OREANDA-NEWS. March 25, 2014. According to Nordea’s recent economic forecast, domestic consumption will be supported by robust slowdown in price surge, which will mean a moderate economic growth up to 2.8% for Estonia this year. Due to gradual improvement in foreign demand, Estonia can expect acceleration of economic growth up to 3.8% in 2015. The main challenges exporters will face include risks related to the foreign environment, weakness of emerging markets, strong euro exchange rate and slow and uneven recovery of Eurozone economies. 

The United States will lead global economic recovery, however, due to emerging markets` weakness and political instability, growth risks must be considered in the first half of the year. Nordea lowered Estonia`s 2014 economic growth forecast from 3.1% to 2.8% due to slow recovery of foreign demand.

“Acceleration of Estonia`s economic growth depends on export destination countries` demand, new investments and expanding export to newer markets. One important challenge in promoting Estonia`s economy will be maintaining moderate price growth also next year, when global economy starts to gradually perk up,“ said Nordea Estonia Chief Economist Tonu Palm. “Slow price growth in the first half of 2014 will increase Estonian residents` real purchasing power, and thereby, support robust private consumption. Estonia`s economic activity and price increase risks will continue to stay below the basis forecast  for this year, because we need recovery of export for faster growth.“

Nordea  foresees a moderate 1.9% price increase for Estonia in 2014 and a hike in inflation up to 3.0% in 2015, which compared to incomes, will be two times lower than growth in gross salaries. External price pressures in the Eurozone and Nordic countries will remain low next year allowing for a lower price increase in Estonia.

Estonian economy`s short-term risks and opportunities 
“Estonian economy`s short-term risks are mainly related to global and Eurozone economic developments. The biggest risk is long-term lower growth on foreign markets, which Estonia can counterbalance by consistently contributing to new growth,“ said Palm. “A tightening labour market requires making more and more strategic decisions in Estonia. In order to remain competitive, entrepreneurs must engage in developing productivity, technology and Human Resources, but also expand branches and markets of export.“

Palm thinks that Scandinavian countries continue to remain high potential and stabile export markets for Estonia due to the size of their markets, higher purchasing power and integrated economies: “Last year clearly demonstrated that competitiveness allows Estonian entrepreneurs to increase their market share in Scandinavian countries even in a situation where Nordic economies are experiencing temporary weakness. There was a much bigger setback on the Russian market, where in addition to greater fluctuations in economy, the currency and credit risks are also higher.  At the same time, with sound risk management, emerging markets offer high development potential.“

According to Palm, the precondition of sustainable economic growth, in addition to employment growth, is recovery on the real estate markets, which raises the value of people`s assets, confidence and thereby, consumption: “In a context of low loan volumes, recovery of the real estate sector is continuing on our market, which is currently still quite rare in the Eurozone, if we leave aside some major European hubs.“

Swedish and Danish experience shows that peoples` bigger savings and investments help manage a decline on foreign markets better, because  private consumers haven`t had to cut consumption as much.

Role of ICT in economic growth
The contribution of information and communication technology companies will play an increasingly important role in Estonia`s knowledge-based economy.  The number of people employed in ICT companies is still 3% of total employment, but the potential is much higher if we can raise labour supply and create synergy between ICT and other branches of economy. ICT companies` turnover growth has been two times faster than the average in business. Tonu Palm believes ICT, electronics and automatics, medicine, the chemical industry and other knowledge-intensive branches to be key to raising the standard of living in Estonia.

Eurozone and Nordic countries` outlook
Nordea’s Economic Outlook foresees a slow recovery is the Eurozone with Germany in the lead.  Southern European countries are already seeing slight growth and the Eurozone`s fiscal policy also sets fewer constraints on growth.  However, economic growth in Eurozone countries is uneven, depending largely on execution of structural reforms, labour market outlooks and global competitiveness.  The biggest risks for recovery are related to emerging markets and developments in the geopolitical situation. In the Nordics, Sweden has the best growth prospects, and we foresee an increase in private consumption and export volumes.  Norway is slightly different from other Nordic countries because economic activity levels declined due to real estate markets cooling and a moderate volume of investments.  Denmark is experiencing slow recovery this year. Similarly to Estonia, Finland expects exports to pick up.