In its fresh Nordic Outlook, SEB has lowered its forecast for Estonia's economic growth in 2019 by 0.2% to 2.8%.
In 2020, Estonia's gross domestic product (GDP) is expected to grow 2.5%, which is 0.3% less than set out in SEB's forecast of 2.8% in November 2018.
Estonia will still see relatively robust growth on the back of a solid increase in private consumption this year, according to SEB economists.
"According to our forecast, private consumption will expand by 4% in 2019 and by 3.4% in 2020," the economists explained, noting that after two years of high inflation, the surge in living costs is finally expected to ease.
"Now that the number of building permits has begun to drop, the economy is running at full employment but export growth has almost halted," they continued. "We expect a gradual slowdown, with GDP growing by 2.8% in 2019 and 2.5% in 2020."
Harmonised Index of Consumer Prices (HICP) inflation in Estonia is to decline from 3.4% in 2018 to 2.6% in 2019 and to 2.4% in 2020, the outlook noted.
"However, public sector investments as a share of GDP remain the highest in the EU and will again contribute significantly to gross fixed capital formation in 2019 and 2020," the bank highlighted. "The outlook becomes more uncertain after 2020, when EU financial support for public sector projects will be cut."
It observed that many of Estonia's largest exporters are subsidiaries of large Nordic corporations that previously moved their manufacturing units to Estonia to benefit from lower labour costs. As this advantage is now fading due to rapid wage increases in Estonia, it is increasingly likely that at least some of them may restructure their operations and thus leave a large dent in the Estonian economy.
Economic growth in Finland and Sweden, the most important countries for the Estonian economy, is slowing down, clearly failing to meet the targets set for the euro area for 2018. According to SEB, Sweden will see economic growth of just 1.6% and Finland of 1.9% in 2019. In 2020, GDP growth in both countries is expected to hit approximately 2%.
Editor: Aili Vahtla