Swedbank and SEB banks revised downwards its GDP forecast for Estonia for 2013. Swedbank cut the forecast from 3.3% y/y to 1.9% y/y, accelerating to 3.9% in 2014 and 4.2% in 2015. SEB believes Estonian economy will expand by 1.5% this year vs. previous 3.3% growth expectation. In 2014 GDP growth is expected by SEB to pick up to 3.7% and to moderate to 3.5% in 2015.

Swedbank attributed the revised forecast to weaker domestic demand and to slower investment in particular. However, the growth is expected to pick up starting with H2/13.

SEB also notes that weak external demand and declining financing from EU structural funds no longer can support investment. The bank believes that the government should pursue a more expansionary fiscal policy in order to prevent continued deceleration of economic growth. Domestic consumption as the driver of growth is exhausting itself faster than in Latvia and Lithuania, SEB Pank Economist Ruta Arumae believes.   

Previously the Bank of Estonia revised its GDP forecast for 2013 to 2% from previous 3%. Main reasons behind a worse outlook are a contraction of domestic demand and specifically fixed capital investment (seen slowing down to 2% growth). However, the decline in investment is driven by temporary factors and is expected to return to equilibrium in 2014 and 2015.

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, the CB suggests.

At the same time the central bank notes that ensuring that investment is directed towards productivity gains is important. Availability of cheap loans should not lead to underestimation of risks and excessively optimistic consumer behavior.