Analytics, Budget, Economics, Estonia, EU – Baltic States, GDP, Good for Business

The European economy is forecast to continue expanding for the seventh year in a row in 2019, with real GDP expected to grow in all EU member states. When it comes to Estonia, the European Commission said that strong broad-based growth is expected to continue in 2019.

While in the winter forecast, the European Commission lowered Estonia's economic growth estimate by percentage points to 2.8%, the economic growth outlook was raised to 2.8% in the spring outlook and next year's growth estimate was left unchanged at 2.4%.

With a labor market close to full employment and moderating inflation, increasing real incomes will uphold private consumption. According to the forecast, general government balance is projected to remain in deficit, at -0.3% of GDP in 2019 and -0.5% of GDP in 2020.

The weaker than expected budget position is caused by the continued fast growth of expenses, while at the same time, a decrease in budget income is expected due to the cooling of the economic environment.

The recent slowdown in global growth and world trade, together with high uncertainty about trade policies, is weighing on prospects for GDP growth in 2019 and 2020. As global trade and growth are expected to remain weaker this year and next compared to the brisk pace seen in 2017, economic growth in Europe will rely entirely on domestic activity. 

More Europeans are now in work than ever and employment growth is expected to continue, albeit at a slower pace. This, together with rising wages, muted inflation, favorable financing conditions and supportive fiscal measures in some member states, is expected to buoy domestic demand. All in all, GDP is forecast to grow by 1.4% in the EU this year and 1.2% in the euro area.

In 2020, adverse domestic factors are expected to fade and economic activity outside the EU to rebound, supported by easing global financial conditions and policy stimulus in some emerging economies. GDP growth next year is forecast to strengthen slightly to 1.6% in the EU and 1.5% in the euro area. The figures for 2020 also benefit from a higher number of working days that year.

Labor market conditions continued to improve despite the slowdown in growth towards the end of 2018. While still too high in certain member states, unemployment in the EU - at 6.4% in March 2019 - has fallen to the lowest rate recorded since the start of the monthly data series in January 2000. Unemployment in the euro area is currently at the lowest rate since 2008.

Over the next two years, the rate of employment growth is expected to slow as the impact of more moderate growth takes its toll and temporary fiscal measures in some member states fade. The unemployment rate is expected to continue to fall in the EU in 2019 and is set to reach 6.2 % in 2020. The unemployment rate in the euro area is forecast to fall to 7.7% in 2019 and to 7.3% in 2020, lower than it was before the crisis began in 2007.

Inflation in the EU is expected to fall to 1.6% this year before rising to 1.7% in 2020. With energy price inflation expected to moderate further in the coming quarters and little sign that higher wage growth has been fueling underlying price pressures, euro area inflation is forecast to reach 1.4% in both 2019 and 2020.

Public debt is projected to continue falling despite lower growth. Debt-to-GDP ratios are forecast to fall in most member states in 2019 and 2020 as deficits remain low and nominal GDP growth should remain higher than the average interest rate on outstanding debt. 

Assuming no policy change, the debt-to-GDP ratio of the EU is forecast to fall from 81.5% in 2018 to 80.2% in 2019 and 78.8% in 2020. The euro area's aggregate debt-to-GDP ratio should fall from 87.1% in 2018 to 85.8 % in 2019 and 84.3% in 2020.

The aggregate government deficit of the EU is expected to rise from 0.6% of GDP in 2018 to 1% in both 2019 and 2020. It is also expected to rise in the euro area, from 0.5% of GDP in 2018 to 0.9% in 2019 and to remain unchanged in 2020, assuming no policy change. The increase this year is mainly due to slower GDP growth and expansionary fiscal policies in some member states.