Estonia Economic Forecast

The economy likely shrank at a slower year-on-year pace in Q1 2023. Industrial output declined less sharply than in Q4, as producer price inflation eased to the lowest rate since Q2 2021. Inflation in Q1 fell to the softest pace in a year, wage growth accelerated, and the unemployment rate declined. This will have eased the burden on household budgets. Less positively, the external sector likely weighed on overall growth, as merchandise exports plunged at the fastest rate since Q2 2020. In Q2, the economic decline is likely softening further: In April, economic sentiment improved, inflation moderated again, and producer prices grew at the weakest rate in 26 months. Meanwhile, Prime Minister Kallas unveiled plans for higher taxation and defense spending in April. In May, during an Article IV visit, the IMF advised that the tax reform be brought forward to curb the country’s fiscal imbalance.

In April, harmonized inflation fell to 13.2% (March: 15.6%) on lower price pressures for food and housing and utilities outweighing rebounding price increases for transport. Our panel sees the headline rate moderating to less than half of 2022’s average in 2023 on weaker domestic demand and higher interest rates. Inflation will remain above the ECB’s 2.0% target, however.