20 December 2022

1. Eesti Pank Economic forecast
2022–2025
20 December 2022

2. THE ENERGY CRISIS AND WEAK PURCHASING
POWER ARE HURTING THE GLOBAL ECONOMY
2
Source: IMF
GLOBAL ECONOMIC GROWTH GLOBAL INFLATION
-4%
-2%
0%
2%
4%
6%
2019 2020 2021 2022 2023 2024 2025
-4%
-2%
0%
2%
4%
6%
8%
10%
2019 2020 2021 2022 2023 2024 2025
forecast in October
forecast in April

3. THE ENERGY CRISIS IS AS DEEP AS THAT IN
THE 1970s
3
Source: OECD
0%
5%
10%
15%
20%
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
SPENDING ON ENERGY BY END CONSUMERS
(% of GDP)

4. EUROPE IS SUFFERING MORE THAN THE REST
OF THE WORLD FROM THE ENERGY CRISIS
4
Source: OECD
-1,4
-0,3
-0,5
EFFECT ON ECONOMIC GROWTH* EFFECT ON INFLATION*
1,3
0,4
0,7
* Difference in percentage points from the baseline forecast for 2023 if the price of gas rises by 50%, the price of oil by 10%, and the
price of fertilisers by 25%; and if the household savings rate rises by 1pp, the cost of capital rises by 1pp, and energy consumption in
industry is temporarily limited
European
OECD
countries
Other
OECD
countries
World European
OECD
countries
Other
OECD
countries
World

5. 0%
2%
4%
6%
8%
10%
2019 2020 2021 2022 2023 2024 2025
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2019 2020 2021 2022 2023 2024 2025
THE OUTLOOK FOR THE EURO AREA IS
WEAKENED BY HIGH INFLATION AND
UNCERTAINTY AMONG PEOPLE AND BUSINESSES
5
Source: European Central Bank, December forecast 2022
ECONOMIC GROWTH IN THE
EURO AREA
INFLATION IN THE EURO AREA
5.2%
3.4%
0.5%
1.9%
2.6%
8.4%
6.3%
2.3%
negative
scenario
negative
scenario
1.8%
3.4%

6. -1%
0%
1%
2%
3%
4%
5%
2000 2005 2010 2015 2020 2025
INTEREST RATES ARE RISING AND BORROWING
WILL BECOME MORE EXPENSIVE
Source: European Central Bank 6
3 MONTH EURIBOR
• Financial markets expect that
Euribor will continue to rise but
will peak below its average
level from before the financial
crisis in 2008

7. ENERGY PRICES WILL REMAIN HIGH AND
VOLATILE
7
0
50
100
150
200
250
300
350
400
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Sources: Nordpool, Bloomberg, Eesti Pank
crude oil
(USD/barrel)
electricity
(EUR/MWh)
gas
(EUR/MWh)

8. THE DIFFERENCE BETWEEN FOOD PRICES AND
THOSE ON THE GLOBAL MARKET WILL WIDEN
8
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Sources: FAO, European Central Bank, Statistics Estonia, Eesti Pank
food
commodities on
the global market
food
commodities
in Europe
consumer prices
for food in
Estonia

9. INFLATION WILL FALL SLOWLY
9
-5%
0%
5%
10%
15%
20%
25%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
19.4%
9.3%
2.8%
Sources: Statistics Estonia, Eesti Pank
4.6%
services
energy
food manufactured
goods
2.2%
INFLATION

10. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
WAGES WILL CONTINUE TO RISE FAST
10
Sources: Statistics Estonia, Eesti Pank
CHANGE IN THE AVERAGE WAGE
1682
€
1827
€
1969
€
2102
€
8.7% 8.7%
7.7%
6.8%
• High inflation will
encourage growth in
wages, which would
otherwise slow as the
economic climate
deteriorates
• Wage growth will also be
boosted by a rise in the
minimum wage and rising
public sector wages
6.8%
1547
€

11. 1200
1400
1600
1800
2000
2200
2018 2019 2020 2021 2022 2023 2024 2025
THE PURCHASING POWER OF THE
AVERAGE WAGE WILL RECOVER BY 2025
11
Sources: Statistics Estonia, Eesti Pank
euros
2.2%
-8.9% -0.7%
4.9%
4.5%
average gross
monthly wage
price adjusted
gross monthly
wages

