4.1% of GDP. In particular, the job retention scheme, with its generous eligibility conditions, has helped to contain the effect of the pandemic on the labour market. However, given the sanitary situation and the absence of strict confinement measures, temporary support has ended and there is no discussion at the moment about further action.
OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020
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A gradual recovery is projected Like other Baltic and Nordic countries, Estonia has suffered a milder contraction than the rest of the euro area. With a strong rebound expected in 2021, Estonia should return to its pre-crisis GDP level at the beginning of 2022. Consumption is expected to strengthen as households regain confidence and draw down large savings set aside at the peak of the pandemic. Expectations for industrial production, exports and the services sector have improved, suggesting a continued recovery in 2021. Investment should also strengthen, as foreign demand improves. Estonia entered the pandemic with the lowest public debt ratio in the OECD, and the fiscal exemption clause has been used to support the economy. Reflecting these fiscal measures, the budget deficit will decline only moderately during the projection period, as the gradual recovery will not bring tax receipts back to pre-crisis levels in the coming two years. However, with recent institutional reforms and a proven track record of credible fiscal management, the public debt trajectory remains sustainable, provided growth returns to its potential and interest rates remain low. Apart from a resurgence of the pandemic, a persistently high level of unemployment weighing on private consumption is a key risk to growth.
Additional policy measures are needed to strengthen the recovery Given the integration in the labour market of many low-skilled workers in recent years, the crisis could leave permanent scars on vulnerable groups and unwind the social benefits of past reforms, as unemployment is set to remain well above pre-crisis levels until 2022. The job retention scheme should be extended as long as unemployment remains high, and active and passive support rapidly provided to job seekers, in contrast to past practices in Estonia. This support should be targeted to those weakly attached to the labour market and therefore at risk of remaining unemployed in the long term. Improving unemployment insurance coverage could also give the unemployed better access to training and stronger incentives to participate. The crisis has also amplified the relevance of digital skills and there is an opportunity for Estonia, a front-runner in digital technologies but with a quarter of adults lacking basic computer skills, to upskill and reskill parts of the population by increasing adult education and training. This would allow low-skilled and displaced workers to strengthen their links with the labour market while allowing firms to reap further productivity benefits from digitalisation. At the same time, some of the EU funds should be directed towards digitalisation, in particular its diffusion across firms, to strengthen growth potential.
OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020