• Underpinned by external demand, Estonian exports have increased, economic growth has remained robust and the inflation rate low, and for the first time in years a decline in the current account deficit can be projected. Thus, regarding the economic adjustment, the developments in the first half of 2004 have been favourable.
  • Eesti Pank projects economic growth to be 5.5 per cent in 2004 followed by a faster growth rate in the next years, amounting to six per cent in 2006. In the first quarter, economic growth in Estonia accelerated to 6.8 per cent.
  • Eesti Pank projects a 2.8 per cent growth rate in consumer prices in 2004, of which price rise in the open sector accounts for two per cent. In the medium term Estonia's inflation will outpace the EU average rate by one or two percentage points - the inflation rate is expected to accelerate to around three per cent.
  • Exports growth will accelerate to 10.9 per cent in 2004, leveling off at 8-9 per cent in the following years. Sustained growth in exports accompanied by a gradual decline in internal demand will reduce the current account deficit to 7.5 per cent of the GDP by 2006.
  • Rapid growth in the debt burden of households and the debtors' insufficient awareness of the risks accompanying the rising interest rates still remains a problem. Thus, the national housing market policy needs updating, with more attention to risk management instead the availability of loans.
  • The present forecast is based on the assumptions of sustained modest price increase, growth of wages in line with the productivity growth as well as strict budgetary discipline. Should these conditions weaken, the economic situation might become worse than expected.


For the first time in several years macroeconomic figures indicate a brisker global growth in 2004, particularly in the United States and Japan. Still, the rise in oil prices that have surged by more than 25 per cent since the beginning of this year might be seen as a significant risk to the global economic growth. Underpinned by improved economic outlook, market expectations of an interest rate hike have increased. In the euro zone, expectations of a base interest rate cut have essentially faded and the tightening of the monetary policy should begin towards the end of 2004.


Economic growth and consumer prices

Eesti Pank's forecast of economic growth is 5.5 per cent in 2004. This year’s economic growth will be more balanced than in recent years, relying both on internal demand and accelerating growth of exports. In the following years the contribution of net exports to the economic growth will be more prominent. According to the forecast, GDP growth will speed up in the following years and is expected to amount to six per cent in 2006.

The 0.4 per cent annual consumer price increase in the first quarter of 2004 was the lowest in history. In April-May the inflation accelerated, but this should be regarded as a temporary phenomenon. According to the forecast of Eesti Pank, inflation will be 2.8 per cent this year. In the medium-term the inflation rate should outpace the EU average by one or two per centage points. Last year’s modest inflation in Estonia compared to the euro zone figures is attributable to a concurrence of short-term one-off factors and could not be sustainable in the longer run. Eesti Pank projects an inflation rate of 3.1 per cent for the next year.

Employment and productivity

In the first quarter, growth in employment continued, posting a rise of 2.2 per cent compared to the same quarter of last year. Employment grew primarily in the non-tradables sector of the economy – in construction 7,400 new jobs were created compared to the first quarter of last year while in transportation, warehousing and communication the year-on-year rise in employment was 5,800. In the manufacturing industry employment has declined by 1,800 persons (i.e. 1.3 per cent) in a year.

According to the forecast of Eesti Pank, growth in real earnings will slow down due to the accelerating inflation. In the first quarter, annual growth in average gross earnings slowed down by approximately three percentage points. Meanwhile the 6.5 per cent growth in average gross earnings consistently outpaced the rise in productivity. According to the forecast, employment growth will remain moderate in the following years and the value added per employee will continue to rise at the rate of five per cent annually.

External demand

The developments in the second half of 2003 and the beginning of 2004 indicated a recovery of exports, in conjunction with the recovery in external demand. Estonia’s exports outpaced the import demand growth of its main trading partners, which indicated continued consolidation of the market positions of Estonian companies in foreign markets at the beginning of the year. In the first quarter, the growth in Estonia’s total exports amouted to 19.3 per cent, which is nearly eight per cent more than in the last quarter of 2003. The growth was in the subcontracting, whose exports outpaced that of the last quarter of 2003 by as much as 17 percentage points. According to the forecast, growth in exports is going to be 10.9 per cent in 2004 and will sustain at some nine per cent in the following years.

Internal demand and current account

The contribution of internal demand to economic growth should decline in the following years, mainly due to the stabilisation in investment volumes. However, the level of investments is still expected to remain at 30 per cent of GDP in 2004 and decline to 27 per cent by 2006. In subsequent years economic growth will outpace increase in government spending, reducing the share of the government sector in the economy. Due to somewhat higher inflation real earnings growth will slow down while the rising interest rates will curb private consumption in the coming years. Nevertheless, private consumption will still be sustained by the favourable monetary policy environment and the upcoming income tax reform.

Largely as a result of growing exports the current account deficit is expected to decline. According to the forecast, the current account deficit should form slightly over 10 per cent of GDP this year and decline to 7.5 per cent by 2006. The reduction is mainly attributable to decline in internal demand and growing export earnings.

