After expanding by almost 5 percent in 2017, GDP growth in Estonia is set to ease gradually to 3.7 percent in 2018 and to 2.8 percent in 2019, the European Commission says in its spring 2018 economic forecast.
Real GDP growth in Estonia hit 4.9 percent in 2017, on the back of a surge in investment and a recovery in external demand. Although growth was broad based across all areas of activity, the main contribution came from investment, which grew by slightly more than 13 percent as a result of a number of sizeable one-off projects and increased absorption of EU structural funds, the Commission said.
Since the import content of investment is very high, the net contribution of external trade was slightly negative. Private consumption growth was somewhat subdued due to excise tax increases.
The strong external outlook is expected to result in export-driven growth in 2018 and 2019. Household consumption is forecast to rise due to the buoyant labor market and higher real disposable incomes.
Several new tax measures have taken effect in 2018, although they are largely budget-neutral, according to the Commission. The revenue lost from the lowering of personal income taxes, for example, is more or less offset by the effect of corporate income tax reforms and some increases in excise taxes. Revenues from the main tax category, labor taxes, have outperformed expectations in the first months of 2018, reflecting the favorable developments in the labor market. On the expenditure side, several new programs in healthcare, education, social funding and in financing municipalities also kicked in this year.
Overall, the fiscal position is expected to improve to a balanced position in 2018 and to a surplus of 0.3 percent of GDP in 2019. In line with this, the deficit in structural terms is estimated to improve over the forecast horizon from about 1.3 percent of GDP in 2018 to 0.9 percent in 2019.
Labor supply pressures, however, are expected to gradually build up, reflecting structural factors such as skills mismatches and an overall decline in the working age population that will kick in towards the end of the forecast horizon. The rate of unemployment is estimated to grow to 6.0 percent to 2018 and to 6.3 percent in 2019.
As in the past, human capital will remain key to sustaining competitiveness in the coming years, the Commission said.
In 2017, HICP inflation in Estonia reached 3.7 percent mainly due to excise tax increases and higher global commodity prices. Inflation is set to moderate in line with global price trends, as planned tax increases remain limited. Inflation is forecast at 2.9 percent in 2018 and 2.5 percent in 2019.
Editor: Dario Cavegn