OECD lowers Estonia's economic growth forecast to 1.5 pct

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The Organization for Economic Cooperation and Development (OECD) in its spring Economic Outlook published on Wednesday expects the Estonian economy to grow 1.5 percent this year and 3.6 percent in 2014 compared to the fall forecasts of respectively 3.7 and 3.4 percent.

The projections of Estonia's economic growth in 2013 and 2014 are above the OECD average and considerably stronger than the eurozone average, the Finance Ministry said.

Growth is driven by strong domestic demand supported by falling unemployment and accelerating wage growth. The OECD expects gradual improvement of external conditions in the second half of the year and continued recovery of the labor market. However, further employment gains are likely to be more modest due to skill mismatches, intensifying wage pressures and the declining population, the report says. Price rise will continue slowing but is expected to remain above the eurozone average at 3.4 percent this year and 2.9 percent in 2014.

The OECD says Estonia's fiscal position is sound but advises the government to continue strengthening the policy framework by introducing a multi-year spending ceiling and an independent fiscal council. In the organization's view steps to strengthen active labor market measures and life-long learning policies, as well as a lower tax wedge for low-income earners, are also called for.

The OECD's economic growth estimate for the current year is considerably lower than private sector forecasts and also below the Finance Ministry's most conservative expectations. The OECD forecast is cautious due to slower growth than expected in the first quarter, but the organization says activity is set to recover and growth will soon return to a rate of 3-4 percent.

The Finance Ministry traditionally revisits its forecast in August when a larger amount of more detailed data on the current year is available. Basing on several indicators, there are no grounds for a substantial revision of the forecast at present.