TALLINN - The European Commission has estimated the annual rate of inflation in Estonia will be 3.6 percent this year and slow down to 2.9 percent in 2007. According to the commission's report, which was released on May 8, the outlook depends on energy prices, while inflationary pressures due to high economic growth and a tightening labor market will remain a potential risk.
Growth in GDP in constant prices is expected to grow 8.9 percent this year and 7.9 percent in 2007, the commission estimated. Estonia's plans to adopt the euro in 2007 's among the first wave of new member states to do so 's was derailed due to high inflation. Even though the country runs a budget surplus, high energy prices and a booming economy propelled the consumer price index significantly beyond the Maastricht criterion. The Statistical Official reported this week that prices of consumer goods and services in Estonia were 4.3 percent higher on average this April than a year ago. Administratively regulated prices were up 6.5 percent, while non-regulated prices grew 3.6 percent year-on-year. The monthly increase in the consumer price index compared with March was 0.7 percent. The prices of goods increased by 0.7 percent on the average, of this food items by 0.4 percent and manufactured goods by 1.1 percent. Services were 0.8 percent more expensive in April than in March.
The change in CPI in April as compared with March was influenced the most by an increase in the price of motor fuel and higher expenses for housing. Year-on-year, expenses for housing have increased the most, by 7.7 percent, with expenses for food and leisure activities climbing more than four percent. Only expenses for communication have declined over the year, dropping 6.1 percent from April 2005. In its report, the commission forecasted that domestic demand would continue to drive growth, led primarily by investment, with housing construction to remain robust. Private consumption is also expected to keep its strength due to a combination of higher employment, wage gains and continued whitening of some parts of the gray economy. The competitive cost advantage and rapidly growing productivity gains will continue to boost export growth, the commission said.
Throughout the forecast period, Estonia's current account gap is estimated to narrow steadily to less than 8 percent of GDP. Further improvements on the trade balance are projected to be supported by public sector savings. Employment gains are likely to continue in 2006 and 2007, albeit at a slower pace than last year. Wages are estimated to grow broadly in line with or slightly below productivity increases, which are expected to remain high both in 2006 and 2007. The risk to this outlook lies primarily with the tightening of the labor market, which could increase wage pressure, the commission said.