The Ministry of Finance reduced the economic growth forecast of 2014 to two percent. The cause for the lower than expected economic growth is primarily the deterioration of growth outlook in Estonia’s neighbouring countries which has postponed the expected increase of export growth and private sector investment growth.
While economic growth is mainly supported by domestic demand at the beginning of this year, it will quicken thanks to recovery of foreign demand in the second half of the year, leading to the export and service industry’s increased contribution to economic growth.
For the next year, the Ministry forecasts an increase of the economy by 3.5 percent, where investment activity and consumption courage should also start to grow with improvement of the economic conjuncture. Growth of the construction market is expected to recover starting from 2015 as well due to increasing private sector investment activity.
Risks of economic outlook are mainly related to events in Ukraine which have been developing fast in recent weeks and carry economic effects which are difficult to assess with precision before the foreign policy situation has stabilised.
Demand in foreign markets is more modest than expected and export of high-share goods is weak, therefore the export forecast for 2014 was decreased to 2.4 percent. Export will pick up within the next year and the growth opportunities of manufacturing enterprises will be expanded by a gradual recovery of Finnish economy as well. Due to large investment needs, import growth in the forecast period will be somewhat faster compared to export.
Consumer confidence has adhered to a steady growth trend for the past couple of years, therefore it can be assumed that continuation of stable developments and reduction of unemployment will keep the slowing of private consumption’s growth merely marginal during this year and the next so that it will remain just below 4 percent. This year, support for real growth of consumption will come from a deceleration of inflation and next year from lowering of the income tax rate.
Consumer price inflation will remain low at the beginning of this year, quickening somewhat during the last months of the year. Prices will be affected in the second half of the year by an increase of food prices and a decrease of housing expenses due to electricity, district heating and gas becoming cheaper. In 2014 as a whole, inflation will be just 1.4 percent, becoming 2.7 percent in 2015.
The number of employed people will continue to grow in 2014–2015, and afterwards will probably turn to a small decline. Unemployment rate will decrease below 8 percent in the coming year and if favourable economic developments persist then down to near 6 percent by the end of the forecast period. A fast growth of average salary by nearly 8 percent surprised in 2013 and this growth will remain somewhat lower in the near future, around 6–7 percent. However, low inflation will still keep the growth of average real salary at a high this year (4.8 percent) and it will subsequently remain around 3.5 percent.
Due to a slight deterioration of the economic environment, the forecast of tax revenue has also been lowered, mainly on account of social tax and fuel excise. As a result, this year’s nominal fiscal deficit of the government sector will be 0.7 percent of the GDP; the budget will remain balanced structurally (the position without one-off influences and without the effect of economic cycle). Nominal deficit can be compensated from the state’s liquid financial assets.
The forecast of public finance takes into account the laws in force, therefore possible additional measures (incl. a new coalition agreement) will be added to the forecast when preparing the state fiscal strategy (SFS 2015-2018). With the SFS, the government adopts the fiscal policy principles for the next four years, including targets for the government sector’s fiscal position.
Source: Estonian Ministry of Finance
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