Estonia’s central bank cuts 2013 GDP growth forecast to 2%

By bne IntelliNews June 12, 2013

The Bank of Estonia revised its 2013 GDP growth forecast from 3% to 2% due to expected contraction of domestic demand and fixed capital investment. The latter is seen slowing down to 2% y/y but the decline is forecast to be only temporary. GDP growth is seen accelerating to 4.2% and 4.3% in 2014 and 2015 respectively. Investment activity will be supported by low interest rates, unrestrained access to external financing, and improving economic climate, according to the central bank.

Ensuring that investment is directed towards productivity gains is important, the central bank noted. Availability of cheap loans should not lead to underestimation of risks and excessively optimistic consumer behaviour. Inflation is projected to deccelerate to 3% in 2013 from 3.9% in 2012. Moderating electricity prices are going to slow inflation down to 2.5% in 2014. In 2015, domestic pressures will influence the price levels and will push the CPI to 2.7%.

The Bank of Estonia still expects strong fiscal performance resulting in a balanced budget already in 2014. The banking authority reiterated that reaching a nominal surplus in 2015 is crucial in order to increase reserves, which could be used to rebalance the economy in the event of negative shocks.

The central bank is convinced that the economic development is going to remain on a balanced track. Further adjustments and deleveraging of households and businesses, small CA deficit and almost balanced fiscal position are indicating that during the recovery from the recession, the Estonian economy became more resilient. At the same time the bank pointed out that both the private and the public sector must be ready to tackle the risks coming from weak external environment. Fragile growth in demand for exports is seen as the main risk to the economy.

The second estimate by Statistics Estonia shows that GDP in Q1/13 expanded by 1.1% y/y but declined by 1% q/q ( as compared to 1% y/y and -1% q/q, according to the first estimate). Domestic demand growth remained stable slowing down to 3% y/y, accounting for 99% of GDP. At the same time gross capital formation declined for the first time since Q3/10 by 7% y/y. 

In Q4/12, GDP growth was reported at 3.7% y/y and for the whole 2012 - at 3.2% y/y.

Key Economic Indicators - central bank forecast         Difference from previous forecast
  2012 2013 2014 2015 2012 2013 2014
Nominal GDP (EUR bn) 17,0 17,9 19,2 20,7 0,0 -0,3 -0,3
GDP, volume change (%) 3,2 2,0 4,2 4,3 0,3 -1,0 0,2
CPI, change (%) 3,9 3,0 2,5 2,7      
HICP, change (%) 4,2 3,3 2,7 3,0 -0,1 -0,3 0,3
GDP deflator, change (%) 3,2 3,1 3,3 3,4 -0,5 -0,7 0,1
Current account (% of GDP) -1,2 -0,8 -0,8 -0,2 -0,1 1,3 1,7
Private consumption expenditures, volume change (%) 4,4 3,0 3,4 3,9 1,6 0,0 -0,7
Government consumption expenditures, volume change (%) 4,0 1,0 1,5 1,5 1,8 -0,2 -0,5
Fixed capital formation, volume change (%)  21,0 1,5 6,8 5,5 4,7 -3,5 -0,8
Exports, volume change (%) 5,6 7,9 3,1 6,0 -0,7 4,2 -2,3
Imports, volume change (%) 9,1 5,8 3,3 5,7 2,1 2,9 -2,9
Unemployment rate (%) 10,2 9,2 8,8 8,5 0,0 -0,2 -0,1
Domestic employment, change (%) 2,2 1,8 0,1 -0,1 -0,2 1,3 -0,1
Productivity per employee, change (%) 1,0 0,2 4,1 4,5 0,6 -2,3 0,4
Real compensation per employee, change (%) 3,1 1,0 3,6 4,3 1,0 -1,3 -0,7
Average gross montly wage, change (%) 5,9 5,1 6,4 7,4 0,2 -0,3 -0,4
Private sector debt, outstanding amount change (%) 1,6 3,7 5,0 5,7 0,1 0,5 0,0
Gross external debt (% of GDP) 98,0 94,3 88,8 82,8 -2,9 -2,9 -4,9
Budget balance (% of GDP) -0,3 -0,3 0,0 0,2 0,7 0,2 0,1
Sources: Statistics Estonia, Eesti Pank

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