The Estonian economy to stay on a balanced track



In the last three years the Estonian economy has adjusted to the post-crisis situation. During its recovery from recession, the economy has become more balanced and less vulnerable. There have been major adjustments in the debt burden of households and businesses, which has shrunk significantly as a ratio to GDP. Further evidence of the better balance of the economy is given by the small size of the current account deficit and by a state budget that is almost in balance. The economy has exited the crisis and domestic demand has picked up thanks to strong rises in export earnings and an increase in the market share of Estonian exports in the trade of partner countries. Private consumption and investment in fixed assets have been supported by lower loan servicing costs resulting from the low interest rates. The improvement in the balance sheets of the private sector has equally lowered the domestic risks to the stability of the financial sector and the support of banks for private sector financing remains strong.

Despite the rebalancing of the economy and the reduced vulnerability, it is important that both the public sector and the private sector be ready to deal with risks coming from the weak external environment. The main risk to the Estonian economy is the fragile growth in demand for exports. Preliminary estimates show that the economy has been shrinking in the euro area for six consecutive quarters, and the joint forecast by the central banks of the euro area expects growth to turn positive during this year. Average growth in the euro area in 2013 will nevertheless remain negative at –0.6%, but it will accelerate in 2014 to 1.1%. The weakness in domestic demand and the fall in prices of food commodities and energy will slow inflation in the euro area to 1.4% in 2013 and 1.3% in 2014, leaving it below the target of 2%. Weak price pressures mean that markets expect interest rates to remain very low.

The rate of growth in the Estonian economy will decline in 2013 as domestic demand growth, particularly for investments in fixed assets, slows to 2%. The slowdown will primarily be caused by one-off factors, and growth will return to its equilibrium level when these factors fade out. In 2014 and 2015 GDP growth will accelerate with support from domestic and external demand to a little over 4%. Low interest rates for loans, largely unrestrained access to external financing, and an improving economic climate will keep investment activity high in Estonia in the coming years. It is important in order to ensure future growth that investments be directed towards improvements in productivity and that the availability of cheap loans not lead to an underestimation of risk. A favourable financing environment and strengthening confidence may together push real estate prices to rise too quickly and consumption behaviour may become excessively optimistic. This would endanger the balance of the economy and inhibit the long-term outlook for growth.

The situation in the labour market continues to improve. An increase in the number of people employed has led to a swift fall in unemployment, but the rise in employment has slowed over the last two years. Employment growth is becoming increasingly restricted by the shrinking of the working age population. This means that in the next few years there may for the first time be a drop in employment even while unemployment is simultaneously falling. Unfavourable demographics from an ageing population and emigration will put labour force participation and the efficient use of labour in an ever more important position. Limited labour resources mean that the main way to ensure economic growth and a move towards higher value added production is to increase the supply of capital for labour and to improve the qualifications of employees.

Consumer price index (CPI) inflation will slow this year to 3.0% and price rises will ease in the years ahead. The biggest factor raising prices in 2013 is electricity, which accounts for around one third of the increase in the price of the consumer basket. No rapid increase in the electricity price is expected in 2014 and inflation will slow to 2.5%. However, in the second half of the forecast horizon the impact of the domestic price component will start to increase. The pass-through of wage costs into end prices for services in particular will push core inflation up and consumer price growth will reach 2.7% in 2015.

Government finances remain strong. The 2012 budget deficit was smaller than forecast at only 0.3% of GDP and a similar deficit is expected for 2013. The budget should reach balance in 2014, which is in line with the targets of the state budget strategy. Maintaining strict budget discipline and achieving a nominal surplus in 2015 are necessary for the state to be able to increase its reserves, which can be used to rebalance the economy in the event of the negative risks being materialised.

Economic forecast by key indicators*

 Difference from previous forecast









Nominal GDP (EUR bn)17,017,919,220,70,0-0,3-0,3
GDP, volume change (%)3,22,04,24,30,3-1,00,2
CPI, change (%)3,93,02,52,7   
HICP, change (%)4,23,32,73,0-0,1-0,30,3
GDP deflator, change (%)3,23,13,33,4-0,5-0,70,1
Current account (% of GDP)-1,2-0,8-0,8-0,2-0,11,31,7
Private consumption expenditures, volume change (%) /14,43,03,43,91,60,0-0,7
Government consumption expenditures, volume change (%)4,01,01,51,51,8-0,2-0,5
Fixed capital formation, volume change (%) /221,01,56,85,54,7-3,5-0,8
Exports, volume change (%)5,67,93,16,0-0,74,2-2,3
Imports, volume change (%)9,15,83,35,72,12,9-2,9
Unemployment rate (%)10,29,28,88,50,0-0,2-0,1
Domestic employment, change (%)2,21,80,1-0,1-0,21,3-0,1
Productivity per employee, change (%)1,00,24,14,50,6-2,30,4
Real compensation per employee, change (%)3,11,03,64,31,0-1,3-0,7
Average gross montly wage, change (%)5,95,16,47,40,2-0,3-0,4
Private sector debt, outstanding amount change (%)1,63,75,05,70,10,50,0
Gross external debt (% of GDP)98,094,388,882,8-2,9-2,9-4,9
Budget balance (% of GDP)-0,3-0,30,00,20,70,20,1

* GDP and its components are chain-linked
/1 Includes NPISH consumption
/2 Does not include valuables

Sources: Statistics Estonia, Eesti Pank

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