The Estonian economy is set to grow 3.3 percent this year; the deterioration of the external environment will likely deepen, however, resulting in economic growth slowing to 2.3 percent next year, Swedbank said on Tuesday.
According to Swedbank, political turbulence is having a negative impact on the global economy. Uncertainty related to the trade conflict between the U.S. and China, as well as Brexit, is being aggravated by geopolitical tensions elsewhere in the world. The output volume of the manufacturing industry has already embarked on a decline in several countries, and this is having a broader impact on the entire economy.
Despite a weaker external environment, Estonia's economic growth remained strong in the first half of this year, however growth is likely to decelerate in the second half. According to Swedbank's summer economic forecast, economic growth is to hit 3.3 percent this year, slowing down to 2.3 percent in 2020.
"While Estonia's economic growth was strong in the first half of this year, the situation differed in a breakdown by economy sector," the bank said. "Growth in output volumes in the manufacturing industry has strengthened, but this growth has not been broad-based, and outlooks concerning increases in output volumes have deteriorated. Electricity production is on a strong downward trend as a result of the rapid increase in the price of carbon dioxide quotas, and according to our estimates, the reduction in electricity production will hold back GDP growth at least in the near future."
Swedbank pointed out that construction volumes, which have in the past climbed very high, have also begun declining. Along with an acceleration in real payroll growth, growth in retail volumes has accelerated as well. While industry and construction confidence indicators are deteriorating, consumer confidence has remained strong, and the confidence indicator of the service sector has been improving again since the beginning of 2019.
This, according to the bank, indicates that domestic demand should remain strong in Estonia in at least the near term.
The import growth of Estonia's main trading partners has slowed down, and the export outlooks of its industrial companies have deteriorated.
According to Swedbank, export growth is to slow down in 2019 and 2020. Even though interest rates are expected to stay low, weakening demand and a lower sense of confidence are curbing investment by businesses.
Along with a deceleration of economic growth, demand for additional labor is also set to decline, which in turn will hold back wage and price increases. According to Swedbank's summer economic forecast, prices are expected to increase 2.3 percent this year as a result of a slowdown in the growth of energy prices and lower alcohol excise duties. In 2020, prices are expected to increase at the same pace as this year.
Wage growth to remain robust
In the next few years, the employment rate is expected to be high and the unemployment rate low. Wage growth is to accelerate to 8 percent this year before slowing down somewhat to a still robust 6.5 percent in 2020.
A more moderate increase in households' purchasing power is to keep the increase in private consumption moderate.
"The extensive revision of GDP to be published by Statistics Estonia soon may undermine the numerical preciseness of our economic forecast, but it likely won't significantly impact the outlook with regard to the changes taking place in the economy," Swedbank said.
Editor: Aili Vahtla