By Zuzana Smidova
The Estonian economy has been hit hard in recent years, contracting since the onset of Russia’s war of aggression against Ukraine in February 2022. At the end of last year, output was 6% below the level seen at the end of 2021.
Although trade with Russia and Belarus represented only 10% of imports and 4% of exports in 2022, inputs from the eastern neighbours played an important role in Estonian exports, notably in wood, manufacturing and fuel re-exports. Following the surge in energy prices, Estonia’s inflation peaked at 25% in August 2022, hitting household consumption. On top of these, a slowdown in key Nordic export markets led to a further decrease of trade.
Economic prospects should improve this year, with GDP contraction easing from -3.1% in 2023 to -0.4% and the economy returning to growth during the year (Figure 1). Inflation will continue to subside, although higher value added tax, excise duties, as well as recent increases in public sector wages and the minimum wage, will slow the disinflation process. With lower inflation and stronger foreign demand, growth should accelerate to 2.6% in 2025. Estonia is a small open economy, so much of its performance hinges on economic developments elsewhere.
Figure 1. Estonian economy should return to growth
To facilitate return to strong, inclusive and sustainable growth Economic Survey of Estonia released today sets out the following priorities:
Firstly, fiscal policy needs to carefully balance the need to rebuild fiscal buffers with ensuring macroeconomic stabilisation. It provided support to households, but the public finances are now in deficit. A consolidation is under way, although some measures for 2025 still need to be approved. With new spending priorities such as defence and family policy, the authorities should carry out planned spending reviews and explore avenues for increasing the revenues in the medium term.
Secondly, strong growth in the years ahead needs to be underpinned by improvements in productivity. Productivity levels remain below OECD average and productivity growth was slowing before the pandemic, while the labour market has been marked by a considerable skills mismatch. Despite Estonia’s innovative ICT sector and advanced e-government, traditional sectors lag in the use of digital technologies. Expanding upskilling programmes can help firms to upgrade managerial and digital skills, keystones for advancing digitalisation and boosting productivity.
Thirdly, to improve health as the population continues to age, healthcare should remain a priority (Figure 2). The authorities should extend health coverage to all permanent residents and reduce out-of-pocket expenses for low-income households. To address staff shortages, better working conditions and more training is needed. Given that financing of the healthcare system has come under a strain, more revenues from general taxation or higher contribution rates will ultimately need to be mobilised.
Figure 2. Life expectancy is below OECD average and Nordic countries
Finally, to meet Estonia’s climate objectives (Figure 3) and advance the transition to carbon neutral economy, the authorities should adopt the car tax, expand public transport and carbon pricing as well as continue investments in the electricity grid. At the same time, moving away from oil shale in the energy production, as planned by the government, is a must given the high share of emissions from the energy sector.
Figure 3. Accelerating climate transition required sustained policy action
Reference:
OECD (2024), OECD Economic Surveys: Estonia 2024, OECD Publishing, Paris, https://doi.org/10.1787/33e6beee-en.