12. Sources: Statistics Estonia, Eesti Pank
INFLATION AND DECLINING SAVINGS WILL
AFFECT CONSUMPTION
12
2500
3000
3500
4000
4500
5000
5500
2018 2019 2020 2021 2022 2023 2024 2025
consumption at current
prices
consumption at constant prices
million euros
11.0%
20.3%
8.3%
4.8%
7.0% 3.2% -1.1% 2.1 %
4.3 %
6.5%

13. CORPORATE PROFITS HAVE INCREASED
DESPITE THE RAPID GROWTH IN COSTS
14
Source: Statistics Estonia
0
200
400
600
800
1000
1200
1400
2017 2018 2019 2020 2021 2022
CORPORATE PROFIT
million euros

14. THE MARKET SHARE OF EXPORTS
WILL STOP GROWING
15
Source: Eesti Pank
million euros
2500
2700
2900
3100
3300
3500
3700
3900
2019 2020 2021 2022 2023 2024 2025
-0.1%
exports of goods and
services
demand in export
markets (index)
market share of Estonian exports
4.1%
2.8%
3.4%

15. 5000
6000
7000
8000
9000
10000
11000
2018 2019 2020 2021 2022 2023 2024 2025
16
THE ECONOMY WILL RECOVER BY THE END
OF NEXT YEAR TO ITS PEAK OF THIS YEAR
Sources: Statistics Estonia, Eesti Pank
million euros
14.5%
15.0%
6.2%
4.8%
8.1%
-0.5% 0.4%
3.1 %
GDP at current prices
GDP at constant prices
4.4 %
6.5%

16. COMPANIES ARE LESS WILLING TO HIRE
17
-60
-40
-20
0
20
40
2017 2018 2019 2020 2021 2022
Sources: European Commission, Eesti Pank calculations
construction
services
retail
manufacturing
EXPECTATIONS OF COMPANIES FOR EMPLOYMENT
balance

17. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
UNEMPLOYMENT WILL BE INCREASED BY THE
COOLING ECONOMY AND THE INFLOW OF REFUGEES
18
Sources: Statistics Estonia, Eesti Pank
UNEMPLOYMENT RATE
5.7%
8.5% 8.7% • The shocks to the economy
will reach the labour
market, and employment
will fall
• Unemployment will grow
partly because refugees
from Ukraine will start to
appear in the labour market
statistics from 2023
• The unemployment rate is
higher among refugees
than among locals
7.6%

18. CONCLUSIONS FROM THE ECONOMIC
FORECAST

19. • The European Central Bank will continue raising interest rates to
reduce inflation. It raised the interest rate by 0.5% in December and
may do so again at several more meetings
• Inflation will remain high in the euro area for longer than was forecast
in September. The new forecast expects inflation to fall to 2% only at
the end of 2025
• Markets expect interest rates to move towards their historical average
next year, and reach a level where they start to restrain economic
activity and inflation more clearly
• The balance sheet of the central bank will start to shrink. The bonds
purchased under the asset purchase programme (APP) will from
March 2023 replace less than half of the value of bonds maturing
INTEREST RATES WILL CONTINUE TO RISE
NEXT YEAR
20

20. -2
-1
0
1
2
2005 2010 2015 2020
THE ASSESSMENT BY ESTONIAN
COMPANIES OF THE STATE OF THE
ECONOMY HAS DETERIORATED
21
Sources: European Commission, Eesti Pank
INDICATOR OF THE ECONOMIC CYCLE
unemployment in construction
capacity utilisation in industry
unemployment in manufacturing
unemployment in services

21. • Increased profits in the corporate sector are a sign that demand has
remained strong so far, allowing companies to raise prices by even
more than costs
• Having so far swallowed the rise in prices, consumers are changing
their behaviour
• The high inflation caused by the energy crisis affects economic sectors
differently
• The rapid rise in costs threatens the competitiveness of exports and
needs attention from the state, rather than the level of costs, as the
prices of inputs including energy and labour costs remain below the
average for the euro area
THE MAIN CHALLENGE IN THE ECONOMY IS THE RISE
IN PRODUCTION COSTS AND CONSUMER PRICES
22

