Analytics, Economics, Estonia, EU – Baltic States, GDP

"Real GDP growth in Estonia is expected to slip to 1.1% this year but should recover to 2.3 % in 2017 and 2.6% in 2018, as negative external shocks fade and investment recovers. Unemployment is set to rise as reforms prompt work-incapacity pensioners to re-enter the labor market. The fiscal position is projected to dip below balance in 2017-2018 but public debt should remain below 10% of GDP," the Commission's Autumn 2016 Economic Forecast says on Estonia.

Estonia's inflation and unemployment are set to remain low and the state budget in balance.

The Commission estimates inflation in Estonia to accelerate from 0.8% this year to 2.6% in 2017. The unemployment rate is forecast to be 6.5% this year and 7.4% in 2017 and the general government balance to be positive by 0.5% of GDP this year and negative by 0.4 % of GDP in 2017.

The general government gross debt is seen to grow marginally from 9.4% of GDP this year to 9.5% in 2017. The current account surplus will contract from 1.8% this year to 1.6% in 2017.

"Estonian companies are increasingly investing in equipment as the domestic labor force is becoming more expensive. Estonian businesses are therefore projected to increase investment over the forecast horizon. This is expected to be accompanied by higher bank lending to enterprises. In parallel, public investment is projected to soar in 2017 as the bulk of projects under the new programming period of EU investment enter the implementation phase," the Commission said.

"By contrast, private consumption growth is expected to decelerate in 2017 and 2018 as rising consumer price inflation overshadows the increase in wages. Similarly, household investment is set to slow due to lower real incomes. Nevertheless, domestic demand is set to remain the main driver of growth over the forecast horizon," it said.

While GDP growth remains moderate, its composition appears favorable to government revenue, especially labor and consumption taxes.

"Considering the already high participation rate and lackluster GDP growth, the room for further employment gains appears limited. Nevertheless, the introduction of a 'work ability' reform in mid-2016 is gradually bringing work-incapacity pensioners back to the labor market. Owing to the reform, employment is expected to continue growing in 2017-2018, while unemployment is also projected to rise from about 6.5 % in 2016 to over 8 % in 2018," the Commission said.

Wage growth is forecast to remain robust, albeit slowing to about 5% annually in 2017-2018 on account of public sector wage restraint, it added.