Monetary policy in the euro area is expected to remain very accommodative. Somewhat contractionary fiscal policy in 2020 is expected to turn broadly neutral in 2021 following a proposed change to the fiscal policy framework, allowing current deficits without offsetting past surpluses or planned future savings.
Diminishing labour market pressures are set to accentuate the strain on the part of the population negatively affected by ongoing structural shifts towards higher value-added production. Strengthening the social safety net and automatic stabilisers, notably by increasing unemployment and health insurance coverage, and renewed efforts to re-skill and up-skill are important in this respect. These policies are also central to long-term efforts to reduce dependence on high-emitting oil shale extraction and use, a cornerstone industry in the north-east of the country.
The government’s plans to allow individuals to opt out and withdraw savings accumulated in the mandatory private individual pension scheme should be reconsidered. A significant share of households, notably those with relatively low incomes and high propensity to consume, are expected to tap into pension savings, supporting consumption from 2021, but this risks feeding macroeconomic volatility in the short term and increasing old-age poverty from already high levels in the long term.
Residential investment growth has been very strong lately, but pressures in the construction sector are easing, house prices are growing in line with incomes, and macroprudential tools have improved resilience. Luminor Group’s reorganisation of its Latvian and Lithuanian subsidiaries into branches increases substantially the size of banking assets under Estonian responsibility. Ongoing money laundering investigations implicating several Estonian lenders call for a stronger legal framework with higher fines.
