SEB forecasts Estonian economy will slow down sharply

SEB's most recent forecasts state Estonia's economic growth will slow down sharply due to the weak external environment, but private consumption will not allow GDP growth to fall below 2 percent.

After a turbulent half-year, the global economy has become more stable in recent months, says SEB analyst Mihkel Nestor in the forecast. Three successive cuts in the US Federal Reserve, positive messages from US-China trade talks and a halt in industrial decline in Asia have provided greater certainty for the future. This view is reflected in the stock markets, which have thrived, at least in the US.

Although the likelihood of a global recession has diminished, economic growth, at least in wealthy countries, remains subdued, primarily due to geopolitics and the labor market situation. 

In OECD countries, the average unemployment rate has reached its lowest level in the last 40 years, while in the US it is the lowest for 50 years. For this reason alone, a significant acceleration of economic growth is highly unlikely. Faster economic growth would imply a surge in productivity, which at least in the euro area has stagnated in recent quarters.

The problems of the current economic environment are most clearly seen in global trade flows, which after earlier rapid growth has declined. One of the reasons for the slowdown in trade is the tariff war between the US and China. The direct impact of safeguard tariffs has been rather limited, but it has affected the confidence of economic operators and made companies very cautious when making new investments. 

The decline in exports is also one of the main reasons behind the slow growth of the euro area. Growth in export-dependent Germany and Italy will remain subdued throughout the time period of the forecast, while countries that are more dependent on domestic consumption will continue to grow steadily. 

"However, despite the strength of the labor market, the rise in domestic consumption will be rather subdued because consumers are cautious and want to increase savings rather than consume more. This year, the growth of the euro zone is limited to just 1 percent, rising to 1.1 percent in 2020 and 1.3 percent in 2021," writes Nestor.

The current external environment is clearly unfavorable for Estonia which is dependent on exports. Although exports of goods have been declining since June, they have been largely caused by a sharp decline in the sale of energy goods. 

"Industrial companies have become very pessimistic about the future and the decline in volumes is likely to have an effect on more and more activities. In addition to the current situation, the long-term competitiveness of the export industry is questionable. Even in comparison with countries with similar living standards, the Estonian manufacturing industry employs to many people, but its added value is low. Therefore, some of today's industrial companies will soon have to close or change their business plan," SEB warned.

Private consumption will support Estonia's economic growth. Employment remains one of the highest in Europe and, due to chronic labor shortages, employers are not yet ready to make redundancies even when the economy is growing at a slower pace.

Due to the strong start of the year, Estonia's GDP will grow by 3.2 per cent this year. In 2020, Estonia's economic growth will slow to 2 percent. As a result of the pension reform, growth is expected to pick up in 2021, but GDP growth is still limited to 2.6 percent due to a weakened demand for exports.


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Editor: Helen Wright

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