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Estonia
The economy will weaken considerably as the impact of Russia’s war of aggression against Ukraine
becomes more broad-based. Real GDP growth is projected to slow to 0.5% in 2023 due to weaker domestic
demand and a deteriorating external environment, despite support from fiscal policy. Growth will rebound in
2024 to 3.2%. Inflation should peak by the end of this year but remain elevated in 2023 and decrease only
as spare capacity in the economy increases.

To avoid boosting inflationary pressures further, fiscal policy support should be temporary and targeted
towards the vulnerable and support for refugees. In the medium term, effective integration of refugees and
reskilling policies could help to alleviate tensions in the labour market. Additional investment in energy
infrastructure and security will strengthen resilience.

The economy is slowing

Following a strong recovery in 2021, when GDP grew by 8.1%, the Estonian economy started to slow in
the first half of 2022 with growth hindered by high energy prices, supply chain disruptions and labour market
pressures. Headline consumer price inflation is among the highest EU-wide and stood at 22.5% in October.
Sustained by lower saving, private consumption increased in the first half of the year. Ukrainian refugees
have eased some of the labour market pressures, and unemployment reached 5.7% in September, but
companies nevertheless continued to cite labour shortages as the biggest obstacle to increasing
production, notably in services and construction. Business and consumer confidence have declined since
the beginning of the year and export orders are down.

Estonia

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 112 database.

StatLink https://stat.link/g4d7zp

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Estonia: Demand, output and prices

2019 2020 2021 2022 2023 2024

Current prices Percentage changes, volume

EUR billion (2015 prices)
Estonia

GDP at market prices 27.7 -0.4 8.1 0.8 0.5 3.2

Private consumption 13.9 -1.1 6.7 2.2 -0.4 4.1
Government consumption 5.4 2.9 3.9 0.1 0.6 1.6
Gross fixed capital formation 6.9 20.6 7.0 -14.6 5.2 4.1
Final domestic demand 26.3 5.8 6.9 -3.3 1.2 3.6
Stockbuilding¹ 0.3 0.3 0.9 3.9 0.0 0.0
Total domestic demand 26.6 5.1 6.6 0.5 1.0 3.2
Exports of goods and services 20.5 -5.3 20.0 -1.1 3.3 5.0
Imports of goods and services 19.4 0.2 21.4 -0.8 3.6 5.0
Net exports¹ 1.1 -4.0 -0.9 -0.2 -0.2 0.0
Memorandum items
GDP deflator _ -0.6 5.8 15.2 7.2 2.9
Harmonised index of consumer prices _ -0.6 4.5 20.2 10.8 2.8
Harmonised index of core inflation² _ 0.0 2.8 10.1 6.6 2.4
Unemployment rate (% of labour force) _ 6.8 6.2 5.0 5.3 6.0
Household saving ratio, net (% of disposable income) _ 10.5 8.3 2.7 0.6 -6.2
General government financial balance (% of GDP) _ -5.5 -2.4 -2.7 -3.5 -2.3
General government gross debt (% of GDP) _ 24.8 24.4 29.0 33.2 35.8
General government debt, Maastricht definition³ (% of GDP) _ 18.6 17.6 17.8 19.1 19.7
Current account balance (% of GDP) _ -1.0 -2.3 -1.4 -1.4 -0.3
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.
3. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at
face value rather than market value.
Source: OECD Economic Outlook 112 database.
StatLink 2 https://stat.link/yurhjf

Spillovers from the war in Ukraine have been relatively contained, helped by a resilient domestic financial
sector, and the full impact of sanctions on Russia is expected to be reflected in trade only in the second
half of the year. Russia’s share in Estonian exports was below 2% before 2022. Some 56 000 Ukrainians
have settled in Estonia to date, corresponding to around 4% of the population, with children being just over
a half of the migrants. High energy prices explain around half of headline inflation and have passed through
quickly to the rest of the economy. Gas demand has been covered by LNG procured from Lithuania and a
new central storage unit purchased at a Latvian terminal. Further investments to increase storage capacity
are under way. Fiscal policy has cushioned some of the impact of high energy prices with a supplementary
budget adopted in mid-year that increased social benefits and support for refugees and added extra
resources for defence.

Balancing adequate support to the vulnerable with the need to tame inflation

Fiscal policy will continue to support households and firms facing the impact of the cost-of-living surge in
2023. The minimum wage will rise by 11% and certain public sector salaries by 15% (including teachers
and the police). The government is increasing spending on social welfare support and lowering the income
tax burden in 2023. These measures come on top of agreed temporary energy price caps for households
and small enterprises. Moreover, Estonia is receiving EU cohesion funds. Higher euro area interest rates
will dampen growth but remain low relative to the underlying growth of the Estonian economy, making the
case for the tighter fiscal stance.

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The economy is projected to slow amid high inflation and uncertainty

Real GDP growth is projected to slow to 0.5% next year before picking up to 3.2% in 2024. High uncertainty
and lower consumer and business confidence will slow domestic demand growth considerably in 2023.
The deteriorating economic outlook in Estonia’s main trading partners will lead to lower external demand
growth. Nevertheless, fiscal policy will help to cushion the downturn during 2023. Inflation will fall as spare
capacity increases, reaching 2.8% in 2024. Considerable uncertainty and risks to the outlook remain, tilted
to the downside. Further escalation of the war would increase uncertainty and exacerbate inflation.
Disruptions to energy supply in Europe could hit activity both in Estonia and its trading partners. Inflation
could be more persistent than projected if wage pressures gather momentum. On the upside, a quick
resolution of the war would reduce uncertainty and inflationary pressures.

Policies need to maintain incentives for energy savings, strengthen the energy
network and facilitate the green transition

Fiscal policy should continue to shield the most vulnerable from inflation, but better targeting is needed to
avoid adding to considerable inflationary pressures. It should also maintain incentives for energy savings.
Diversifying energy imports and upgrading the energy network and security, as planned, would improve
the resilience of the economy and increase the capacity for greener growth. Effective integration of
refugees could help to ease persistent skills shortages.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022