Economic policy statement of Eesti Pank

Estonia close to meeting the Maastricht criteria

Economic recovery in Estonia will be lead by the exporting sector. Several forward-looking indicators give reason to hope the worst of the global recession is over by now, whereas risks related to economic resumption have not yet withdrawn. Confidence in our region and in the Estonian economy has also not fully recuperated. When the global economy stabilises, the Estonian economy will also start rebalancing. However, it is going to take a lot of time before we revert to pre-crisis levels, and growth will be uneven across sectors. The revival of external demand has an important role to play here.

Employment will continue declining in the final months of 2009 and also in 2010, but at a considerably slower pace than in the first half of 2009. If enterprises use the larger flexibility provided by the new Employment Contracts Act, the creation of jobs can be expected to be more active in 2010. A sharp contraction in domestic and external demand has reduced corporate profits and to a smaller extent also wages. The labour market started to undergo more vigorous changes around the turn of the year, when first signs of the depth of the crisis appeared. Thus, in the future, economic activity will be affected by adjustment to lower incomes. The faster the economy recovers, the greater will be confidence in the future.

Price level in Estonia will fluctuate very little over the next couple of years. The consumer basket started to cheapen at the end of 2008, along with decreasing commodity prices. The prices of goods open to foreign competition have been quick to react to the downward pressure on prices associated with the economic slump. This trend has not been broken by the July rise in VAT. Monopoly services have not yet started to cheapen, but their prices are also expected to respond to the current market situation.

In order to support Estonia's economic growth potential, it is necessary to maintain an investment-friendly environment. Credit market activity is mainly shaped by low demand. Companies must finance further growth on account of internal resources due to high debt burdens. These are the circumstances which may exert a drag on the economic growth potential in the next years. Enterprises and households are experiencing less difficulty in paying back loans than anticipated in June.

It is possible for Estonia to meet all the Maastricht criteria and to adopt the euro in 2011. At the same time there are several risks associated with meeting the budget criterion, such as the widening deficits of local governments and shortfalls in the receipt of non-tax revenue. Postponement of the adoption of the euro will delay the resumption of the economy. Thus efforts must be continued to keep this and next year's fiscal deficit below 3% of GDP. Several temporary measures have also improved the budget. Consequently, it is necessary to review both the level of next years' expenditure and the income base to ensure longer-term fiscal balance.

The easing of the economic crisis and the build-up in confidence accompanying the outlook for the adoption of the euro will create preconditions for amending banking regulations. Eesti Pank's estimation is that if the autumn forecast's base scenario materialises, the strict reserve requirements banks are obliged to meet will be alleviated in the second quarter of 2010.

Economic forecast by key indicators

   Difference from
previous forecast
  2005 2006 2007 2008 2009 2010 2011 2009 2010 2011
GDP (EEK bn) 175.0 207.0 244.5 251.5 214.0 211.8 224.2 0.1 8.0 10.3
Real GDP growth (%) 9.4 10.0 7.2 -3.6 -14.2 1.4 4.7 -1.9 1.2 -0.1
HICP (%) 4.1 4.4 6.7 10.6 0.1 -0.4 1.7 0.5 2.5 2.5
GDP deflator (%) 5.5 7.6 10.2 6.7 -0.8 -2.4 1.1 2.3 1.0 -0.7
Current account (% of GDP) -10.0 -16.9 -17.8 -9.4 6.3 0.4 -5.3 3.6 2.2 -0.4
Current account plus capital account balance (% of GDP) -9.2 -14.8 -16.7 -7.5 8.4 3.4 -2.3 3.6 1.3 -1.1
Real private consumption growth (%) 9.9 13.0 9.1 -4.8 -18.2 0.1 6.1 -8.7 1.8 1.4
Real government consumption growth (%) -0.2 3.5 3.7 4.1 -5.1 -1.3 -1.1 3.9 3.0 -5.1
Real investment growth (%) 15.4 18.5 9.0 -12.1 -35.6 -1.1 11.8 -6.1 -11.5 1.9
Real export growth (%) 18.6 14.0 0.0 -0.7 -12.0 5.2 10.3 15.6 -9.6 -7.9
Real import growth (%) 17.5 22.9 4.7 -8.7 -28.0 8.3 17.8 6.3 -10.2 -1.6
Unemployment (%) 7.9 5.9 4.7 5.5 14.5 16.6 14.3 1.7 2.9 1.9
Employment growth (%) 2.0 6.4 1.4 0.2 -10.1 -3.3 2.3 -4.9 -1.3 2.2
GDP growth per full-time employee (%) 9.4 5.6 7.1 -4.6 -13.6 2.4 5.1 -3.0 -2.0 -0.6
Real wage growth (%) 7.5 10.4 12.0 4.3 -4.3 -4.1 0.5 0.4 -0.9 -3.2
Average gross wage growth (%) 11.4 16.2 20.4 13.8 -4.7 -4.4 2.0 0.5 1.3 -0.9
Nominal money supply growth (%) 42.0 28.2 13.4 5.5 -0.9 1.9 2.6 7.6 4.1 -1.0
Nominal credit growth (%) 50.4 51.6 30.2 7.3 -6.3 -0.1 3.1 1.2 0.4 -1.8
External debt (% of GDP) 85.4 96.8 109.8 118.5 127.2 129.3 108.8 -6.2 -12.8 -15.1
Budget balance (% of GDP) 1.6 2.3 2.6 -2.8 -3.0 -2.8 -1.5 0.0 0.1 1.1

Sources: Statistics Estonia, Eurostat, Eesti Pank