TALLINN - Estonia's economic outlook is continuing to worsen as the Finance Ministry has forecast a 3.5 percent GDP contraction in 2009, significantly worse than previous government estimates that the economy would grow by as much as 2.6 percent.
On Nov. 27 the Finance Ministry announced the results of their autumn economic forecast speculating that the economy will decline by 3.5 percent in 2009, due primarily to diminishing domestic demand. The outlook was more severe than most predictions from private banks, with the exception of SEB, which estimated a 4 percent contraction next year.
The ministry's forecast also said that inflation would drop to 4.2 percent 's a reduction that would not be drastic enough to make headway in Estonia's adopting the euro. With the economy heading in a gloomy direction, Finance Minister Ivari Padar said that Estonia is faced with a complicated balancing act if it is to achieve its targeted 2011 eurozone entry date.
"Inflation has so far been the biggest hurdle in our path to joining the eurozone, but the recession will also put the brakes on rising prices. It will also lead to a reduction in tax revenue, which will mean we have to keep a careful eye on the budget deficit to make sure it stays within the permitted margins," Padar said in a ministry press release.
SIGNS OF TROUBLE
Meanwhile, the financial news service Bloomberg has uncovered a worrying report by the European Commission that underlines the Baltic region as being in danger of a drawn out and highly damaging recession, as governments have struggled to inhibit runaway credit and inflation.
Estonia, which was ranked second-weakest of the EU economies in the third quarter, has continually cited its healthy capital reserves as an assurance against recession. The Commission's report states, however, that if the current global economic turmoil persists 's as the ministry's forecast suggests 's then Estonia may struggle when its reserves run dry.
"A return to the previous pattern of high growth rates driven by easy access to credit seems unlikely in the foreseeable future," the report said.
The Commission's Oct. 10 report, titled 'Recent Economic and Policy Developments in ERM II Member States,' also alluded to inept policy making in dealing with the economic crisis.
"Policy responses to rising imbalances and vulnerabilities have on the whole been insufficient," the report said.
"Policies were not clearly geared at containing imbalances and minimizing vulnerabilities at times of high growth, which may hamper the ability to manage the adjustment process," it said.
To compound worries, the ministry's announcement was shortly followed by more bad news for the economy, with Statistics Estonia reporting an 11 percent drop in industrial output year-on-year.
According to the Dec. 2 report, industrial output has been on the decline since March, with October marking the year's low-point 's with decreased public demand being cited as the main contributing factor.
The reduction in building output was the most pronounced, with the production of building materials declining by almost a third 's a worrying indicator of the state of Estonia's once thriving construction market.