Estonia's Economic Growth to Recover in 2010

Article published on Oct. 22, 2008
community published
Article published on Oct. 22, 2008

According to the base scenario of Eesti Pank's 2008 autumn forecast, Estonia's gross domestic product will decline by 1.8% in 2008 and by 2.1% in 2009

Economic policy statement of Eesti Pank Economic forecast for 2008-2010

So far the economic correction has been more abrupt than expected primarily due to decreasing domestic demand. In addition to the cessation of the rapid real estate market expansion, also private consumption dropped in spring more than forecasted. This has been induced by increasing uncertainty, higher interest rates, and declining borrowing. At the same time, in the past year and a half, external development factors have become less favourable from the point of view of Estonia's future development. This has been conditioned by the weakening demand in export markets, the rise in the price of commodities, and growing global money market interest rates due to the financial crisis.

According to Eesti Pank's estimate, the economy should pick up again either at the end of 2009 or at the beginning of 2010. The average economic growth rate of 2010 will be 3%. Private consumption growth should recover in 2010 along with the revival of household confidence, whereas 2009 will be characterised by slowing wage growth and increasing unemployment. We expect in the forecast that growth in Estonia's main export markets will not die down totally and the mutual distrust in the global financial markets will pass. If these expectations do not come true, we will have to be ready for a longer economic adjustment period. In Eesti Pank's opinion, the financial standing of the Nordic banks operating in Estonia continues to be strong enough to cope with both the global financial crisis and the risks related to Estonia's contracting economic growth. The measures taken by the governments of the Nordic countries and Estonia to further increase the credibility of banks should contribute to confidence as well.

The exporting sector is and will be the main factor balancing the downward cycle. The growth rate of goods and services exports has so far been speedy as usual. Unfortunately, the economic cooling is getting hold of a growing number of countries and the support of the external demand will turn out to be smaller than desirable, especially in 2009. The speed at which Estonia will overcome the downfall depends on the country's success in utilising and expanding its export potential. In Eesti Pank's opinion, efforts to maintain and improve a business environment supportive of investment, including increasing the flexibility of the labour market, must be continued.

A more rapid economic adjustment would cause the current account deficit and inflation to decrease faster. Eesti Pank estimates that as domestic demand falls, the current account deficit will drop to 6-7% in the next years. Consumer prices will increase by approximately 11% this year. Inflation remains two-digit chiefly due to the rising prices of energy and food in the global market. Eesti Pank's base scenario forecasts the 2009 inflation rate to be 4.8%. The central bank expects the Estonian inflation rate to drop close to the Maastricht inflation criterion at the end of 2010. In order to meet the criterion, the timing of the administrative measures influencing prices is extremely important.

As is characteristic of a slowdown, the general government expenditure of this and the next year will grow faster than private sector expenditure, thus outpacing the expected income growth. According to Eesti Pank's estimate, the consolidated state budget for 2008 and 2009 will be in a deficit, but owing to the reserves accumulated in previous years, public sector debt will grow minimally. In the current economic situation, a budget deficit is, in principle, acceptable, provided it is temporary and moderate and does not pose a risk to the reliability of the Estonian economy or the adoption of the euro as soon as possible. Taking into account the considerable uncertainties prevailing in the environment surrounding us, the government must be ready to take steps to improve budgetary balance and avoid a deficit that would exceed the Maastricht budget deficit criterion.

In order to ensure further economic development and the stability of public finances, a new budgetary strategy needs to be prepared as soon as possible. In the medium term, the new strategy should ensure a sustainable growth of both public sector reserves and priority expenditure and thus maintain the long-term sustainability of fiscal policy. In this context, the preparation of the 2010 planned budget is of key importance.

Economic forecast by key indicators

 200520062007200820092010Difference from the spring forecast GDP (EEK bn) 173.5 205.0 238.9 255.9 265.5 282.0 -15.4 -26.1 -33.9 Real GDP growth (%) 9.3 10.4 6.3 -1.8 -2.1 3.0 -3.7 -5.1 -2.0 HICP growth (%) 4.1 4.5 6.8 10.7 4.8 2.8 0.9 0.3 -0.2 GDP deflator growth (%) 5.2 7.0 9.6 9.0 6.0 3.2 -0.5 1.6 -0.1 Current account (% of GDP) -10.0 -16.7 -18.1 -11.1 -6.5 -7.1 -0.9 1.0 -0.5 Current account plus new capital account balance (% of GDP) -9.2 -14.6 -16.9 -9.1 -4.8 -4.0 -0.8 1.3 -0.2 Real private consumption growth (%) 9.7 12.8 7.8 -1.5 -1.7 3.9 -4.2 -5.5 -0.6 Real government consumption growth (%) 1.9 1.8 3.9 2.6 -2.0 0.8 -2.0 -1.7 -0.8 Real investment growth (%) 9.4 19.5 4.8 -5.6 -10.4 6.4 4.1 -8.2 1.3 Real export growth (%) 20.9 11.6 0.0 -0.9 0.5 4.8 -3.1 -4.2 -1.7 Real import growth (%) 17.5 20.4 4.2 -5.9 -3.3 5.3 -4.1 -4.1 0.3 Unemployment rate (%) 7.9 5.9 4.7 4.8 7.0 8.3 -1.6 0.5 2.4 Change in the number of the employed (%) 2.0 6.4 1.4 -0.7 -2.5 -1.2 1.7 -2.3 -2.0 Value added growth per full-time employee (%) 7.3 4.5 5.9 0.2 -0.6 4.1 -2.9 -3.8 -0.5 Real wage growth (%) 7.7 11.6 11.6 3.8 0.0 1.8 -1.9 -2.7 -1.7 Average gross wage growth (%) 11.4 16.2 20.4 14.6 5.0 4.9 -0.3 -2.0 -2.1 Nominal money supply growth (%) 42.0 28.2 13.4 3.9 2.2 2.8 -7.7 -6.3 -6.0 Nominal credit growth (%) 50.4 51.6 30.2 10.2 4.1 6.4 0.9 -4.4 -1.8 External debt (% of GDP) 86.1 97.7 112.4 114.4 115.2 116.3 4.3 4.9 6.3 Budget balance (% of GDP) 1.3 3.3 2.7 -1.4 -2.5 -1.3 -0.1 -2.5 -1.3

Sources: Statistics Estonia, Eurostat, Eesti Pank