Another Drop in Growth Forecast

Photo: Reuters/Scanpix
10/23/2013 1:05 PM
Category: Economy

Swedbank has once again downgraded its GDP growth estimate, this time to 1.6 percent, compared with 1.9 percent in late August.

For next year, Swedbank is predicting growth of 3.8 percent, followed by 4.2 percent in 2015, reported uudised.err.ee.

In its fresh forecast, the bank writes that the Eurozone economy has seen an upturn recently, but Estonia's main trading partners are doing slightly worse than predicted a few months ago. Yet analysts are hopeful that external demand will see modest improvement as we near the end of the year.

Swedbank Estonia's chief economist, Tõnu Mertsina, said investments are decreasing and the growth in exports is slowing.

"In the first half of the year, Estonia's economic growth slowed by 1.2 percent in the annual comparison, mainly due to decreasing investments and modest growth in exports," Mertsina said.

"Investments have decreased mainly on account of the public sector. The modest growth in companies' investments has not been able to compensate the intense decline of public sector investments," he said.

Pay hikes boost consumption

Despite declining productivity in the workforce, salaries grew by 7 percent in the first half of the year.

"The job market lacks qualified workers, while unemployment has declined to a level where finding additional workers from the unemployed requires increasingly greater investments," Mertsina said.

"The combined impact of these factors has caused noticeable pressure on salaries. Since the growth of employment is slowing down, the lack of a skilled workforce will in the near future remain a serious problem," he said.

"Since inflation is slowing down, the real growth in wages is also picking up in pace. That is reinforcing consumption. At the same time, the growth in employment, which will slow down dramatically next year and the year after, will begin impeding the growth of consumption as well," said Mertsina.

The pace of inflation dies down

This year, power and food prices have contributed significantly to inflation.

In the first nine months of the year, household electricity prices have risen on average by a quarter, and the impact of that on the growth in consumer prices has been slightly below a percentage point.

At the same time, foodstuff prices have increased 1.2 percent. Yet falling prices in food and transport services have alleviated inflation. Next year, the impact of electricity prices will fade, while fuel and foodstuff prices on the world market are expected to ease the pressure consumers are facing.

"We believe inflation will fall to 3 percent this year, 2.8 percent next year, and rise back up to 2.9 percent in 2015," Mertsina said.

All across the board

Other financial institutions have also been consistently lowering their growth predictions for 2013, especially after the first half disappointed analysts.

The Finance Ministry's latest forecast, published in early September, was 1.5 percent. SEB concurred, while Nordea's latest forecast predicted 1.9 percent growth and the Institute of Economic Research, 2 percent.

Ernst & Young's mid-September prediction was 1 percent.


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