22. • Tighter monetary policy will restrain inflation increasingly firmly, but
fiscal policy also plays a key role in price rises
• Interest rates are rising fast, but the level they are reaching is largely
aligned with the growth in consumer prices and asset prices in Estonia
• The number of loan clients facing payment difficulties because of
higher interest rates will be small, and there is no risk to the banking
sector
• Interest rates having remained very low increased the risk to the real
estate sector
• The rise in energy and input prices has been a bigger cost to
businesses and households than the rise in interest rates
HIGH INTEREST RATES ARE BETTER ALIGNED
WITH THE ESTONIAN ECONOMY
23

23. • The rise in prices affects different
income groups very differently
• The consumer basket of people on the
lowest incomes increases by around
five percentage points faster in price
than that of those in the richest quintile
• Inflation caused by demand can be
reduced by targeting support at those
who need it most
THE ENERGY CRISIS WILL NOT AFFECT ALL
HOUSEHOLDS EQUALLY SERIOUSLY
24
-5%
0%
5%
10%
15%
20%
25%
30%
2018 2019 2020 2021 2022
I kvintiil
II kvintiil
III kvintiil
IV kvintiil
V kvintiil
Sources: Statistics Estonia, Eesti Pank
INFLATION IN THE CONSUMER BASKET
I quintile
II quintile
III quintile
IV quintile
V quintile

24. -6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2018 2019 2020 2021 2022 2023 2024 2025
SLOWING GROWTH IN TAX REVENUES AND NEW
INCOME AND EXPENDITURE MEASURES WILL
MAKE THE BUDGET BALANCE WORSE
25
Sources: Statistics Estonia, Eesti Pank
GENERAL GOVERNMENT FISCAL POSITION
(% of GDP)
nominal fiscal
position
effect of the economic cycle
-5.5%
-2.4%
-1.9%
-4.6%
-3.8%
structural fiscal
position
• Various measures that will be harmful
for the fiscal position will come into
force next year:
• increased family benefits
• an extraordinary rise in
pensions
• an income tax exemption for
pensions
• a rise in the tax-free minimum
threshold
• Spending on defence will increase,
and pressure to accelerate public
sector pay rises will remain strong
-3.2%

25. • The budget deficit will narrow this year, but this will not be because of
fiscal discipline, but because inflation has caused an extraordinary
increase in tax revenues, while some spending has been postponed
• Having increased revenues this year, high inflation will substantially
increase expenditures and the deficit in the coming years
• The deficit will widen sharply next year and the money that is added
into the economy will boost inflation, meaning that fiscal policy is not
working in the same direction as monetary policy
• Energy prices are likely to remain high, making it important that
additional state aid be accurately directed and temporary
FISCAL POLICY WILL FACILITATE
INFLATION
26

26. INTEREST EXPENSES ARE ALSO RISING FOR
THE STATE
27
-2%
0%
2%
4%
6%
8%
2005 2008 2011 2014 2017 2020
Itaalia
Saksamaa
Soome
Rootsi
Eesti
INTEREST RATES ON 10-YEAR
SOVEREIGN BONDS
Source: Bloomberg
• If there are no changes to fiscal policy, the
interest expenses of the state could reach 3-4%
of all expenditures after a decade, with the debt
level at 38% of GDP and interest rates at 4%
• The later fiscal discipline is restored and the
larger the debt is at that point, the larger will be
the future need to raise taxes or limit the growth
in spending
Italy
Germany
Finland
Sweden
Estonia

27. KEY INDICATORS FOR THE EESTI PANK
ECONOMIC FORECAST
28
2020 2021 2022* 2023* 2024* 2025*
GDP at current prices (EUR billion) 27.43 31.36 36.13 38.36 40.22 42.82
economic growth at constant prices (%) -0.4% 8.1% -0.5% 0.4% 3.1% 4.4%
inflation (%) -0.4% 4.6% 19.4% 9.3% 2.8% 2.2%
unemployment (%) 6.9% 6.2% 5.7% 8.5% 8.7% 7.6%
average gross wage (euros) 1 448 1 547 1 682 1 828 1 969 2 102
change in the average wage (%) 2.9% 6.8% 8.7% 8.7% 7.7% 6.8%
budget balance (% of GDP) -5.5% -2.4% -1.9% -4.6% -3.8% -3.1%
* forecast
Sources: Statistics Estonia, Eesti Pank