Bank of Estonia: Economic growth in 2015 slowest in six years
The Bank of Estonia reported on Wednesday that economic growth had slowed in 2015, that the year had seen the slowest growth of the last six years - and that there was not yet light at the end of the tunnel.
Real income of households as well as sales on the domestic market had grown quickly, while exports were still shrinking. The continuing decrease of corporate profits hinted at an overdue adjustment either through increased production or slower salary increase, the Bank of Estonia stated. Policy decisions of the European Central Bank (ECB) maintained favorable conditions for investment.
The growth of the Estonian economy had slowed due to the unfavorable situation in several neighboring countries, where a lack of demand affected Estonian exports, the bank’s statement read. At the same time, domestic demand had increased thanks to increased household income and purchasing power.
The increase in incomes was driven by the increased minimum salary, by salary agreements in the education and health care sectors, and by a decline in the working-age population as well as the labor market in general.
Exports of goods declined over the past two years, and the Estonian share of the relevant export markets declined. Recent statistics show that the decline continued in the first quarter of 2016. As shrinking exports led to shrinking profits, and companies’ expenses on labor increased at the same time, the competitiveness of Estonian business remains an important issue.
Speeding up growth in the Estonian economy depended to a large extent on the development of target export markets, the bank wrote. The economic indicators of the Euro Area had shown a situation that was more difficult than previously expected, and according to the ECB’s March forecast, overall growth would be slower than expected.
For Estonia, this meant that slow growth of external demand would also lead to slower growth of the local economy.
Declining energy prices over several years had slowed price increases as well. Estonian consumer prices had fallen for almost two years in a row, and in February 2016 the Euro Area reported negative inflation as well. This was why the board of the ECB had decided in March to continue its current monetary policy, which would maintain the current investment conditions in Estonia as well as elsewhere in the Euro Area, the Bank of Estonia wrote.
The next forecast of the Bank of Estonia is announced for Jun. 8 this year.