Estonian economy "cooling faster than expected"

TALLINN 's In its latest economic assessment, the Bank of Estonia has fallen into line with what some analysts have been predicting 's a sharper drop in GDP than previously expected.

"This has been caused by less supportive external environment, which has brought along slower external demand growth and a rise in commodity and food prices, as well as an increase in risk margins. In addition, the increasing uncertainty and high inflation have reduced domestic demand. At the same time, faster economic adjustment helps speed up the decline in the current account deficit and in inflation," the report said, issued April 16.

Not only will the fall be sharper than expected, it will last longer, Eesti Pank believes.

"Both the domestic and external environment are less favourable than last autumn
The long-awaited economic adjustment is under way in Estonia, but it is no longer as smooth as expected due to the less favourable external environment. The economic activity indicators are following a downward trend in several major economies, referring to a further slowdown in growth. It is likely the situation will not improve considerably in 2009, either."

In light of its new position, the central bank has revised its growth projections down markedly to just 2% in 2008 and 3% and 5% in the next two years, respectively.

"Subject to the external environment, the economy should pick up again either at the end of 2009 or at the beginning of 2010," the statement concludes.

Eesti Pank also draws attention to the crucial role of government in minimising the potential problems caused by the slowdown, saying the government should pursue "responsible fiscal policies."

"Without budgeted expenditure cut by approximately 3 billion kroons, the fiscal deficit would amount to over 1% of GDP this year. In order to balance the budget, planned expenditure should be cut by 8 and 11 billion kroons in the next two years," it advises.