Governor Madis Müller says a quick recovery in Estonian economy is not to be expected, as purchasing power is improving at a slow pace in both domestic and foreign markets. That means the economic environment may become even less favourable before it takes a turn for the positive sometime next year.
The fight against inflation is still ongoing and the full effect of interest rate hikes is yet to be seen in the economy. This is a complex situation and the competitiveness of Estonian companies needs extra attention, said Governor Madis Müller at the Äriplaan economics conference.
“The decade of low interest rates came to a sudden halt,” the Governor of Eesti Pank said, highlighting past year’s most dramatic change in the general economic environment. Starting from July last year, the European Central Bank has raised interest rates on ten consecutive occasions. Estonia largely prefers floating loan interest rates and felt this shift promptly. “Sharp interest rate hikes are a bitter pill when it comes to treating fast price increases,” Müller agreed. At the same time, Müller said, rapid inflation does much more harm to the wellbeing of individuals and the successes of companies than larger loan payments do. So, the primary goal is still to curb inflation. Depositors find themselves in an improved situation, however, as higher interest rates are passing through to deposit interest rates.
Müller said the Estonian economy was weaker than usual overall, with a large impact coming from the poor state of Estonia’s main export markets. The latest economic forecast from the European Central Bank showed a dampened outlook for growth in the euro area economy, whereas inflation is fading more slowly than expected. The general economic weakness is not yet visible on the labour markets, including the Estonian labour market. The unemployment rate has risen somewhat, but that stems from the increase in the number of people who are actively jobseeking. “The economic downturn takes a while to reach the labour market,” said Müller and predicted an increase in the unemployment rate over the coming year. Even though employers in many sectors are unable to offer full-time work to their employees, companies have staved off redundancies knowing there is a shortage of skilled labour.
The competitiveness of Estonian companies has suffered because of a rapid increase in the prices for inputs. Governor of Eesti Pank says Estonia cannot keep relying on the hope that its export markets will start doing better and the demand will recover. “We ourselves have to work on improving our competitiveness,” Müller stated. On the companies’ side, that could look like making business processes more effective, investing in new technologies, and trying to find new markets. The Estonian state should focus on creating a favourable and predictable business environment. “There is no need for fine-tuning subsidies. Instead, we need to tackle the more permanent obstacles – remove the causes for more expensive energy compared to our competition and get rid of administrative barriers,” said Müller. “In the long term, orderly state finances and a low debt level will support the competitiveness of the Estonian economy,” he added.