With investment and external demand for exports recovering, the European Commission is projecting that the Estonian economy will regain momentum in 2014-15.
The Winter 2014 forecast, released by the Commision's Economic and Financial Affairs division on Tuesday, projects that Estonia's economy will grow by 3.0 percent in 2014, and at a 3.9 percent clip in 2015.
Industrial capacity is now close to its long-term average, and this is expected to prompt investment in production capacity this year as demand has started recovering following the economic downturn. The report notes that despite recent wage increases, profitability has been largely restored to Estonian companies, and public investment is expected to return to growth in 2015.
The report noted that labor force participation is at 69 percent, and expected to grow further, while unemployment, at 8.7 percent in the fourth quarter of last year, will continue to slowly drop, even with changes to the age structure of the working population.
Nominal wage growth accelerated to 8.5 percent in the second quarter of 2013, with real wage growth reaching 4.8 percent, driven by a host of factors, including persistent skill mismatches and rising job vacancies, recent minimum wage increases, and pay agreements to health workers and teachers. Nominal wage growth is expected to stabilize this year and next at 7 percent, with real wage growth at around 4 percent. Inflation is projected to remain stable or decline.
The EC suggests that the forecast would be complicated if wages rise faster than expected, or that if demand for exports to Finland and Russia are lower than anticipated.
After exiting recession in spring 2013 and three consecutive quarters of subdued recovery, the outlook for a moderate step-up in economic growth around the EU is also expected. Following real GDP growth of 1.5 percent in the EU and 1.2 percent in the Eurozone in 2014, activity is seen accelerating in 2015 to 2.0 percent in the EU and 1.8 percent in the euro area. This represented an upward revision of 0.1 percentage points compared with the autumn 2013 forecast.