Estonian economy "cooling faster than expected"

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

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

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

"Both the domestic and external environment are lessfavourable than last autumn
The long-awaited economic adjustment is under way in Estonia, but it is nolonger as smooth as expected due to the less favourable external environment.The economic activity indicators are following a downward trend in severalmajor economies, referring to a further slowdown in growth. It is likely thesituation will not improve considerably in 2009, either."

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

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

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

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