Analytics, Economics, Estonia

"Due to abruptly contracted foreign demand, Estonia's economic decline might reach 5.5% this year," stated the central bank, adding in its analysis that the economic growth along with the surge in foreign demand is expected to recover in 2010. "If the GDP of Estonia's foreign trade partners will fall by an average of 3%, Estonia's economic decline might even reach 9% in 2009," stated the outlook.

The Bank of Estonia estimated that the economic policy measures of major economic regions should help the global economy overcome the difficult times and hence it is not impossible that the economic growth will recover sooner.

According to the central bank's economic outlook, the inflation rate will not exceed 2% in 2009. The price level will also not grow in 2010. "A lot of enterprises have changed their operations and have improved the compliance between the prices and wages and the new market situation. This is also proven by the fast changes on the labour market – decline in the employment rate, more extensive use of flexible forms of work and lowering of wages in some sectors."

The Bank of Estonia is of the position that the Government should lower all components of spending, including social spending, otherwise their level might not be affordable for the State in coming years. "Together with the overall macroeconomic perspective, it should be taken into account that the options for financing the budgetary deficit have also become scarce," stated the outlook. The central bank added that structural reforms that would help enhance the efficiency of State administration should also be carried out.

In the light of the plan to cut the budget deficit by nearly 8 billion kroons, this year's deficit should be approximately 3% of GDP, according to current projections.