Estonia growth below expectations

TALLINN - Estonia’s central bank Eesti Pank lowered on Dec. 12 the country’s economic growth forecast for this year to 1 percent, stating that increased investment will be required for economic growth to recover, reports LETA.
Eesti Pank said that Estonia’s economic growth continued to be based on domestic demand in 2013, and this was primarily driven by higher household incomes and consumption. Support for the Estonian economy from exports has been less than was earlier forecast because growth in Estonia’s main trading partners was weaker than expected in the first half of the year. The consequence was that the Estonian economy declined in the first half of 2013. Although growth recovered in the third quarter, growth for the full year will be a modest 1 percent.

Economic growth will accelerate as export markets recover, reaching 2.6 percent in 2014 and 3.9 percent in 2015, Eesti Pank forecast.
The euro area economy has recovered at the expected speed and economic decline that had lasted for six consecutive quarters came to an end in the second quarter. The joint forecast produced by the central banks of the euro area foresees that the euro area economy should grow by 1.1 percent in 2014, and 1.5 percent in 2015.

Interest rates have stayed low in the Estonian lending market and access to bank loans has been good but, despite this, growth in fixed capital formation came to a stop in 2013. The main reason was that companies had little need for investment as their existing production resources have been underused.
Increased production capital and an improved supply of capital to labor will allow competitiveness to be maintained and will raise production levels even as the working age population is shrinking and labor costs are rising rapidly. Low levels of investment activity will threaten both the development prospects for companies and the sustainability of economic growth.

Employment increased rapidly in the first half of 2013, but the growth leveled off in the third quarter.
Higher productivity of employees, rises in the minimum wage and an increased public sector payroll will keep growth in household incomes strong in the years to come. The rapid rise in incomes will improve the real purchasing power of households.

Estonian companies have thus far managed to cover their rapidly rising wage costs with price rises, but this is mainly the case for businesses that are focused on the domestic market. Those exposed to foreign competition have not been able to raise prices to the same extent.
Consumer price growth will remain moderate in Estonia in the coming years, reaching 2.1 percent in 2014 and 2.9 percent in 2015.

The fiscal position of the general government will remain strong in the next few years. Spending under the budget will still exceed income throughout the forecast horizon. The structural fiscal position with cyclical effects stripped out will remain in surplus throughout the years covered by the forecast, but the surplus will shrink.
Although the economy as a whole is below its potential output, rapid growth in employment, wages and private consumption have increased the tax take and so the negative impact of the economic cycle on the fiscal position is smaller.