Financial Sector

Banking sector is characterised by strong profitability, which indicates improved efficiency and successful expansion of business operations. Due to increased profits (16% annual growth) the capitalisation of the banks remains strong and a slight decline in capital adequacy (from 14 to 13.6 per cent) indicates capital optimization.

The first quarter of 2004 witnessed fast growth in loans and leasing facilities, which increased domestic real sector debt to banks and leasing companies by 3.4 billion kroons, i.e. 28 per cent compared to the same time last year. Over a third of the growth in the volume of the debt burden came from lending to households while the rest was made up of loans to companies.

Annual growth in household borrowing amounted to 44 per cent in the first quarter, which is one of the highest indicators in the European Union; the respective rates are higher only in the UK and Ireland. With annual remaining close to 55-56 per cent for some time, housing loans continue to be the principal source of increase of the households' debt burden. Growth in corporate borrowing was also quite robust in the first quarter – almost two billion kroons – which marks an annual rise of 19 per cent. Next to substantial lending to transport sector enterprises, most loan facilities were channelled to trading and real estate companies. Annual growth in industrial sector borrowing remained at only 5-6 per cent.

Considering the favourable conditions offered by banks, the loan servicing ability of the household sector is currently quite good, which is also reflected in good loan quality. At the same time, rapid growth in the debt burden of households and its possible adverse side effects involve risks. The biggest problem is the little awareness of the risks accompanying rises in interest rates by the borrowers. Since problems are more likely to emerge on part of the households, the role of the government becomes more important. Thus, the national housing market policy needs updating, with more attention to risk management instead the availability of loans.

The new issue of the Financial Stability Review prepared by Eesti Pank is going to be available on the Internet at www.eestipank.info as of the 25th week.

Government Sector

In the first quarter, the cash-basis central government surplus stood at a near two per cent level of the quarterly GDP. In April, the central government surplus was in excess of two billion kroons due to the extraordinarily large VAT and excise duty revenues, which resulted from the rise in excise rates as of 1 May timed to coincide with Estonia's accession to the EU as well as from building up stocks before the enlargement. . The revenues in April were extraordinary and imports are expected to decline as soon as in May. However, the central government surplus was counterbalanced by a deficit at local government level.

Table 1. Eesti Pank forecast for main economic indicators, spring 2004

    Changes since
forecast in
autumn 2003
2001 2002 2003 2004 2005 2006 2004 2005
GDP, billion kroons 104.3 116.9 125.8 137.7 151.4 166.9 10.0 10.8
Real GDP growth (%) 6.4% 7.2% 5.1% 5.5% 5.8% 6.0% 0.3% 0.0%
Inflation (%) 5.8% 3.6% 1.3% 2.8% 3.1% 2.9% -1.2% -0.3%
Current account balance (% of GDP) -5.6% -11.3% -12.6% -10.2% -9.0% -7.5% 0.9% 0.1%
Primary current account (% of GDP) -0.9% -6.6% -6.6% -3.8% -2.8% -1.0% 2.2% 0.8%
Real private consumption growth (%) 5.9% 9.9% 5.4% 5.4% 5.2% 5.0% 0.1% -0.2%
Real government sector consumption growth (%) 1.8% 5.9% 5.8% 6.5% 3.9% 3.6% 3.0% 0.6%
Real investment growth (%) 13.0% 17.2% 5.4% 5.7% 5.2% 6.2% -0.9% -0.4%
Real export growth (%) -0.2% 0.6% 6.0% 10.9% 9.9% 8.8% 2.1% 0.7%
Real import growth (%) 2.1% 5.4% 9.0% 8.1% 8.1% 6.4% 1.2% 0.9%
Employment (thousands) 572.1 579.3 587.9 595.0 598.0 601.0 1.0 1.0
Growth of value added per worker (%) 5.7% 5.9% 3.6% 4.3% 5.3% 5.5% 0.0% 0.0%
Real wage growth (%) 6.9% 7.1% 8.2% 4.1% 5.3% 5.2%    
Real money supply growth (%) 15.1% 10.8% 10.2% 10.7% 12.2% 13.9% -1.9% 0.8%
Real growth of credit (%) 17.3% 14.3% 27.7% 27.9% 21.7% 16.3%    
Gross debt (% of GDP) 55.6% 60.1% 69.1% 72.1% 73.6% 73.9%    

Table 2. External presumptions

  2002 2003 2004 2005
USA 1.6 2.3 2.2 2.1
EU-15 2.3 2.1 1.9 1.9
FIN 1.6 0.9 0.6 1.5
SWE 2.4 1.9 0.7 1.7
GDP growth        
USA 2.2 3.1 4.6 3.8
EU-15 0.9 0.4 2.0 2.3
FIN 2.2 1.5 2.7 3.1
SWE 2.0 1.7 2.6 2.5
EURIBOR 3M 3.4 2.2 2.0 2.6

Source: Consensus Forecast