Estonian economy faces third year of recession, but experts warn: Lithuania will not maintain its leading position for long

The Central Bank of Estonia published its latest forecasts in December, which do not bode well for the country’s economy. Estonia’s economy is expected to contract for the second consecutive year in 2023, with gross domestic product (GDP) falling by 3.5%. In addition, the economy will also deteriorate this year: according to the Bank of Estonia, in 2024 the country’s GDP will decrease by another 0.4 percent. The recession has lasted since 2022, when the economy shrank by 0.5 percent.

These indicators are significantly worse than those recorded in Lithuania. The forecast of the Bank of Lithuania published on the same day predicts that our country’s GDP in 2023 will decrease by 0.2 percent, but this year we will see 1.8 percent. growth.

The economic situation is better than that of Estonia and Latvia. The central bank of this country predicts that in 2023 Latvia’s GDP will decrease by 0.4 percent, this year it will increase by 2 percent.

Delphi Interviewed economists say that there are many reasons why Estonia is experiencing an economic recession, but this trend is not expected to last long and that in the medium and long term Estonians are expected to become the leaders of the Baltics again.

Significant export markets commissioned

According to SEB Bank economist Tadas Povilauskas, one of the main reasons why Estonia’s economy is performing worse than Lithuania’s is the problems in the country’s main export markets.

“The main differences between Lithuania and Estonia are revealed when looking at individual sectors. First of all, we can see that Estonia’s exports have fallen significantly. The structure of Lithuanian exports is more diversified , both in terms of fronts and geographically, which helps us a lot,” says T. Poviauskas.

He notes that Estonia’s main export markets are Finland, Sweden and Latvia. Estonians mainly sell wooden products for the construction sector to Scandinavian countries. The volume of new construction in Sweden declined sharply, which also had a negative impact on industrial production in Estonia.

Furthermore, when electricity prices fell, it became unprofitable for Estonians to produce electricity from their shale oil. This sector is therefore also facing problems.

The SEB economist also notes that the economy is characterized by cyclicality, when a period of slowdown occurs after long and rapid growth. This is what is currently happening in Estonia’s information technology sector, one of the most important drivers of the country’s economy.

“In recent years, the Estonian IT sector has developed very quickly, and all the unicorns and startups have pushed the economy forward. Last year, the added value created by this sector even decreased,” emphasizes T. Povilauskas .

He also points out that the volume of construction work in Lithuania and Latvia is much higher than in Estonia. It is true that residential buildings are built the same way in all countries, but in our country much more is invested in public infrastructure, such as roads or renewable energy projects.

Pension money overheated the economy

Swedbank economist Nerijus Mačiulis points to another reason for Estonia’s economic problems: the money that residents of this country have withdrawn from second-tier pension funds, while in 2021 the state authorized. So, about 1.3 billion suddenly appeared on the market. euros, which caused the economy to overheat.

Nerijus Maciulis

“First of all, it should be noted that not only 2023, but also 2022 was a very bad year for the Estonian economy. One of the reasons for this is linked to the overheating of the economy from 2021, when politicians decided to distribute to the population part of the money accumulated for future pensions. This significantly boosted consumption, recording a sharp rise in GDP. But of course, when the money ran out, the hangovers and problems began. This is why the recession in the Estonian economy has lasted for two years,” explains N. Mačiulis.

It also highlights Estonia’s dependence on “weaker export markets”, mainly Finland and Sweden, whose economies are expected to collapse in 2023 due to high interest rates and other reasons. grows more slowly.

All these problems are also reflected in the expectations of Estonian businesses and residents. The Baltic country’s consumer confidence index is currently one of the lowest in the European Union.

Estonians rate the financial prospects of their country and their people much lower than Lithuanians or Latvians.

The outlook is not so gloomy

However, both economists note that Estonia’s economic problems are temporary and that Lithuania will not necessarily remain the leader of the Baltics for long.

“There is no reason to believe that Estonia’s economic growth will be slower than that of other Baltic countries in the future. First of all, Estonian companies invest more than Lithuanian or Latvian companies, l ‘Estonia has attracted more foreign direct investment and remains in a higher position in international rankings in terms of attractiveness for foreign investors,’ explains N. Mačiulis.

The Swedbank economist believes that it is also worth mentioning the achievements of the Estonian education system and the quality of education. For example, a study by the Organization for Economic Co-operation and Development (OECD) published in December showed that, based on the skills students learn in school, Estonia remains among the five most advanced countries in the world .

“It is clear that this is one of the most important factors of long-term competitiveness, which will probably allow Estonia to attract more investments and create higher added value in various sectors” , says the interviewer.

T. Poviauskas also believes that the Estonian economy will recover and its growth will likely again exceed Lithuanian economic indicators.

“A thing like investment is quite volatile. We will always see Estonian investments in national defense and energy. Additionally, funds from the FRR fund are coming, so there will be money. So, in terms of “Investments, we can see a rapid increase from a low base in Estonia. Our investments have seen very significant growth in 2023, it is obvious that such growth will not take place this year”, estimates the SEB economist.

According to him, Lithuania can be happy and boast of 2023 compared to Estonia, but it cannot be said with certainty that we will overtake Estonia in one to two years.

Source: The Delfi

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