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Finance Ministry ups Estonia's 2018 economic growth forecast to 4 percent

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The Ministry of Finance introducing the latest economic growth forecast for 2018.
The Ministry of Finance introducing the latest economic growth forecast for 2018. Source: Sander Koit/ERR

The Ministry of Finance on Monday increased Estonia's economic growth forecast for 2018 to four percent, up 0.7 percent from its previous estimate in the forecast published in fall 2017.

The ministry expects 3.2 percent economic growth in 2019.

"External demand for Estonian goods and services has grown," Minister of Finance Toomas Tõniste said in a press release. "There is hope that a favorable environment will remain for some time yet, creating good conditions for our exporting companies.

The minister also noted that investments by Estonian companies in the national economy began growing again last year. "When our neighbors are doing well, our economy does well too," he added.

Estonia is expected to post economic growth rates of close to three percent in the years 2020-2022. Growth in this years is likely to be supported by the manufacturing industry and export-oriented services. Despite the exceptional 4.9 percent rate of growth seen last year, the Estonian economy is not overheated, although it is apparently functioning somewhat above its potential level, the ministry said.

The country's private sector, meanwhile, has been behaving in a conservative manner since the economic crisis, reducing its loan burden and accumulating financial buffers. Over the past year, businesses have become bolder in their investment expectations, a trend which is expected to continue if conditions remain favorable.

The average gross monthly wage in Estonia is estimated to increase from €1,221 in 2017 to €1,307 in 2018 and €1,381 in 2019, with real growth rates of three and four percent, respectively.

While the working age population in Estonia is shrinking, the effects thereof have thus far been offset by increasing labor market participation, including by those who have found employment as part of the work ability reform; the ratio of people in employment to the working age population is at an all-time high. Increases in labor market participation will allow for employment to grow until 2019, after which the internal resources of the Estonian labor market will have been exhausted. The number of people in employment is expected to grow from 664,000 this year to 667,100 next year, remaining at that level through 2020, after which it will start to gradually decline again.

An increase in the statistical unemployment rate will take place in the next few years as a result of the work ability reform, which was aimed at helping large numbers of people who were out of employment find a job. The unemployment rate is estimated to hit 5.8 percent this year and 6.2 percent in 2018. Leaving aside those who entered the labor market as a result of the reform, the unemployment rate in Estonia would be five percent this year and 4.8 percent in 2019.

The ministry also revised its consumer price index (CPI) inflation forecast for this year from 2.7 to 2.9 percent.

Economic growth is expected to boost the state's tax revenue. The tax burden, meanwhile, is likely to remain in the region of 34 percent of GDP, which is below the average EU level. The tax burden in 2018 is estimated to be 34.4 percent, 0.8 percent higher than in 2017. Compared to 2017, capital taxes are due to register the fastest growth in connection with an expected increase in dividend payouts as a result of the lower tax rate applied to regularly distributed profit. In 2019-2022, tax income will grow at a slower rate than the nominal GDP, and the tax burden will decline to 34 percent of the GDP by 2022.

The Estonian government sector's debt burden remains the lowest in the EU and is expected to decline further in the future. A reduction to 8.5 percent of the GDP from the 2017 rate of nine percent is expected this year; by 2022, it is expected to drop to 6.6 percent of the GDP.

The government has decided in the fiscal strategy process to improve the government sector's fiscal position by envisaging a nominal government sector surplus and a structural balance for the next four years. Without these decisions, the structural fiscal position in 2019 and 2020 would be negative by 0.7 percent of the GDP.

The government sector's nominal surplus is estimated to equal 0.5 percent of GDP in 2018, up 0.7 percent from 2017. The central government and municipalities alike are expected to post a surplus as a result of increased income and lower investment volumes. In 2019, a nominal deficit of the government sector equaling 0.2 percent of GDP is expected.

Editor: Aili Vahtla

Source: BNS

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