TALLINN - Estonian consumer prices had their worst month on record in October as the recession has cut into demand forcing retailers to offer steep discounts, reports Bloomberg. Consumer prices slid 2.2 percent from a year earlier. This follows a decrease of 1.6 percent in September. The median estimate of five economists in a Bloomberg survey was for a 2.1 percent drop. Prices dropped by 0.1 percent from the month earlier level.
Estonia's GDP slid 16.1 percent in the second quarter from the year earlier period, though this has squeezed inflation, with annual prices declining every month since May.
Swedbank macroanalyst Maris Lauri says that GDP will drop in the third quarter by 13.5 percent from last year, as the economy stabilizes, with a slight improvement in exports. "Most likely, correction of inventories took place in companies in the first half of the year, investments with the support of public sector EU funds like road construction, have increased," said Lauri. Swedbank forecasts that Estonia's GDP for the full year will fall by around 13 percent with some growth in 2010 expected.
The country is working to become the eurozone's next newest member with a target adoption date for the currency set for 2011. While Estonia will meet inflation criteria for euro adoption, according to the Finance Ministry, it still needs to push through spending cuts to keep the budget deficit within 3 percent of GDP this year and next to qualify.
A wrench being tossed into the euro plan might be that the country has no sovereign bond market, reports LETA. Even though Estonia now seems that it will meet the inflation and budget deficit criteria, it must also comply with the requirement that the interest rate on its government bonds does not exceed the average interest rate of the three lowest-earning government bonds of EU member states by more than two percentage points.
But Estonia doesn't have a government bond market, as it has not issued any government bonds. Brussels may instead look to the interest rates on bank bonds, but since these have a much higher interest rate, this could eliminate any eurozone chances.