Tõnu Palm, Chief Economist at Luminor

Tõnu Palm, Chief Economist at Luminor

Estonia surprised positively in Q2 with an economic downturn that was two times lower than the average in the Euro area. The economy has started to recovered quickly from the impact of the coronavirus due to strong consumption. An economic growth of 4.2% can be expected in the next year.

According to the new economic forecast published by Luminor today, the impact of the coronavirus on the open economy of Estonia was not as strong as was feared. According to Luminor’s Chief Economist Tõnu Palm, the downturn of the Estonian economy in Q2 was more moderate than expected and amounted to 6.9% y-o-y. At the same time, the average economic downturn in Euro area in Q2 was 15%.
 
According to Palm, the quick recovery of the Estonian economy has been driven by extremely strong retail sales. The unprecedented boom occurred at the height of the crisis in Estonian e-commerce, where sales volumes increased by more than 40% on average in March and April when compared to the previous year.
 
“When we take a broader look at retail trade, we see that the volumes exceeded the level of last year in Estonia already in May,” said Luminor’s chief economist. “This is an outstanding achievement and shows that the consumer is more stable and stronger than before. Whilst retail sales dropped by a record 18% in Estonia and only by 2.7% in the Euro area after the global financial crisis in 2009, the situation has now reversed. Retail sales increased by 2% in Estonia and dropped 3.4% y-o-y on average for the first seven months of this year. This reflects stability”
 
The strong support measures for the economy, the easing of the COVID-19 restrictions and the newly emerging foreign demand mean that the recovery of the economy with the export and industry bouncing back as well will become more broad-based in the future. The Estonian economy will decline by 4.6% this year, but grow by 4.2% in the next year already. Depending on the development of the coronavirus and proceeding from the improving demand for export of goods, the turn to growth could be even stronger. Palm believes that the speed of the economic recovery will be fast in the first stage, but remain uneven across economic sectors for the time being.
 
Palm said that the growth prospect of European countries with the support of the easing of coronavirus restrictions and the exceptionally stimulating monetary and fiscal policy is already improving rapidly. “Keeping the spread of the virus under control remains the main key to success, and Estonia and its main trade partners have managed to do it well so far,” admitted Palm. “However, the number of new coronavirus cases is growing again in Estonia and Europe, which is a serious risk. Curbing the spread of the virus is the foundation of economic certainty and a precondition to the recovery of investment volumes.”
 
The chief economist pointed out that the distancing requirements established to restrict the spread of the coronavirus boosted the digitalisation of the economy and the technological transformation, the impact of which on business models and the labour market will last for years. “The best example of this is the boom in e-commerce, where sales volumes increased by more than 40% on average in March and April when compared to the previous year,” said Palm. “The data communication volumes of the digital economy are also growing very fast, which will lead to a new global race in the context of the development of 5G mobile communication and services.”
 
The future Economic policy choices, i.e. where the billions of euros borrowed by the state and the money of the EU structural fund, which are meant for supporting the recovery from the coronavirus, will be invested will be more significant than the initial growth boost.
 
“Time will show us the priorities of the economic policy, but for the first time, Estonia has the opportunity to steer smart development by making large investments in smart economy,” emphasised Palm. “Rapid economic growth lies ahead of us, but it could also be bolstered by invests into export potential.” He added that the selection of investments determines largely the speed of the sustainable and long-term income growth, the benefits Estonia will reap from new technologies and how green the growth will be in the next decade.