Eesti Pank raised its forecast for economic growth for this year and lowered its forecast for next year

Postitatud:

23.09.2014

During its technical review of the economic forecast, Eesti Pank revised its figure for economic growth this year upwards to 2.1%, but reduced its figure for 2015 to 2.5% from the level forecast in June.

The revision of accounting data for the national accounts1 led Eesti Pank to update the forecast for 2014–2016 issued in June. The technical update of the forecast is done for the most important economic indicators. The update took in the revised GDP statistics, and also statistics on the Estonian labour market, foreign trade and prices that have been released since the forecast, and it made use of the latest information about the external environment.

In its revision, Statistics Estonia adjusted GDP upwards by an average of 1.3% from earlier calculations2 and this affected the growth dynamics of the time series significantly. The estimate of growth for the first half of 2014 rose to 1.4%, as the corrected data show that GDP did not shrink in the first quarter and growth in the second quarter was faster than initially estimated. The negative impact on growth from transport and storage in the second quarter was reduced as expected, and energy production exited the low point observed at the start of the year that had been caused by the warm winter and the energisation of additional transfer capacity to Finland. The corrected data show that the economy grew year-on-year by 0.3% in the first quarter, whereas the statistics available at the time of the June forecast had implied a decline in GDP of 0.8%, and it grew by 2.4% in the second (see Figure 1).

Figure 1. GDP growth before and after the revision

Growth in the Estonian economy in the first half of 2014 was based mainly on household consumption. This was due to the rapid rise in wage income and slower consumer price inflation, which helped boost the purchasing power of households. Retail statistics for the summer months indicate that private consumption continued to increase rapidly in the third quarter. The updated forecast expects private consumption to grow slightly more slowly in the second half of the year as wage growth declines.

Growth in investments was slow in the first half of the year, but was still somewhat more than forecast in June. Although one-off investment projects in the public sector came to an end, gross fixed capital formation was boosted by investment in the private sector. Investment activity in the private sector is likely to increase again, as capacity utilisation in manufacturing has reached a level where the current structure of production requires larger investment for output to be raised. The increase in wages at the expense of corporate profits has restricted the ability to fund investments, but interest rates on loans and access to bank lending will continue to be favourable for the next few years. The revised GDP data show that investment increased in the first half of the year by more than previously estimated, meaning that the forecast for fixed capital formation has been adjusted upwards for this year and down for next year. The forecast for 2016 did not change noticeably.

The change in the forecast external balance was mainly due to the correction to the forecast for investment. As the content of investment goods largely consists of imports, then the slower growth in investment in 2015 than was forecast will lead to slower growth in imports and the current account deficit will be smaller than was earlier forecast.

The European economy was weaker than expected in the first half of the year, and in September the European Central Bank lowered its forecast for growth in the euro area in 2014 and 20153. Demand growth in Estonia's trading partners in 2014 has been lower than was forecast in June, but exports grew faster than expected in the first half of the year. The data for foreign trade that are available so far do not necessarily reflect the impact of the conflict between Ukraine and Russia; this will probably become evident from the second half of the year and will be carried over to the next. Although the sanctions imposed by the European Union and by Russia have caused problems for producers of items that fall under the embargo, their impact on the Estonian economy as a whole has not been particularly large.

The labour force survey shows that unemployment declined faster in the second quarter than was forecast in June, and the fall in unemployment is also shown in the statistics from Töötukassa. The unemployment rate does not change significantly in the years to come in the updated forecast, as the wage pressures that have arisen in the economy illustrate the structural nature of unemployment where the skills of the available labour force are not those required by companies and this makes it hard for the unemployed to find work. Although unemployment will not fall much in the coming years, the number of employed will fall as the working age population shrinks.

The slowdown in growth in average gross wages over three consecutive quarters indicates that the labour market has started its forecast adjustment. Growth in wage costs is expected to slow further in the relatively weak economic environment, as wage growth is still higher than labour productivitygrowth, real unit labour costs have increased over the past two years, and company profits are smaller than they were a year ago.

Consumer price inflation has been below the forecast this year, mainly because energy prices have been cheaper and food prices have stopped rising. Prices for manufactured goods, which are mainly dependent on events in external markets, have also fallen. The forecast is for consumer price growth to remain close to zero this year, and to be 0.1% for the year as a whole. Inflation will rise to 1.3% next year, and to 2.4% the year after.

The forecast for the main macroeconomic indicators for Estonia is shown in Table 1.

Table 1. Economic forecast by key indicators*

 Difference from June forecast
 20132014201520162013201420152016
GDP at current prices (EUR billion)18,7419,5220,4821,800,310,330,030,01
GDP at constant prices, change (%)1,62,12,53,60,81,4-1,40,0
Inflation (CPI), change (%)2,80,11,32,40,0-0,7-1,1-0,3
GDP deflator, change (%)4,52,02,42,7-0,5-1,4-0,2-0,2
Current account (% of GDP)-1,4-0,7-0,4-0,3-0,40,01,41,4
Private consumption, change (%)3,83,62,53,5-0,41,3-1,5-0,3
General government consumption at constant prices, change (%)2,80,20,92,21,50,50,00,0
Gross fixed capital formation at constant prices, change (%)2,51,81,94,71,43,8-5,7-0,5
Exports at constant prices, change (%)2,62,33,04,50,80,1-0,50,0
Imports at constant prices, change (%)3,11,22,14,50,50,4-1,7-0,1
Unemployment rate (%)8,67,47,57,30,0-1,1-1,0-1,0
Employment in resident production units, change (%)1,2-0,4-0,5-0,4-0,70,9-0,20,0
GDP per person employed at constant prices, change (%)0,42,53,04,01,40,5-1,20,0
Average gross monthly wages, change (%)7,95,15,26,60,1-0,9-1,0-0,1
Private sector loan stock at the period end, change (%)1,33,94,55,30,02,11,51,2
*   GDP and its component are shown as chain-linked values
Sources: Statistics Estonia, Eesti Pank

Eesti Pank will publish a full-length economic forecast prepared together with other euro area central banks in December 2014.

For further information:
Viljar Rääsk
Public Relations Office
Tel: 668 0745, 527 5055
Email: [email protected]
Media queries: [email protected]


1 - On 8 September 2014, Statistics Estonia released a corrected estimate of growth in the second quarter and retrospectively revised the figures for the national accounts from 2000 onwards. At the same it started using ESA 2010, the new European system for national and regional accounts. For more on the revision see. http://www.stat.ee/79710
2 - Applies from 2000 onwards
- http://www.ecb.europa.eu/pub/pdf/mobu/mb201409en.pdf