Bank of Estonia sets 2019 economic growth forecast at 3.3 percent ({{commentsTotal}})

While economic growth and wage growth are both expected to slow in the coming years.
While economic growth and wage growth are both expected to slow in the coming years. Source: Bank of Estonia

According to its latest economic growth forecast, the Bank of Estonia expects the Estonian economy to grow by 3.3 percent in 2019 and 2.1 percent in 2020. Estonia's central bank is recommending residents and the state alike start saving.

Growth in the economy will slow as export markets are weaker than before and labor shortages remain in Estonia, according to a Bank of Estonia press release. Wages will continue to rise despite slower economic growth, but will do so at a lower rate. Increasing wages and low unemployment point toward good tax revenue intake, indicating that the budget should be in surplus to support the economy if needed during harder times.

The cooling in the economy will be reflected in labor market indicators. As demand for the output of companies will grow at a slower rate in the future in both Estonia and its main export markets, businesses have shown less desire this year to take on new employees than last year.

The number of employed persons is forecast to remain steady, while wage growth will slow from 8.1 percent this year to 5.2 percent by 2021. As incomes rapidly rise, it would be a good idea for people to continue saving money as they have been.

Foreign employees contributing to growth

As there is little unoccupied labor available in Estonia, employers have been active in hiring from abroad. The amount foreign workers contributed is estimated at up to 1.3 percentage points of last year's GDP growth of 3.9 percent. In recent years, foreign labor has been employed most in construction, agriculture and manufacturing.

The hiring of foreign labor has both boosted economic growth and slowed wage growth. Rapidly rising wages have been a headache for exporting companies, as higher labor costs make it harder for them to compete in foreign markets.

Inflation in Estonia, meanwhile, is forecast to fall from 3.4 percent last year to 2.1 percent in 2021. This will be driven primarily by rising labor costs, while the fall in energy prices and the reduced impact of the alcohol excise duty will serve to stem it.

As the Estonian economy continues to do well, tax revenues will be higher than usual in the years ahead. Unemployment is extraordinarily low by itsual standards, and wage growth is consequently very fast. Despite slowing economic growth, unemployment will remain very low in the coming years, and there will be more workers than ever before. This will encourage people to consume, which will temporarily increase the state's tax revenues. In this case, it would be appropriate for the government to run a budget surplus in the coming years. Such a budget surplus would not require spending cuts, the bank explained, but simply that spending grow more slowly than revenues.

Additional spending could encourage inflation

A responsible fiscal policy of keeping the budget in surplus in good times and supporting the economy in bad times by running a deficit would soften any increase in unemployment during economically difficult times, and would support stable growth in incomes in Estonia.

If a budget deficit is used during the current good times to fund additional spending, the government will be encouraging inflation and make businesses want to hire more labor from abroad. Growth in the economy would be slowed by a reduction in competitiveness, however, and this would hurt the growth in people's incomes.

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Editor: Aili Vahtla



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