The International Monetary Fund (IMF) finds that the outlook for the Estonian economy is positive and growth will continue at close to 3.5 percent in the medium term, but noted that the biggest threat to this outlook is wage pressure not accompanied by growth in productivity.
According to the IMF, external risks for Estonia are balanced in the near term, and current growth rates may prove longer lasting than expected as consumer confidence and business confidence remain high in the euro area.
Downsides include tensions in trade relations as well as the U.S. adopting a protectionist posture. Domestic risks, meanwhile, remain predominantly negative, the IMF said.
Wage pressure is not accompanied by improvement in productivity, and this may affect the profitability of businesses in the medium term, just like their loan servicing capability, which in turn would have a negative effect on banks' loan portfolios.
Regarding the real estate market, the IMF found that continued robust demand may drive dwelling prices even higher, leaving the banking sector vulnerable to risks.
Editor: Aili Vahtla