IMF Staff Completes 2024 Article IV Mission to the Republic of Estonia
IMF News, June 21, 2024
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- Published: June 21, 2024
Economic situation and near-term outlook
- The economy is caught in a prolonged recession; contraction in Estonia’s economic activity has extended further, along with weak external performance.
- Soft demand from key trading partners and loss of competitiveness have depressed exports, forcing firms to cut back on investment.
- Firms hoarded jobs until recently; fading prospects of an imminent recovery and increasing real wages have started taking a gradual toll on employment, though vacancies are still reported in certain sectors.
- Rising unemployment, combined with tighter financial conditions, has weighed on disposable income and private consumption despite higher real wages.
Inflation, wages, and labor market
- Inflation has eased: headline inflation declined steadily to below 4 percent in late 2023 before rebounding on a 2-percentage point VAT hike.
- Drivers of disinflation: lower energy prices, easing supply chain disruptions, and increasing economic slack.
- Real wage growth has started moderating recently but remains well above productivity growth.
Growth projections and drivers
- Growth is poised to make a gradual comeback in 2024:
- After stagnating in early 2024, growth is projected to recover, led by a rebound in export markets.
- Domestic demand should strengthen as improved business confidence, a broadly supportive policy mix and easing financial conditions encourage firms to revisit investment and hiring plans.
- Better job prospects along with real wage growth should support real disposable income and consumption.
- Average 2024 GDP growth is projected at -0.5 percent due to the slow start in the year, with growth projected to gain further momentum in 2025.
Executive Board assessment and policy advice
- Directors welcomed the expected recovery in 2024 in the context of a rebound in export markets and a broadly supportive policy mix.
- Key risks and challenges highlighted:
- Higher input costs and declining productivity growth.
- Downside risks from volatile commodity prices and supply-side disruptions.
- Increased, though contained, financial stability risks due to the prolonged recession and tighter financial conditions.
- Policy recommendations and priorities:
- Adopt a well-coordinated policy response to support the recovery and address rising fiscal needs from national security and aging.
- Pursue ambitious reforms to increase productivity, restore competitiveness, and advance green and digital transitions.
- Maintain a neutral fiscal policy stance in 2024 given the prolonged cyclical downturn.
- Over the medium term, implement growth-friendly fiscal consolidation through revenue mobilization and spending prioritization to counter fiscal pressures and support structural transformation.
- Strengthen the fiscal framework and introduce a spending rule to more effectively anchor the fiscal path.
- Continue close vigilance to risks in the commercial and residential real estate sectors and ensure proper weighting of credit risk across the banking system.
- Ensure adequacy of banks’ capital buffers to safeguard their ability to provide credit and absorb shocks.
- Continue efforts to address risks related to Money Laundering/Terrorist Financing.
- Increase productivity and regain competitiveness by addressing labor mismatches, supporting reallocation toward higher value-added products and services, enhancing R&D investment, adopting digital technologies in traditional sectors, and supporting a more ambitious green transition.
Selected economic indicators, 2023–25 (as reported)
- National accounts (Percentage change, unless otherwise indicated)
- Real GDP growth: 2023: -3.0 ; 2024: -0.5 ; 2025: 2.2
- Private consumption: 2023: -1.2 ; 2024: 0.3 ; 2025: 1.4
- Gross fixed capital formation: 2023: -3.4 ; 2024: -2.3 ; 2025: 3.1
- Exports of goods and services: 2023: -6.9 ; 2024: -4.8 ; 2025: (not listed)
- Imports of goods and services: 2023: -5.2 ; 2024: -4.1 ; 2025: 2.7
- GDP (nominal; billions of Euros): 2023: 37.7 ; 2024: 38.8 ; 2025: 40.8
- HICP inflation
- Headline, Period average: 2023: 9.1 ; 2024: 3.8 ; 2025: 2.1
- Headline, End-period: 2023: 4.3 ; 2024: 2.9 ; 2025: 2.3
- Core: 2023: 10.1 ; 2024: 4.1 ; 2025: 1.7
- (An additional core line shows 2023: 4.6 ; 2024: 3.0 — presented in source)
- Labor market
- Average monthly wage (year-on-year growth in percent): 2023: 11.7 ; 2024: 7.6 ; 2025: 6.8
- Unemployment rate (ILO definition, percent, pa): 2023: 6.4 ; 2024: 8.4 ; 2025: 7.7
- General government finances (ESA10) (Percent of GDP, unless otherwise indicated)
- Revenue: 2023: 40.1 ; 2024: 42.6 ; 2025: 41.7
- Expenditure: 2023: 43.5 ; 2024: 46.4 ; 2025: 45.6
- Fiscal balance: 2023: -3.8 ; 2024: -3.9 ; 2025: (not listed)
- Structural balance: 2023: -2.4
- General government gross debt: 2023: 19.6 ; 2024: 23.0 ; 2025: 26.2
- Balance of Payment
- Current account: 2023: -2.1 ; 2024: -4.0 ; 2025: -3.3
- Trade balance: 2023: 0.6 ; 2024: 0.1 ; 2025: (not listed)
- Net FDI: 2023: 7.5 ; 2024: 0.4 ; 2025: 0.5
- NIIP: 2023: -21.6 ; 2024: -23.7 ; 2025: -24.6
- Exchange rate
- REER (percent change): …
Source: IMF press release, June 21, 2024.