The Bank of Estonia said on Wednesday that it had cut the country's economic growth forecast for 2016 to 1.8%, and described a potentially overheating labor market as a risk to the economy.
The new GDP estimate by the central bank is 1.8% for 2016, 2.9% for 2017 and 3% for 2018. Compared to its December forecast, the Bank of Estonia cut its estimate for this year by 0.4%, and the estimate for 2017 by 0.2%.
Economic growth will accelerate this year and in the next two years as a result of the improving external environment and higher productivity. Trading partners’ demand has been growing in the past six months at the previously forecast rate, and available data suggests that the momentum of growth will continue, the central bank said.
In the near future, higher productivity per employee will allow economic growth to speed up, because the number of hours actually worked by full-time employees has declined temporarily in anticipation of improvement in demand.
In the longer term, growth can be ensured only by investment and the development of employees, which should be supported by economic policy favoring growth and promoting competitiveness on the level of the state and businesses alike.
The Estonian government sector budget will remain close to balance in the coming few years. However, pressure may arise to limit public sector spending should the government plan to increase investments that have been postponed so far, and if this should occur simultaneously with a deceleration of economic growth and a resulting reduction in tax revenue.
Editor: Editor: Dario Cavegn