The IMF puts the capacity for growth of the Estonian economy at up to 3% per year
At the end of its recently finished annual visit to Estonia to assess Estonian economic policy, the IMF projected the near-term potential output growth of the Estonian economy at 3% per year, which is slightly below the estimate of Eesti Pank. Eesti Pank agrees with the IMF that it will be important for fiscal policy to adhere to the requirement of structural balance in the years to come.
This year’s annual visit by the IMF to assess Estonia’s economic policy focused on potential output growth. The IMF estimated that the near-term growth potential of the Estonian economy will be just below 3% per year, and this estimate assumes that several reforms will be carried out to support growth.
Deputy Governor of Eesti Pank Madis Müller said that the earlier analysis by the central bank has indicated that the economy is capable of long-term growth of 3-4% a year. “The rate of growth is much lower than in the previous decade and this must be taken into account by companies, politicians and households when they are making their plans. That the estimate by the IMF of 3% is lower than earlier estimates shows that we need a discussion in Estonia about the reforms that will support growth”.
Growth in the Estonian economy has been driven most in recent years by private consumption, which has been based on low inflation and rapid wage rises. “Both employment and average wages have climbed faster than increased output from companies might have indicated. Corporate profits have been falling for the past 18 months, and that could harm the ability of companies to invest and to build a foundation for economic growth”, noted Mr Müller.
He also made the positive point that despite weak foreign demand and rapid wage rises in Estonia, Estonian companies have managed to retain their competitiveness. “The non-price competitiveness of Estonian companies has improved, showing that Estonia’s advantage as a producer lies in more than cheap labour resources”.
Mr Müller also stressed the importance of maintaining a balanced state budget. “The IMF said that it is important for the state budget to be in structural balance in the years to come and the economic forecasts of the central bank find that budget balance is both possible and necessary. It is necessary because it is the best tool available to the government for giving businesses operating here confidence. There is more than enough volatility as it is in Estonia’s small and open economy.”
The annual IMF visit finished on Monday after a week and a half, during which the IMF assessed Estonian economic policy.