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Finance Ministry sets 2018 economic growth forecast at 3.6%

Photo is illustrative.
Photo is illustrative. Source: (Ministry of Finance)

The Estonian economy is set to grow by 3.6% this year and by 3% in 2019, the Ministry of Finance said in its summer economic forecast published on Tuesday.

"Moderate and balanced growth of the Estonian economy will continue," said Minister of Finance Toomas Tõniste (Pro Patria). "Jobs will be created and wage pressure will persist; against this backdrop, overperformance of the state budget and an increase in tax inflow is expected."

The minister said that the forecast published by the ministry will serve as the basis for state budget negotiations this autumn, and many things may still change. In the state budget strategy endorsed this spring, it was agreed that the budget would be drafted in structural balance, and since income and expenditure forecasts have changed a bit over the summer, the government will have to do work in the coming few weeks to achieve that goal, he added.

According to the forecast, Estonia's economic growth will remain close to 3% in the years 2019-2022. After the acceleration of growth last year, the economy will develop at a more affordable speed in the future. The situation of the Estonian economy is good and the internal risks low. Economic growth is supported by both domestic demand and export. The growth in external demand will slow down compared to last year, but will remain higher than the long-term average.

Estonia's private sector has been conservative since the economic crisis, reducing its loan burden and accumulating financial buffers. The level of investment by enterprises is low, but the quality of investments is better than at the time before the crisis as the volume of research and development activity is growing rapidly. Residents' consumption behaviour is saving-oriented compared to incomes, and people are cautious in borrowing.

Average monthly wages to total €1,307

The average wage will grow from €1,221 per month last year to €1,307 this year and €1,385 in 2019. Real growth in the average wage, which takes into account the effect of price increases, will be 3.6% this year and 3.1% in 2019. The increase in wage income is broadly consistent with economic growth, the ministry observed.

Strong economic growth will create new opportunities, which is why increases in the number of employees will continue both this year and in 2019. The ratio of people in employment to the working age population has hit an all-time high. Although increased workforce activity has thus far helped offset the impact from the reduction in the numbers of working-age people, the reduction in birth rates in the 1990s is beginning to have a greater impact on labour market developments, and the number of people in employment will start to decrease in a couple of years.

Unemployment rate to total 5.7%

Unemployment is low, and has not been increased significantly by the work ability reform, as a large portion of the people affected by the reform have managed to find a job as a result of the favorable economic environment. The ministry expects the unemployment rate to be 5.7% this year and to rise to 6% in 2019. Without the impact of the work ability reform, unemployment could be expected to decline next year.

Consumer prices are estimated to grow 3.3% this year, driven by higher energy prices, but also by services having become more expensive as a result of wage increases, as well as by tax changes. The price increase is expected to slow down beginning next summer, as the effect of the change in energy prices will subside and the impact of tax changes will decrease. Price rise will decelerate to 2% in 2021-2022.

The government sector's nominal budgetary position will be strong in 2018, with the forecasted surplus equalling 0.8% of GDP. Compared to expectations to date, a positive input will be provided by tax inflow, while the standing of municipal budgets has improved as well. Without further decisions by the government, the surplus is estimated to decline and a shortfall emerge in the second half of the period covered by the forecast, caused both by increasing social expenditures as well as growing investments.

Hence the government still needs to make efforts to achieve the structural balance goal set out in the state fiscal strategy, the ministry said.

Estonia's debt burden to decline

The debt burden of the Estonian economy will ease in the coming years and reach 6.2% of GDP by 2022. Compared to 2017, the debt burden will decline by 0.5% this year to 8.2% of GDP. The budgetary position will be at a nominal surplus in the next few years, creating preconditions for the accumulation of reserves.

At the same time, the state's cash flows will be negative in 2019-2022 in connection with the repayment of loans and implementation of financing transactions. The negative cash flow will be financed largely at the expense of reserves. Without improving the budgetary position, the treasury would need to borrow money from 2021 onwards.

The tax burden is set to ease to 33.1% by the end of the period, roughly to 2015 levels. As a result of wage increases, the share of labour taxes will increase by 2022, whereas the share of capital taxes will decrease as the effect from the legal person income tax measure will recede.

The Ministry of Finance bases its forecasts on valid laws, which means that the forecast counts with an increase in excise duty rates in the following years, even though it was agreed in the fiscal strategy to forgo these increases. Forgoing the excise duty hikes next year would also affect this year's tax receipts as there would be no accumulating of stocks ahead of the duty increase.

Editor: Aili Vahtla

Source: BNS

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