Central bank forecasts continued salary advance

Photo: Britt Weykam / PantherMedia / Scanpix

The Bank of Estonia’s recent economic forecast suggests that salary advance will reach 8.1 percent this year; the central bank urges the government and people to favor savings.

The economy is set to grow by 3.3 percent this year and 2.1 percent in 2020. Growth is forecast to slow due to weaker export markets and continued labor shortage.

Foreign labor to the rescue

Salary advance will continue despite slower growth, albeit at a slower pace.

Employment will remain on the current level, with salary advanced forecast to fall from 8.1 percent this year to 5.2 percent by 2021. People are urged to continue to save for as long as rapid salary advance persists.

Because Estonia is short on workers, entrepreneurs have been turning to foreign labor. The contribution of foreign labor in last year’s 3.9 percent growth came to 1.3 percent. Sectors that have relied on foreign labor the most include construction, agriculture and the processing industry.

In addition to supporting growth, foreign labor has slowed salary advance. Rapid salary advance is a problem for exporting companies for whom competing on foreign markets has become more difficult due to growing labor expenses.

Price advance is forecast to slow from 3.4 percent last year to 2.1 percent in 2021. Price advance leans on salary advance, while lower energy prices and weaker effect of alcohol excise duties are contributing to slower inflation.

Tax revenue growing rapidly

Because the Estonian economy is living good times, tax revenue is forecast to remain strong in the coming years. Record-low unemployment is translating into fast salary growth. This is why the state budget should sport a surplus to be able to support the economy during more difficult times.

The cooling economy is forecast to reflect in labor market indicators. As demand is forecast to grow more slowly both in Estonia and on primary export markets, entrepreneurs’ enthusiasm to find new labor has fallen.

Despite slower growth, unemployment is forecast to remain very low and employment at an all-time high. This translates into consumer confidence that will in turn deliver strong tax revenue. The government would do well to aim for budgetary surplus in the coming years. Surplus budgets in the coming years would not constitute cost-cutting but costs growing slower than revenue.

The Bank of Estonia urges responsible fiscal policy to compensate for rising unemployment during difficult times and ensure more stable growth of income. Additional expenses based on fiscal deficit would only accelerate price advance and motivate entrepreneurs to seek foreign labor, the central bank notes. Growth would slow due to reduced competitiveness that would hit growth of income.