Republic of Estonia: 2023 Article IV Consultation-Press Release; and Staff Report

The 2023 Article IV Consultation discusses that after a swift rebound from the pandemic in 2021, Russia’s war on Ukraine has triggered a sharp and broad-based downturn for Estonia. Inflation has declined from a peak of 25 percent in August 2022 to 11.2 percent in May 2023, but it remains among the highest in the euro area. Over time, inflation has become increasingly broad-based, with core inflation also rising rapidly, despite the widening negative output gap. Estonia’s policy mix needs to be re-calibrated to support a more sustainable recovery. A much less stimulative fiscal policy should be considered. Alongside targeted financial policies to underpin financial stability and structural reforms to raise productivity, address labor market shortages, and promote the green and digital transition, this policy mix will help Estonia achieve sustainable and inclusive growth over the longer term. Targeted structural reforms would help raise productivity, address labor market shortages, and promote the green and digital transition. Encouraging an increase in the share of private sector R&D to a level closer to the EU average would accelerate the evolution toward higher value-added production and exports.