Economic policy statement of Eesti Pank

Slowing economic growth inhibits inflation

In general, Estonia's economic developments have been in line with the autumn forecast, but the future outlook has in some respects become less favourable. The anticipated economic slowdown continued also in the fourth quarter of 2007. This was conditioned by primarily domestic demand oriented sectors, e.g., the construction sector. At the same time, external environment related risks have increased. The global financial market turbulences and the expected economic downturn in the USA may inhibit EU's economic development, thus affecting also Estonia. In addition, our inflation rate has been higher than anticipated due to external factors, which may, in turn, limit private consumption. According to Eesti Pank's estimates, it this year's economic growth is likely to drop more than expected. At the same time, slower growth contributes to a faster deceleration of price rises and the trade deficit.

The quickening of price increases at the beginning of the year is temporary and is expected to decline considerably in the second half of the year. In addition to the raising of excise duties, another aspect contributing to the 11% price hike of January was the rapid price increase of food and fuel in the global market. This was a one-off factor, which caused temporary price rises in the entire Europe. The wage growth in Estonia is showing first signs of a slowdown, which helps inhibit inflation. Owing to the peg of the kroon to the euro, the longer-term price rise of goods in Estonia will be of roughly the same calibre as in Europe.

When the adjustment period ends, Estonia will have good chances to continue its rapid growth, as long as the economic policies triggering the country's current success will be pursued further. In the central bank's opinion, Estonia's enterprises have managed well in the changed economic environment. Goods and services exports are on the up and employment remains high. However, in order to ensure dynamic productivity growth and economic expansion also in the future, it is necessary for insecurities to withdraw and for the private sector to invest in branches primarily focusing on the foreign market. The possibilities therefor are in place, since the increasing loan volumes in exporting sectors and foreign investment inflow prove the fact that banks and the financial market are continually ready to finance good business projects.

Taking into consideration the current economic adjustment stage, strict and prudent fiscal policies are vital to maintain economic balance and support investments. Sizable fiscal surpluses ensure investors' trust in the Estonian economy. The Government has so far kept the budget in surplus and has promised to do so in the future as well. In Eesti Pank's opinion, the Government should still be ready to cut the 2008 budgetary expenditure, should revenue collection turn out to be lower than anticipated.

In the next years, the labour market and social policies should support the preservation of the high employment level and the creation of new jobs. According to Eesti Pank, the amendment of the Employment Contracts Act is necessary, because the existing legislation is too rigid in international comparison. Competitiveness is highly dependent on labour market flexibility, since it makes it possible for employees to quickly relocate from less productive enterprises to more competitive ones and receive relevant training. The period of rapid economic expansion tended to gloss over this problem, but the bottlenecks are likely to emerge as the growth slows.

Eesti Pank will publish its next economic forecast on 16 April 2008.

For further information:
Livia Kulm
Public Relations Office
Phone: +372 6680 745; +372 5291 449
E-mail: livia.kulm [at]