Peeter Raudsepp, director of the Estonian Institute of Economic Research, discussed the latest review and forecast of Estonia’s economic situation on Tuesday. According to experts, Estonia’s economic climate has shown slight signs of improvement or growth for two main reasons. First, the period of declining economic indicators has passed. Second, entrepreneurs have either adapted to or are adapting to the current situation.

“We are not experiencing economic growth, but experts assess that some recovery has occurred. This means that while the state of the economy is poor, it is not deteriorating but has stabilized and now shows slight signs of stabilization, and to some extent, even improvement,” Raudsepp said.

Consumer confidence remains below the long-term average and has declined since the COVID-19 pandemic. The cost of the EKI shopping basket remained the same in June, indicating that while the sharp price increases of the past few years have subsided, prices continue to rise at a manageable rate.

“Naturally, our prices are very high compared to our income levels. Compared to the European Union average, we are at 109 percent in terms of food prices, with Finland at 110 percent and Sweden at 105 percent. This puts us on par with Finland and among the top ten in Europe,” Raudsepp noted.

He added that the situation is much worse concerning wardrobe items: the prices of clothing and footwear are at 117 percent of the EU average, placing Estonia among the top three in the EU in this category.

“As we move forward, new taxes, including the new VAT rate, will have a significant impact. Where are we headed? We are moving toward becoming one of the five most expensive countries in Europe,” Raudsepp said.

The major challenges for the Estonian economy include a lack of competitiveness, which is increasingly concerning, insufficient demand and a lack of trust in the government’s economic policies.

“The survey’s authors never anticipated a scenario where the government lacks an economic policy,” Raudsepp stated. “There should be an assessment of the impact of economic policy itself, but in this case, the assessment indicated that no comprehensive economic policy had been agreed upon at the government level.”

Additionally, the economy faces challenges such as an unfavorable investment climate for foreign investors and limited innovation, as businesses have little financial capacity or ambition to pursue it. Raudsepp emphasized that this is a negative indicator, as it directly affects the economic outlook for the next few years.

“Indicators of economic confidence and security are all in the red, but compared to a year ago or a few quarters ago, they are now moving in different directions. Divergent movement is always positive; we are more concerned about unidirectional trends,” he added.

Entrepreneurs’ price increase forecasts for the next three months indicate an expectation of inflation, with a general trend toward rising prices. However, the survey results do not reflect the government’s recent tax decisions or ideas, which may also lead to price increases, as the survey was completed in early June.

Estonia’s international competitiveness is also declining. Raudsepp noted that this decline occurred across almost all sectors and is likely to continue unless significant changes are made. Price increases are expected to persist.

“Past experience shows that VAT rate hikes led to chaotic price increases – starting earlier and ending later, with prices rising more than the VAT rate mathematically justified,” he pointed out.

Raudsepp added that Estonia faces a shrinking economy, rising tax burden and declining population. With higher expenses, a decreasing population means increasingly higher taxation levels, creating a vicious cycle that needs to be urgently addressed.

Minister wants to slash renewable energy fees for major companies

Erkki Keldo (Reform), who has been the minister of economic affairs and industry for about a week, stated that economic data can be interpreted in various ways. While the ongoing war in Europe affects the competitiveness of Estonian companies, there are signs of improvement in business and economic confidence, and the labor market situation remains stable.

Keldo highlighted some positive developments in the economic environment, such as Tallinn Airport setting a record for the number of passengers in June and last year being a record year for foreign investments. Additionally, the volume of deposits for both businesses and households has increased compared to the previous year, and the issuance of home loans and leases in May was the highest in two years.

“Considering our situation since the onset of the security and energy crisis, the second quarter gives hope that better times are ahead for businesses as well,” said Keldo. “While many crises are not yet behind us, businesses and society are seeing numerous signs of improvement.”

He mentioned that the government aims to focus on specific actions, accelerate processes related to planning and reduce bureaucratic obstacles for businesses.

“We can certainly agree that one of the main concerns is insufficient demand. Our largest export partners are Finland, Sweden and Germany, where the situation is challenging, with inadequate demand. The state’s role is to be a good partner, agree on target markets, packages [of measures] and ways to help and support businesses in this situation of insufficient demand,” Keldo stated.

Regarding attracting investments to Estonia, the Ministry of Economic Affairs has concrete ideas and action plans. He pointed out that electricity prices are crucial for many energy-intensive companies, and the government can adjust regulatory fees.

“I intend to propose to the government to reduce renewable energy charges for large consumers,” said the minister. “At the same time, Estonia has the option to establish direct lines, allowing companies to operate outside the regulatory framework.”

He noted that there are companies interested in investment support, expedited planning processes and showing interest in coming to Estonia. Therefore, the state should consider how to assist them in realizing this interest. Additionally, reducing bureaucracy, particularly for small businesses, is crucial.

“I will present a specific action plan to the government. There is a political agreement that our priority is to attract foreign investments here,” Keldo affirmed.