The European Commission has lowered Estonia's 2017 economic growth forecast by 0.1 percent to 2.2 percent.
The Commission expects Estonia's gross domestic product to grow 2.6 percent, or as much as in the fall forecast, in 2017, it can be seen from the newly-released winter forecast.
After dropping to 1.4 percent in 2015, real GDP growth in Estonia is expected to have slowed further to 1.1 percent in 2016. Although private consumption growth remained strong thanks to rapid and sustained wage growth, its impact on GDP growth was limited due to its high import content, such as cars, it is noted in the forecast.
While exports recovered thanks to higher demand from Estonia's main trading partners, investment growth disappointed for a third year in a row. This mainly reflected a very gradual implementation of EU funds and still-low business investment in equipment and construction.
The pace of external demand, particularly from Finland, Latvia and Lithuania, is projected to increase. In parallel, Estonia's shale oil sector and related exports are set to benefit from the increase in oil prices.
In services, buoyant high-tech exports are expected to largely compensate for the losses in transport services resulting from the decline in transit trade with neighboring Russia. Overall, the external balance of goods and services is set to remain positive over the 2017-2018 forecast period.
However, as import-intensive investments are projected to resume, the contribution of net exports to growth is set to improve only slowly.
Estonian companies are projected to increase investment over the forecast horizon. In parallel, public invstment is projected to surge in 2017 as the bulk of projects under the new program period of EU funds has begun being implemented.
Conversely, private consumption is expected to grow at a slower pace in 2017 and 2018 amid rising consumer prices inflation. Similarly, household investment is set to slow down as real income growth decelerates. Overall, domestic demand is expected to remain the main driver of growth, although it should be increasingly driven by investment rather than consumption.
The harmonized consumer price index (HICP) should increase 2.8 percent in 2017 as well as in 2018. Last fall, the Commission predicted a 2.6-percent inflation for 2017 and 2.7-percent inflation for 2018.
Risks to the forecast are balanced. Positive risks relate to the possibility of higher exports growth, especially if international oil prices increase faster than assumed. On the downside, a delayed recovery in business investment cannot be ruled out.
Editor: Aili Vahtla