SEB corrects growth estimate for Estonia to 1.7%

8/30/2016 3:34 PM
Category: Business

SEB introduced its economic analysis for the first half of 2016 on Monday. Like other banks, they corrected their GDP growth predictions downwards. According SEB analyst Mihkel Nestor, the current slow development can be seen as the new normal, and will likely only change in the case of unexpected and large market events.

Accordingly, the current growth in the eurozone of around 1.5%, and the expected growth of some 1.7% annually over the next few years were “adequate”, Nestor said. “For a jump to 4 to 5%, some kind of technological breakthrough would be needed, for example, but that isn’t foreseeable,” he added.

In the Estonian economy, smaller events could cause such jumps, for instance if a very large producer enters the country or extends their business here.

The Estonian economy grew by 1.1% in the first half of 2016, which is far behind the forecast 2.7%. The annual growth has the potential to reach 1.7%, SEB predicts, while pointing out that according to the OECD models used for the prediction, healthy growth for Estonia would be somewhere around 3%.

Productivity remains an issue

Nestor pointed out that though wages had grown in the first and second quarters by 8% and 7.6%, respectively, there was a lot of pressure due to Estonia’s low productivity. “The Nordic countries get the same amount of work done with fewer workers,” he said, and added that SEB expected the number of unemployed to increase over the next few years.

While large industry sectors, such as chemical production, are shrinking due to their dependency on e.g. oil shale and the resulting dependency on the global oil price, there is growth potential for exports of the more common sectors, such as timber, furniture production, textile, and electronics. Examples for smaller, yet also growing business areas are the production of boats, and trailers.

Selling abroad had become more difficult compared to a few years ago, Nestor added. Slow export growth, then, had affected general growth of the economy to quite an extent.

Neighbors are doing well

SEB’s analysis shows that Russia seems to have made it out of recession. The country seems to have adapted to European Union sanctions, and is doing better despite the fact that sanctions will likely continue. Recovering oil prices have helped along, and although this year growth of the Russian economy is expected to remain negative, SEB expects to see a small rise next year.

For Finland, things look better. Its economy has grown for two quarters, and its industrial output increased for three months in a row as well as the labor market situation improved. The last time the country was doing this well was in 2013.

As an example for Finland’s speedy recovery, Nestor quoted recent labor market reform, one result of which was that shops can now have longer opening hours.

Sweden’s growth potential SEB still sees as promising. Growth is driven by investment in real estate and the public sector’s efforts building more housing, for arriving refugees among others. Estonia is profiting from this growth to an extent, as they can sell wooden houses as well as furniture and textile products to Sweden.

Latvia and Lithuania have corrected their growth estimates downward, much as is the case with projections for Estonia. Latvia is affected by the lacking access to the Russian market and slow exchange of goods. Still, slightly larger growth is expected for the two countries than for Estonia.

Editors: Merilin Pärli, Dario Cavegn

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