Economic policy statement of Eesti Pank
The strength of economic growth depends on actions taken by euro area governments
Estonia's 2012 economic growth is set to slow markedly due to the external environment, but the slackening will not be as extensive as forecasted last autumn. The more optimistic growth expectation bases on solid domestic demand at the start of the year. Nevertheless, the fast growth in domestic demand is temporary and will not considerably affect the forecast on next quarters, since the factors affecting Estonia's economy have not changed. Inflation is decelerating in 2012 as well.
The very high uncertainty due to the euro area sovereign debt crisis continues to weigh on the growth outlook in Europe. Pursuant to the joint economic forecast of European central banks, euro area growth will be in the range of -0.5...0.3% in 2012 and between 0...2% in 2013. This year's average inflation in the euro area will be 2.3...2.5%, and it will decline to 1...2.2% in 2013. The sovereign debt crisis means that our main trading partners' economic growth, and thus also Estonia's external demand growth will remain modest this year. The baseline scenario of Eesti Pank's spring forecast rests on the assumption that euro area governments will take adequate measures to keep risks to financial stability in check, contributing to an improvement in growth outlooks in the second half of the year.
Higher real wages and employment growth promoted consumer confidence, thereby supporting private consumption at the beginning of the year. Corporate investment growth continued both at the end of 2011 and likely also at the start of 2012. Investment has gained some vigour owing to the pickup in lending activity. The exceptionally low interest rate levels will contribute to credit activity throughout the entire forecast horizon (2012-2014). According to the forecast, growth in both private consumption and investment will moderate after the first quarter of this year. A prerequisite for a re-acceleration is improvement in the external economic environment and a pickup in export growth.
Economic growth has so far not eased the problem of long-term unemployment. Looking further ahead, this may result in wage growth exceeding productivity. The Estonian labour market has responded to economic expansion by a robust rise in both employment and wages. Though economic growth slackened already in autumn 2011, wage growth kept accelerating even at the start of this year. This is largely a cyclical development, where employees receive a share of companies' earlier profit growth in the form of higher base pay and performance-related pay.
Inflation is currently lower than last year, but it has moderated more sluggishly than expected due to volatile oil prices, which were higher than projected in the first months of the year, but have fallen back to the assumed level by now. In the coming years, oil price should gradually decline. Looking at global-market food raw materials price expectations, food price growth should also remain subdued. Thus, inflation will slow in both this year and the next years.
With a view to posting a consolidated budget surplus, the government sector should increase their income faster than expenditure over the forecast horizon. The uncertainty deriving from the external environment calls for caution in making permanent increases in budget expenditure and requires vigilance from the government to be ready for imminent cost adjustments should the economic situation deteriorate. The government should not lightly abandon the objective of a surplus in 2013. For the sake of ensuring stability, the fiscal framework should include, besides the requirement of a balance, also a plan for spending restrictions in the medium term.
Economic forecast by key indicators
|Difference from previous forecast|
|Nominal GDP (EUR bn)|
|GDP, chain-linked volume change (%)|
|HICP, change (%)|
|GDP deflator, change (%)|
|Current account (% of GBD)|
|Private consumption expenditures, chain-linked volume change (%)|
|Government consumption expenditures, chain-linked volume change (%)|
|Fixed capital formation, chain-linked volume change (%)|
|Exports, chain-linked volume change (%)|
|Imports, chain-linked volume change (%)|
|Unemployment rate (%)|
|Domestic employment, change (%)|
|Productivity per employee, change (%)|
|Compensation per employee, change (%)|
|Real compensation per employee, change (%)|
|Private sector debt, outstanding amount change (%)|
|Gross external debt (% SKPst)|
|Budget balance (% SKPst)|
|Sources: Statistics Estonia, Eesti Pank|