Governor of the Central Bank: Estonia's economy slowly recovering from recession

Madis Müller, governor of the Bank of Estonia. Photo: Madis Veltman

Just like last year, in making their business plans, business operators in Estonia must reckon with the prospect that Estonia's economic recovery will be slow and no rapid rebound is expected, Madis Müller, governor of the Bank of Estonia, said at the business conference «Äriplaan 2025» (Business Plan 2025) in Tallinn on Wednesday.

Gradually, however, Estonian economy is overcoming the recession, according to Müller. Among the positive signs are the increase in cross-border orders expected by Estonian exporting companies and the reversal of the dynamics of the production volume of several branches that used to be in difficulty in the meantime. The purchasing power of Estonian people has also recovered in the last two years. In addition, the economy is supported by the reduction of interest rates by the central bank. Since June, the European Central Bank has cut rates twice.

«This supports the investment capacity of businesses and creates additional budget space for households with mortgages for other expenses,» the governor of the central bank said. He recalled that since the loans of Estonian companies and households are mostly with floating interest rates, the sharp rise in interest rates quickly had a negative impact on the economy. Now there is reason to believe that the positive impact of interest rate cuts will also be quickly felt in the Estonian economy as well.

Müller noted that in terms of prices, Estonia has reached the average level of countries of Europe in the last couple of years. Consumer goods, food, and drinks are already more expensive here, but service prices are cheaper. Entrepreneurs would like to raise prices even further because the continued growth in wage costs has put profits under pressure.

However, this may not succeed. Müller pointed to statistics showing that as price levels rise, more and more goods are being purchased from abroad in Estonia, using the opportunities offered by e-commerce.

«This suggests that it will probably be difficult to raise prices further,» he said.

Speaking about Estonia's public finances, the head of the central bank stressed the need to put public finances on a more sustainable path.

«This is inevitable in the long run,» he stressed.

Müller conceded that spending cuts will slow economic growth in the short term and tax increases will accelerate the pace of price increases. But keeping the budget in deficit can be likened to the use of doping in sport, he said.

«While, of course, doping can provide short-term gains in athletic performance, such as running faster or lifting heavier weights, it also means fewer years of healthy life. In public finances, we should adopt a longer-term perspective,» he said.

Müller further pointed out that Europe's experience demonstrates that countries with larger deficits and consequently higher debt levels have not necessarily attained higher standards of living. He emphasized that the key determinant of a nation's prosperity lies in the choices made regarding economic policy and how well the necessary changes in direction have been thought through.