Estonia’s economic growth to speed up in 2015

According to the Ministry of Finance’s forecast, the Estonian economy will grow by 0.5 percent this year and by 2.5 percent in 2015. The economic growth is mainly supported by domestic consumption. Export growth will quicken in the second half of the current year, yet imports will grow faster than exports.

An increasing growth rate of exports can be expected over the next three years but domestic demand will provide a persistent support for growth. Economic growth is expected to speed up to 3.5 percent by 2016.

The Ministry of Finance has lowered the forecast of economic growth for 2014 as compared to the spring forecast, having taken into account the first half year’s weak real growth indicators and deteriorated future outlooks. The forecast also accounts for Russia’s import ban on foodstuffs. The direct forecasted effect of those restrictions is expected to be moderate.

According to the forecast, the average salary will increase by 6 percent this year and growth will remain near that level in the next year as well. As demand improves and the nominal gross domestic product (GDP) growth of Estonia’s export partners resumes, the nominal growth of salaries could become somewhat faster in the coming years, while inflation-adjusted real salary growth will slow down somewhat. Until now, the fast real growth of wage income was supported by declining import prices. Fast growth in the future would require productivity-increasing investments. Such investments are also expected to increase in the coming year.
The increase of consumer prices is forecasted to slow down to 0.3 percent this year and hasten again to 1.9 percent in 2015 and 2.5 percent in 2016. Inflation will start to increase in the autumn due to foodstuffs becoming more expensive and the slowdown in the decrease of energy prices.
The relatively fast pace of growth in private consumption will slow down somewhat, to 3.6 percent this year. The growth rate will remain fast, regardless of the wage growth slowing down. Consumer confidence has remained high, supported by a decrease of unemployment. Slower inflation helps retain the purchasing power of incomes. In 2015, net incomes will also increase due to a lowered income tax rate and slashed unemployment insurance payments, enabling a 3.8 percent growth of private consumption.
Similar to last year, the level of investments will remain moderate this year and may even turn to a decline. Investments of companies are still held back by a low demand for their products and a decrease of government projects funded from the sales revenues of CO2 allowances. Household investments in residential property are slowly growing and supports the construction market. The expected improvement of foreign demand should lead investments by businesses to a clear growth again in 2015.
Exports of goods and services are expected to grow by 2 percent this year, driven by a strong export of services; additionally, an increase of goods exports can be expected in the second half of the year. Foreign demand will start to recover in 2015 and growth opportunities for Estonian companies will be expanded by the slow recuperation of the Finnish economy. Export growth will pick up, reaching 3.5 percent in 2015. Due to domestic demand and also import needed for export-oriented production, the growth rate of imports of goods and services will increase in the next few years, remaining somewhat ahead of the growth of exports.
The rate of unemployment is forecasted to continue its decline, dropping to 7.5 percent this year, to 6.8 percent next year and if economic trends are favourable then to near 6 percent in subsequent years. Regardless of the decreasing working-age population (ages 15 to 74), the rate of participation in labour force and the rate of employment have both increased while recovering from the crisis. Yet based on the population census of 2011, the number of employed people could decline ever faster starting from 2016, also limiting the economic growth of Estonia.
The outlook for the state budget for 2015 has not worsened as compared to the Ministry’s spring forecast and Estonia has a strong structural fiscal position. This year, the nominal fiscal deficit of general government is forecasted to be 0.2 percent of GDP and will increase to 0.5 of GDP in 2015. In subsequent years, the fiscal position of general government is expected to improve continually, reaching a fiscal balance in 2016. The structural fiscal position will be 0.8 percent of GDP in 2015 and will remain in surplus for the entire forecasted period.
The level of tax receipts is forecasted to remain generally good, regardless of the moderate economic growth. The tax burden of 2014 is forecasted to be 33.3 percent of GDP and remain stable until 2018. Tax amendments planned for the coming years will reduce the tax burden of labour force, balanced by better collection of indirect taxes.
Estonia’s general government debt will reach 9.9 percent of GDP in 2014, exceeding reserves by approximately 1 percent of GDP. Based on cash flows, the treasury will have no direct need to involve loan funds to finance nominal budget deficits. Therefore, general government debt is expected to decrease to 8.2 percent of GDP by 2018, a quarter of that being the effect of European Financial Stability Facility (EFSF). The nominal debt burden of local governments is forecasted to increase due to the need to finance their fiscal deficits.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: