The Estonian economy will grow 3 percent this year thanks to a strong start of the year, but the rate of growth will slow down to 2.3 percent in 2020 and further to 2 percent in 2021, SEB said on Tuesday.
Although the year 2019 began very well for Estonia, several indicators are causing concern regarding the future, SEB economic analyst Mihkel Nestor said. Of these, deserving of the most attention is the steeply deteriorated economic confidence of industrial businesses, which indicates that the problems that have been ravaging the European industry have now reached Estonia as well.
In addition to temporary issues with demand, the Estonian industry is affected by a remarkable increase in the cost of workforce in recent years, which is rendering several businesses uncompetitive. As a result of these factors, the contribution of industry and exports to economic growth in the coming years will be subdued, Nestor noted.
Just as in many other countries, Estonia's service sector remains in good shape. Unlike industry, the service sector has also gained a great deal from the rapid increase in wages seen in recent years. The significant role played by the industry in employment as well as its presumed contraction will inevitably start to limit the growth of private consumption in the future as well.
As a result of the demographic situation, however, the resulting increase in unemployment will be modest.
Despite the reduction in potential buyer numbers, the real estate sector has to date been quite bold in making plans for the future, SEB said. A steep reduction in the number of young people of home-buying age may soon significantly cut into this optimism, however. The sector is faced with additional uncertainties related to the future of state investments in a situation where financial support from the EU is slated to decline significantly.
European growth to increase from 1 to 1.3 percent by 2021
For Estonia, the key to the future lies in the well-being of the eurozone economy, whose individual fates have been quite diverse recently. The industrial sector, led by Germany, is experiencing trouble as a result of weak demand. The service sector, meanwhile, continues to thrive, supported by very high employment and appropriate wage growth.
The key to the future of the European economy in the near term lies in whether and how much the industry's difficulties will be carried over to domestic demand. The European Central Bank (ECB) is doing everything on its part to support the economy by lowering the negative interest rate for deposits to -0.6 percent by the end of the year.
SEB is thus forecasting rather an improvement in economic growth to take place in Europe in the coming years, with growth expected to accelerate from 1 percent this year to 1.3 percent by 2021. The economies of Finland and Sweden, Estonia's primary trading partners, have clearly slowed down, and in the next few years will see moderate growth averaging at 1.5 percent.
Editor: Aili Vahtla