Analytics, Economics, Estonia, Financial Services, GDP
International Internet Magazine. Baltic States news & analytics
Friday, 26.04.2024, 17:00
OECD estimates Estonia's economic growth to be 3.5% in 2019
The recent forecast estimates Estonia's this year's economic
growth to be 3.3%, whereas May's forecast predicted a growth of 3.7%. OECD's
prediction for Estonia's economic growth for 2019 in May, however, was 3.2%, it
appears from the analysis.
Economic growth is predicted to slow down in 2020 due
to weakening of external demand. Increasing real wages will support
robust private consumption growth. Investment is set to pick up, supported
by strong business confidence and the recovering housing market. Inflation will
remain at a high level, sustained by further tightening of the labor market,
OECD's report said.
The government budget is projected to be in surplus during
the projection period, that is until the end of 2020, while the public
debt-to-GDP ratio will remain among the lowest in the OECD. While procyclical
fiscal policy should be avoided, there is space to let fiscal policy play a
more active role to boost job creation, invest in infrastructure, and
mitigate environmental concerns, it said in the report.
OECD estimated that the economy continues its expansion with
relatively broad-based economic growth. Strong household and business
confidence is supporting private consumption. Residential investment has picked
up following a housing downturn, and now makes a sizable contribution to
growth. Robust foreign demand has supported export growth.
OECD economists said that as employment has risen, nominal
wage growth has been strong, around 6% a year, and labor shortages are
emerging, particularly in sectors such as retail.
The economists said that thus far, strong wage growth has
not given rise to an acceleration of price inflation. Core inflation is
currently around 1%, whereas headline is around 3-4%, lifted by higher excise
taxes and large movements in energy prices.
Monetary policy for the euro area is projected to remain
very accommodating for a prolonged period, the report said. While fiscal policy
should avoid being expansionary, which would aggravate labor and product market
tensions, there is space to address supply constraints and step up
redistribution through taxes and transfers to improve opportunities for those
currently at risk of poverty.
Negative demographic trends and emigration of workers
accentuate labor shortages and make finding labor increasingly expensive, OECD
analysts said. Recent reform of immigration policies has eased access to
skilled workers from non-EU countries. Annual quotas remain tight, but could be
relaxed further, which would help to ease labor shortages, it was said in the report.
Based on the analysis, the economy is projected to slow to a
more sustainable pace during the projection period. Business investment will
nevertheless recover, partly with the assistance of EU structural funds. For
example, the construction of Rail Baltic will boost both public and business
investment in 2020.
As the economy slows, inflation will stabilize, the analysts
added. With the economy approaching its supply constraints, there is a risk of
higher wage and price inflation, which can further deteriorate competitiveness.
In addition, Estonia is particularly vulnerable to drops in external demand,
being a very open economy, OECD pointed out.