Bank of Estonia raises 2017 economic growth estimate to 3.5 percent ({{commentsTotal}})

Bank of Estonia's Ardo Hansson and Ülo Kaasik.
Bank of Estonia's Ardo Hansson and Ülo Kaasik. Source: (Siim Lõvi/ERR)

In its fresh economic forecast, the Bank of Estonia raised Estonia's economic growth estimate for this year by 0.9 percent to 3.5 percent, noting that, based on economic cycle indicators, it can be said that the economy is growing faster than normally sustainable in the long run.

In 2018, economic growth is to total 3.3 percent and in 2019 total 2.9 percent, the central bank reported. Compared to its December forecast, indicators for both next year and 2019 were raised by 0.3 percent.

Economic growth has accelerated drastically as foreign demand has grown and individual problems affecting sectors have eased. Increased demand has raised the economy above its sustainable level. The result of growth at the end of last year and in the first quarter of thi year has been that the output gap has turned positive, meaning that real GDP growth has exceeded long-term potential growth.

The Bank of Estonia raised this year's inflation by 0.4 percent to 3.2 percent, while next year's inflation estimate remained at 2.4 percent. The inflation estimate for 2019 was raised by 0.1 percent to 2.1 percent.

Unemployment in Estonia has for years been so low that there has been excessive upward pressure on wages and labor costs have risen faster than labor productivity. Companies have found that labor shortages are already restricting production more firmly than in the past decade, and there is no sign of this easing in the near future.

The unemployment rate is estimated to total 6.8 percent this year, 1.4 percent less than in the bank's December forecast, while next year's unemployment rate was lowered by 1.1 percent to 8.7 percent and the 2019 rate by 0.8 percent to 9.4 percent.

The growth rate of average gross wages was raised by 0.7 percent to 5.7 percent for this year and by 0.1 percent to 5.1 and 5.4 percent in 2018 and 2019, respectively.

The structural budget balance estimate was left at -0.3 percent for this year, while the estimates for 2018 and 2019 were lowered by 0.6 percent to -1.1 percent.

According to the Bank of Estonia, an economy that is small and open to the impact of external events has greater need of a strong fiscal position, which includes having sufficient reserves. Both the Estonian and European economies have recently achieved faster growth, but this could easily be changed. Were an economic shock to occur, it could be difficult or very expensive for Estonia to borrow, and if there are no reserves then there are fewer ways to stabilize the economy.

The central bank's forecast finds that the budget will remain in deficit for the next two years, with the structural deficit running at 1.1 percent. This means that the structural deficit is deepening at a time when rapid growth in wages and consumption are causing tax revenues to exceed their long-term trends. If the economy then begins to cool again, there is a danger that the government would have to cut spending growth or take additional measures to increase revenues in order to balance the budget. This would worsen the confidence of companies and households already affected by frequent changes in legislation and bills for more changes.

Editor: Aili Vahtla

Source: BNS