Central Bank Lowers Economic Growth Forecast to 2% ({{commentsTotal}})

Bank of Estonia Source: Photo: Postimees/Scanpix

The Bank of Estonia has downgraded its 2013 economic growth projection to 2 percent, down from the 3 percent forecast released last December.

In a statement today, the central bank said the economy is lagging due to the slowing growth of domestic consumption, primarily with regard to fixed-asset investments. At the same time, the slowdown is due to temporary factors and growth is expected to pick up to 4 percent in 2014 and 2015 thanks to higher domestic and foreign demand, the bank said.

"Low interest rates, access to foreign financing without significant restrictions, and an improving economic climate will keep investment activity high in Estonia in the coming years,” the statement said.

"To ensure continued economic growth, it is important that investments are directed to boosting productivity and that the option of inexpensive borrowing is not accompanied by an underestimation of risks.”

The bank warned that the favorable financing environment and strong confidence may lead to real estate price hikes and overly optimistic consumption.

"That would endanger economic balance and inhibit the long-term growth outlook,” the bank said.

Regarding the job market, things are looking up, but employment is increasingly being affected by the shrinkage of the working-age population. In the next few years, for the first time, Estonia is expected to see a simultaneous decline in both employment and unemployment.

"Unfavorable demographic developments, meaning aging population and emigration, have an increasingly greater role in the active participation and efficient utilization of the workforce,” the bank said.

Meanwhile, inflation, which has been the highest in the Eurozone, is set decrease to 3 percent this year, with further easing expected in 2014 and 2015, when it is forecast to drop to 2.7 percent.

The biggest factor in inflation has been rising electricity prices - currently constituting a third of the consumer basket price increase - but its effects are expected to slacken next year. Still, prices will rise due to rapid salary growth, partly offsetting any gains in purchasing power.

The state is expected to reach a balanced budget by next year, with a deficit of 0.3 percent of GDP projected for this year, the same as last year's result. In 2015, the bank hopes, the state can begin growing its reserves.

Economists were disappointed in May when Statistics Estonia reported worse-than-expected first quarter GDP growth, a figure that has now been revised to 1.1 percent. The OECD duly downgraded its annual growth forecast for Estonia from 3.7 to 1.5 percent.

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