The reason Estonia’s economy is in a comparatively worse state next to Latvia and Lithuania is that it is more sensitive to interest rate changes, Luminor Bank economist Professor Lenno Uuskula has said in an interview given to “Aktuaalne kaamera”.
– Why is it the case that while Latvia and Lithuania’s economies are growing, ours is in contraction?
– There are several reasons for this. One is our higher sensitivity to interest rates. Our loan burden is substantial, compared with that of Lithuania and Latvia, especially the latter. Those two countries have pursued very strong policies when it comes to industry, including Lithuania supporting its companies and attracting investments into the country.
Estonia has been heavily dependent on exports to Sweden; exporting valuable investment goods, which our southern neighbors actually do not have the capability for. But these investment goods tend to be very cyclical, and right now they are going through a bad phase. For this reason we are also heavily affected. The same applies to startups. The IT sector is rather straightforward, but our companies have been very sensitive to changes in interest rates.
– We have been looking in a northerly direction, towards Finland and Sweden. Is it wrong to do so, given they are currently doing poorly too, and our stagnation is linked to their markets?
– It is not the wrong thing to do. That is the natural stage of development. It’s simply that the current moment is moving against us.
– Despite the economic squeeze, there have not been significant job losses. Our unemployment rate remains quite low. How have we managed this, and will unemployment rates remain low?
– There are two factors at play here. One is that just before Covid, numerically smaller generations entered the job market; half the number of those few years ago, so there are fewer young people entering the job market.
Previously, we had been talking about a shortage of labor during times of economic growth, but now, with a recession going on, the labor force is actually balanced. Another factor is that real wages have fallen.
The money companies are paying employees is less, because prices have risen more than wages, making labor relatively cheap. This allowed companies to maintain employment relationships a bit longer.
– Is it a good thing that employees have stayed on despite lower wages? Perhaps we should have let go and looked for more efficient activities, instead of hoping to continue as before, in the near future?
– It has been tricky in the sense that if this is very short-term, it is certainly very important to retain specific knowledge as we are relatively intelligent, making it essential to keep an employee at the company as it is harder to train someone new.
However, if the situation turns out to be a long-term one, then indeed, it is better for the individual to move to a new job and actually do something new, rather than stay in an old job, be underutilized, for lower pay.
– Are we at the trough of the recession or is it just a deceptive quagmire?
– It seems that there was a small contraction in the first quarter. Looking at retail, which makes up a very large part of our economy, there was certainly a decline there.
The factors causing retail to drop included that last year we were consuming a bit ahead of the curve, because VAT was rising. Now we’re not spending that money, so now there’s no longer a big jump in price increases on the horizon.
Wages will continue to grow, which means purchasing power will rise. This means people will again have money to spend in stores. Similarly, there will be more encouragement to make far-sighted decisions. (ERR)