OREANDA-NEWS. October 04, 2010. The Bank of Estonia economic forecast released raises the forecasts of both economic growth and inflation for this and the next two years.

According to the fresh forecast, the Estonian economy is seen to grow by 2.5 percent this year, by 4.2 percent in 2011 and by 3.8 percent in 2012. The figures are respectively 1.5, 0.1 and 0.5 percentage points higher than the previous forecast.

In the central bank's estimate, consumer prices will rise by 2.4 percent in 2010 and by respectively 2.7 percent and 1.7 percent in the next two years. These figures too are respectively 1.2 percent, 1.6 percent and 0.4 percent higher than the previous forecast.

The central bank is more optimistic than before about private consumption and has substantially raised this year's export and import growth forecasts, predicting a more than 14 percent increase in exports and a nearly 18 percent growth in imports.

Compared to the Finance Ministry forecast that serves as the basis for the state budget, the Bank of Estonia is more optimistic also about the government sector budget balance next year, expecting a deficit of 0.9 percent of gross domestic product. The bank has excluded from its calculations the impact of the emissions trade. The Finance Ministry predicted a budget shortfall of 1.6 percent of GDP for 2011.

The Estonian economy has exited recession and started growing, mainly on the back of exports, the central bank said in a comment on the forecast.

The faster-than-anticipated growth of Estonia's trading partners is likely to be short-lived as the temporary post-crisis normalization in the world trade situation is nearing its end and government expenditures are increasing. The aftermath of the crisis is exerting a strong pressure on growth outlooks in several countries because global economic recovery largely depends on the ability of advanced economies to regain control over their general government budget and debt level, the bank said.

The external environment's inflation is expected to remain subdued in the coming years although various raw materials have gone up in price and markets do not expect them to return to lower levels.

In the central bank's view, Estonian companies and the government have increased efficiency. Post-slump adjustments have laid the foundation for productivity-based growth and productivity per employee is likely to reach a historical high in 2012, the bank says. The volume of the economy will nevertheless remain below pre-crisis levels over the next years and the next quarters' rapid expansion compared to 2009 is temporary due to the growth of external demand slowing down.

Unemployment is expected to contract in the second half of 2010 but long-term unemployment will continue growing well into 2011, the Bank of Estonia said.

Inflation will be above the euro zone average in the next years but mostly due to external factors and administrative measures. If domestic price pressures surface it may be a sign of either weak competition or insufficient post-crisis adjustment, the central bank said.

Looking further ahead, it is important to determine whether or not the economy will cope with the hike in general government spending and tax burden in the aftermath of the crisis and if it is necessary to lower taxes in order to support the growth potential, the Bank of Estonia said.