Economic policy statement of Eesti Pank

The economy needs balanced wage growth

The Estonian economy has entered a period of very rapid growth in recent quarters, mostly on the back of growing export income. The pick-up in international trading has helped the Estonian economy recover after the steep recession. Exports have increased across all groups of goods, but the current growth impetus is expected to slow further on. The upturn in domestic demand, which started in the second half of 2010, continues, and it will gain increasingly more importance in future economic growth. Compared to recent quarters, growth will be slower in the coming years.

Risks related to external developments are more delineated, but not withdrawn. As a result, it is necessary to stay vigilant in order to better resist to possible setbacks. Household saving is likely to decrease along with the improving economic situation, although it is prudent to put aside in good times. One of the lessons to be learnt from the recent crisis is that a small and open economy needs to have enough savings to cushion the impact of unfavourable market conditions.

The pick-up in inflation, which started last year, was mostly caused by commodity price rise and it was further boosted by the growing profitability of local enterprises. Upward price pressures from the external environment are expected to abate in the coming years. At the same time, there is the risk of commodity price volatility in the global market. It is important to avoid the current high inflation passing through to wage growth, since this would cause additional price growth. Wage growth should be kept in line with productivity growth, otherwise the competitiveness of the economy will suffer.

Labour market data entail signs of the risk of wage growth diverging from productivity growth. Although employment has shown rapid recovery over the past year, long-term unemployment has been on the rise and people's interest in working abroad increased in the second half of 2010. Labour migration from Estonia reduces our economic growth potential and may boost wage pressures. From the point of view of balanced economic development, companies should, different from the past boom, keep their wage costs in check in the years to come.

Accelerating economic growth has so far not resulted in a higher loan turnover. The latter will remain modest in the next years as well, although export income and wage growth have contributed to corporate and household borrowing ability. Companies are financed through internal and intra-group sources, so the loan turnover will increase due to short-term loans taken to finance floating capital. Household credit demand is slow to recover, since people continue to be cautious about taking new long-term commitments for investment. The capitalisation of banks is strong and they have ample funds to lend owing to growing deposit growth. Looking ahead, it is important that banks be willing to take risks and finance projects that are essential to sustainable economic growth.

As regards fiscal policy, the government's objective is to achieve a nominal surplus by 2013. According to the baseline scenario of Eesti Pank's forecast, this objective is sensible and, if cost increases are constrained, also rather easily attainable. The recent crisis experience showed that the government needs to supplement the fiscal policy framework with expenditure rules.

Economic forecast by key indicators

   Difference from
previous forecast
  2009 2010 2011 2012 2013 2010 2011 2012
GDP (EUR bn) 13.9 14.5 15.9 17.1 18.4 0.3 0.8 1.0
GDP, chain-linked volume change (%) -13.9 3.1 6.3 4.2 4.2 0.6 2.2 0.4
HICP (%) 0.2 2.7 4.7 2.5 2.9 0.3 2.0 0.8
GDP deflator (%) -0.1 1.5 2.8 3.2 3.5 1.6 1.0 0.5
Current account (% of GDP) 4.5 3.6 1.7 1.0 -0.2 2.3 4.3 3.8
Private consumption expenditures, chain-linked volume change (%) -18.8 -1.9 2.8 4.8 5.4 -1.0 -3.9 0.4
Government consumption expenditures, chain-linked volume change (%) 0.0 -2.1 2.1 0.6 1.0 -1.2 1.8 0.1
Fixed capital formation, chain-linked volume change (%) -32.9 -9.2 25.3 13.2 9.7 -2.1 8.4 4.0
Export, chain-linked volume change (%) -18.7 21.7 22.5 4.7 6.4 7.4 16.1 -2.2
Import, chain-linked volume change (%) -32.6 21.0 22.6 6.3 8.6 3.2 12.1 -1.5
Unemployment rate (%) 13.8 16.9 13.0 11.5 10.1 -0.9 -1.8 -1.9
Employment growth (%) -9.9 -4.8 5.1 1.4 0.9      
GDP growth per person employed (%) -4.5 8.3 1.2 2.8 3.3      
Real wage fund growth per person employed (%) -2.4 -2.3 -1.8 3.7 3.3      
Compensation per employee growth (%) -3.3 -0.2 3.2 6.1 6.3      
Nominal money supply growth (%) 0.8 3.0 5.0 7.9 7.8 -2.6 -2.2 1.3
Credit stock growth (%) -6.2 -6.4 -3.2 4.0 7.5 -2.7 -4.2 2.6
Gross external debt (% of GDP) 125.5 114.2 100.9 92.7 88.0 -6.3 0.0 -3.6
General government budget balance (% of GDP) -1.8 0.1 0.0 -1.6 0.4 1.3 1.1 -0.3

Sources: Statistics Estonia, Eurostat, Eesti Pank