European Commission lowers growth forecast for Estonia to 1.9% in 2016
The European Commission expects the Estonian economy to grow by 1.9% in 2016 and 2.4% the next year, the newly-released spring 2016 economic forecast states.
In February the EU had predicted 2.1% growth for this year and 2.3% for the next.
Real GDP growth in Estonia fell to 1.1% in 2015, from 2.9% in 2014. The fall reflects negative base effects in the electronics sector, sharply reduced demand in neighboring Russia, and low international oil prices, which affect Estonia's shale oil sector, the forecast argues.
"Private consumption boomed, supported by strong wage increases, income tax cuts and the absence of consumer price inflation. At the same time, business investment activity fell considerably due to weak external demand and the completion of major energy sector investment projects," the commission said.
Estonia's income level is expected to catch up with the EU average as its real GDP is forecast to grow by 1.9% this year and by 2.4% in 2017. While the global outlook remains uncertain, regional demand is expected to grow, raising Estonia's capacity utilization to a point where businesses will need to invest.
The large contribution of private consumption to growth will likely diminish in 2016 and 2017 as consumer price inflation picks up. Domestic demand, however, is projected to remain the main growth driver over the forecast horizon, the forecast states.
The Commission expects Estonia's harmonized index of consumer prices (HICP) to total 0.8% this year and 2.9% in 2017, while in February the indicators were 1% and 2.5% respectively. The commission expects the increase to be driven by higher excise tax rates, strong wage growth, sizeable annual minimum wage increases, and a gradual pick up in commodity prices.