Finance Ministry lowers growth outlook to 2%

Finance Minister Sven Sester (IRL) (Postimees/Scanpix)
4/6/2016 9:39 AM
Category: Business

The Finance Ministry forecasts that the Estonian economy will grow by 2% this year. An earlier forecast published in September 2015 assumed it would amount to 2.6%.

For 2017, the current forecast talks about 3% growth, which is down from the 3.4% talked about in the previous forecast.

According to Finance Minister Sven Sester (IRL), one of the reasons for the changed growth forecast is low external demand. Sester also said that labor cost was a factor.

Growth in 2015 was mainly supported by private consumption, Sester said, its 4.8% bringing it close to boom-time numbers. This year and the next, the influence of private consumption would be less significant, 3.4% in 2016 and 2.5% in 2017.

In Sester’s view, the sudden growth in private consumption was caused by several factors, among them the lowered labor taxes, increased family allowance, and the low oil price.

Exports and imports

According to the ministry, an important base for increased growth are companies’ expectations to increase exports to neighboring countries. “Being a small and open economy, we depend on plenty of other countries. In the next years the whole world’s economic activity should increase, which again should support the growth of Estonia’s trade partners, and with this create good opportunities for our own exports to grow more quickly,” Sester said.

The ministry assumes that together with increasing external demand, exports of goods and services will increase. That Russia’s economic downturn had slowed would influence external demand, and according to current forecasts, starting in 2017 general economic activity should increase. With it, the ministry expects the growth of Estonia’s foreign trade partners to lead to increased exports. Exports are expected to grow by 1.6% in 2016, by 3.8% in 2017, and by 4.5% in 2018.

Currently imports are growing faster than exports, while this is expected to be balanced off by the lower investment volumes of the past two years. Currently investment is on the rise again and expected to be 2% in 2016, while it could increase to 4.5% over the coming years if present growth forecasts about Estonia’s main trading partners are to realize.

Consumer prices

The ministry’s forecast expects the consumer price increase for 2016 to be 0.3%, and 2.7% in 2017. This is significantly lower than the previously forecast 2% for 2016 and 2.9% for 2017. Over the coming years, prices are forecast to increase by 2.9% in 2018, and by 2.8% in 2019 and 2020.

Unemployment

Unemployment was expected to rise to 6.6% this year, the ministry stated. The current employment rate was at a record high of 65.2% and the possibilities for further positive developments thus limited. Because of this, and in conjunction with a decline in the working-age population, the ministry expects the number of employed people to decrease.

Public sector debt

The government sector’s nominal budget deficit is forecast to amount to 0.4% of GDP in 2016. For next year, it is expected to increase to 0.7% of GDP. The Finance Ministry expects things to improve and forecasts a 0.8% budget surplus for 2020.

In 2016 the public sector’s structural budgetary position will amount to 0.3% of GDP. It is expected to decrease to 0.1% in 2017, and to be in deficit in 2018.

Public sector debt is to increase to 9.8% of GDP in 2016, but forecast to settle at 9.1% in 2020.

Editor: Dario Cavegn

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