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Swedbank leaves Estonia's 2018 economic growth forecast at 3.9 percent

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Swedbank. Source: Siim Lõvi/ERR

Swedbank has left Estonia's economic growth forecast for both this and next year unchanged at 3.9 and three percent, respectively.

According to the bank, the Estonian economy is expected to grow 3.9 percent this year before decelerating to three-percent growth next year due to the weakening of the economy's growth cycle.

Although the outlook of the import of Estonia's trade partners allows the bank to forecast a slight weakening of foreign demand this and next year, it will nontheless remain strong enough and offer Estonian companies good export opportunities.

The security of companies is still high. Unused capital has decreased due to the increase in demand, forcing companies to invest more. Market interest rates should start increasing gradually, but these will remain low enough in the near future at least, and will promote investment.

The impact of EU funds in the investment of the government sector is to increase. The growth in the investment of companies and the government sector should decelerate this year, but their rate in relation to GDP will increase.

According to Swedbank's forecast, the growth of consumer prices this year will decelerate to three percent due to the alleviation of external price pressures. Both the prices of crude oil and other raw materials should grow at a slower tempo this year. The increase in food, alcohol and tobacco prices will contribute the most to inflation.

Strong economic growth will support labor growth and keep unemployment low, even though the work capability reform will increase the number of jobseekers with reduced work capacity. Fast wage growth should continue this year as the supply of workforce will not be able to keep up with the demand for workforce. The number of vacancies has risen to the highest it has been since the last economic crisis.

Due to the raise in the portion of the salary that is exempt from income tax, the usable income of a larger part of earners will increase and it will have a positive impact on private consumption. The tax amendments should somewhat reduce wage growth expectations. According to the bank's forecast, salaries will increase approximately six percent this year.

The Estonian economy should remain in good balance and resilient in the near future. Strong demand and moderate price growth will help with the improvement of the profits of companies. An increasing concern is the Estonian labor market, which has become more intense. The fast growth of labor expenses that accompanies this will hinder the improvement of companies' price-based competitiveness. The savings rate of households is strong and close to the balance of their budget, but the picture is inconsistent across households.

Public finance will remain in relatively good order in the next few years — the budget deficit and debt of the government sector are small. The economy at present does not require additional stimulation from the government. Now is a good time for strengthening public finance, including increasing reserves.

The world economy in the last two years has enjoyed the strong growth of trade volumes. Raising import tariffs in the U.S., the possible countermeasures following it and in the worst case a trade war, are threatening to turn around the current positive trends and exacerbate external demand. Even though the risks linked with Swedish real estate have decreased recently, they must still be taken into account.

Estonia to see fastest growth in Baltics

Swedbank is estimating the fastest economic growth in the Baltic countries to be in Estonia this year, while the bank lowered Latvia's forecast from 4.2 to three percent.

Estonia's forecast was left unchanged at 3.9 percent compared to earlier, while Lithuania's 3.1 percent forecast was also left unchanged. Swedbank is forecasting an economic growth of 3 percent in Estonia, 3.2 percent in Latvia and 2.5 percent in Lithuania for next year.

According to Swedbank's forecast, Estonia's inflation will be 3 percent this year and 2.5 percent next year. The forecast for Latvia is 3.3 percent and 2.5 percent and for Lithuania 3 percent and 2.5 percent, respectively.

Swedbank warned in its forecast that even though the economies of the Baltics, especially the Estonian and Lithuanian economies, are very open and benefited from the strengthening global growth and reduced uncertainty, growth can be affected negatively by the wider spread of protectionist policies elsewhere in the world. Swedbank said that the Baltics will not show last year's fast growth tempo again this year, but at the same time, growth should still remain between 3 and 4 percent.

Editor: Aili Vahtla

Source: BNS

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