Estonia

Recovery will be gradual

After two years of recession triggered by Russia's invasion of Ukraine, which penalised European activity and foreign trade, Estonia will return to growth in 2024. The recovery will be gradual and will not reach the scale of 2021. It will be driven by gradual increases in private consumption and service exports, supported respectively by real wage growth and a timorous revival in foreign demand. Despite an expected spike in inflation at the start of the year, due to the increase in the VAT rate, disinflation will set in following the strong monetary tightening in the eurozone. Nevertheless, ECB policy has led to higher financing costs, which will continue to affect business and household investment. Higher mortgage rates have weakened the housing market, penalising construction, while the high cost of energy affecting companies in the sector is unlikely to ease over the coming months. In addition, unemployment, which rose in 2023, should stabilise at a high level in 2024 (7%). The performance of the manufacturing industry will remain fragile, with furniture orders still lacklustre, as they are closely tied to housing construction in Finland and Sweden, where activity is anticipated to be sluggish. The country will therefore be relying instead on exports of business services and information and communications technologies (ICT) to sustain activity. European funds will support public investment, notably via the Recovery and Resilience Facility (RRF). This has been extended to 2023 to include new REPowerEU grants of 83.4 million euros out to 2026 for Estonia to accelerate the energy transition.

Implementation of the fiscal consolidation program

In 2023, the public deficit widened with the economic recession and the counter-cyclical increase in social and security spending, which will continue to put pressure on the budget in 2024. The 2023 budget endorsed the permanent increase in military and pension spending, indexed to the previous year's wage growth and inflation, which will prevent a substantial reduction in the deficit despite forthcoming tax reforms. From 1 January 2024, the VAT rate will rise by two percentage points to 22%. The government is also planning to raise excise duty on alcohol and tobacco, as well as gambling tax, to generate additional revenue. Estonia will have no difficulty in financing its deficit as it has the lowest debt ratio of the EU. It has access to supranational funds, such as the FRR granted in 2021, which now totals 953 million euro for Estonia alone. In exchange, Estonia must meet its targets by August 2026.

In 2024, the current account will continue to improve, moving into surplus. The downward trend in trade that began in 2023 will be gradually reversed. The gradual recovery in domestic demand will support imports, while energy prices will remain high. Exports of goods, notably electronics, wood, and furniture, will remain weak due to the sluggishness in Nordic countries. The current account surplus will continue to be generated mainly by exports of business services, transport, and ICT. Remittances from abroad and transfers from the EU contribute to a lesser extent.

Political stability despite a difficult economic and geopolitical context

The coalition, formed following the parliamentary elections of March 2023, comprises three parties: the Reform Party (center-right liberal), the Social Democratic Party (SDE) and the liberal Eesti 200. It enjoys an absolute majority but was weakened in August 2023, when the Russian links of the Prime Minister's husband, Kaja Kallas, were revealed. Discontent with the government is growing but not a threat as the coalition has pursued a policy of fiscal consolidation in a difficult economic context since coming to power. The country has been particularly hard hit by the war in Ukraine and sanctions against Russia. Since March 2022, Russian gas imports have ceased, and the country now relies on LNG, mainly from the Baltic and Nordic countries with which it will continue to maintain close ties.

The political landscape in Denmark remains relatively stable under the centrist government, which comprises the centre-left Social Democrats, centre-right Liberal Party, and centrist Moderates. Given the government's current unpopularity, polling at around 33%, the likelihood of an early election in 2024 appears minimal (next election is to be held before October 2026). Of particular significance is the upcoming European Parliament elections scheduled in June 2024.

Last updated: March 2024