Swedbank has raised Estonia's 2017 real growth forecast by 0.7 percent to 4.2 percent, and next year's growth forecast by 0.3 percent to 3.5 percent in its fresh economic outlook.
In August, the bank estimated Estonia's gross domestic product growth to total 3.5 percent this year and 3.2 percent in 2018.
In 2019, the country's economic growth is to total 3 percent, which is 0.3 percent more than in the previous forecast, Swedbank said on Thursday.
"Although external demand has substantially increased this year, the branches of activity that are directed at domestic demand are the biggest contributors to economic growth, and economic growth has become broad-based," Swedbank chief economist Tõnu Mertsina said when introducing the bank's latest economic outlook. "With the strong economic growth, the increase in the productivity of companies has improved and the gap between wage increases has closed up. This means that companies' price-based competitive ability and profitability will improve. In our estimation, external demand will remain strong also next year and will allow Estonian companies to increase their exports.
He added that following a three-year decline, investments have started to grow this year. "The confidence of Estonia's industrial companies has risen to the highest level in six years and the rate of employed means of production has exceeded the long-term average, along with the growth of demand and production volumes," Mertsina said, adding that, as a result, it can be forecast that the private sector's investment activity remains on the present level.
"Government sector investments mainly in buildings and constructions have increased, which explains the strong growth in construction works commissioned by the state," the economist noted. "In the near future the strong growth of government sector investments should continue, which is supported by the impact of European Union funds increasing."
In spite of strong consumer confidence, however, the growth of private consumption has slowed down, as expected. One reason for this is the sudden deceleration in the wage growth adjusted for inflation. As a result of raising the share of income exempt from income tax in 2018, the income used by most wage earners will increase once again and this will have a positive impact on private consumption.
The financial state of companies and households is strong and the state's finances are in order. In the current economic growth cycle the Estonian economy does not need any stimulation from the state. It would be wise to use the better opportunities for carrying out structural reforms and investing for raising efficiency.
Due to higher raw material prices, an increase in excise duty rates and strong wage growth, the increase in consumer prices accelerated to more than three percent this year. Next year, price increase should slow down to three percent.
The number of unemployed is to increase as a result of a change in the social benefits system of the disabled which will force them to start looking for a job. Although the demand for workforce will grow, its supply is limited and therefore the increase in employment will be modest in the next two years.
Editor: Aili Vahtla