OREANDA-NEWS.  June 24, 2014. According to Nordea`s most recent economic outlook, Estonia`s economic growth will remain at 1.2 per cent this year.

The upturn of Estonian economy has been slowed down by rapid cooling of the economy in the first quarter of the year, slow recovery  of foreign markets and emergence of geopolitical risks in relation to events between Russia and Ukraine. With recovery of export markets, utilisation of European Union new programming period funds and growth in investments, Estonian GDP growth will accelerate to 3.2 per cent in 2015. Growth risks will remain to the downside. 

The key issue for Eurozone and Estonian economic policy is acceleration of economic growth. Economies require faster nominal growth in order to reduce the crisis-driven high debt burden and lower unemployment. In 2013, Estonia had the fastest increase in nominal growth in the Eurozone (Estonia +5.9% y/y; Finland +0.6 y/y; Eurozone +1% y/y ).

Acceleration of inflation in Estonia will remain slow, supporting GDP real growth

The anticipated slowdown in consumer price inflation was realised in Estonia.  In the last quarter of 2014, price growth will accelerate  at a moderate pace. All in all inflation will remain at Eurozone average. Nordea forecasts a 1.0 per cent price increase this year and moderate acceleration to 2.6 per cent in 2015.  Nordea Chief Economist Tonu Palm believes that, to a large extent, the slowdown in price increase has taken place on account of deceleration of energy prices. “Weakness of global economy alongside a strong euro exchange rate has curbed import and raw material prices in Europe and Estonia. Export prices and industrial goods` manufacturing prices continue to drop in Estonia, which reflects a broad-based slowdown in price increase. The surge of construction and real estate prices will decelerate. There are however  signs of  increasing price pressures in stronger economies (including US producer prices). Industrials start to show strength to pass some of the price increases to consumers. Expected  pick-up in wages alongside lower unemployment levels will support a start of a new inflation cycle.“

Temporary but fast cooling of Estonian economy in the first quarter was caused by concurrence of several factors

“The main reason for the -1,4 per cent y/y drop in GDP growth in the first quarter of this year was trade partners` low import demand, a big drop in the added value of transport and logistics (including decline in carriage of goods in warehousing and transportation supporting sectors, drop in rail transport volumes), a warm winter, a rise in electricity import and fast price increase in the real estate sector,“ said Palm.  “Trade partners` low import and energy demand had a lot to do with Estonia`s modest export volumes.“

“In order to grow, Estonia`s open economy requires a more robust upturn in the Eurozone and Nordic countries, led not only by private consumption but also export and investments,“ said Palm. “Germany, Sweden and the UK have the most favourable growth outlook out of Estonia`s trade partners. The latter are affected by ongoing recovery of the Eurozone and at least a 3% GDP growth in the US in the second half of the year. In order to boost economic growth, and considering developments in Russia and Ukraine, Estonia should continue to diversify export markets and expand activities on export markets which are heading towards broad-based recovery.“

With global economy recovering turnaround is at sight. Improved economic confidence promises to deliver gradual upturn in Estonia`s export markets in 2015.

A strong labour market and robust increase in income continues to support private consumption

Despite the moderation in wage growth as a result of  temporarily cooling economy, Nordea believes that the drop in inflation will lead to still robust ca 5% growth of real wages on average for  current year.

“Slowdown of private consumption will remain moderate in the forecast horizon due to support to real income growth from lower inflation. However, consumption alone will not be enough to deliver fast growth,“ stated Palm. “The labour market is strained in the long-term because the number of working age people is going down, affected primarily by a negative migration balance. In order to retain the same level of employment, the rate of employment should increase. This is difficult to achieve. In order to soften the decline in the number of employed, continuing education should be aided by motivation of older people to stay on the labour market longer. Why not support valuable exchange of experience between generations, and considering the low level of savings, motivate people to earn a higher income also at retirement age. Elderly are likely to spend more than save, which we need for growth“.

Estonia`s untapped potential in rapid growth of e-economy

In Estonia`s case, e-commerce penetration has remained slower than in several European countries, which refers to untapped opportunities to widen choices and thereby, support better price competition in a small market. According to Tonu Palm, Estonia has a good starting position to develop e-economy, considering the strong potential in our ICT sector: “Work towards this end takes place in public private partnership, however, bigger breakthroughs require a bigger leap forward in volumes, which is only possible if foreign partners are involved.

E-residence is a step in the right direction. This could be complemented by potential other initiatives, such as an export driven e-healthcare service, which would promote healthcare tourism in Estonia. Europe is faced with an ageing population and personalised healthcare services will draw attention and see a rapid price increase.“