Swedbank cuts Estonia's growth forecast to 1.9 pct

Photo: TOOMAS HUIK/PM/SCANPIX BALTICS

Swedbank published a fresh economic outlook on Tuesday showing its real GDP growth forecast on Estonia for this year at 1.9 percent, almost half lower than the growth estimate of 3.3 percent published in April.

Swedbank expects the Estonian economy to grow 3.9 percent in 2014, compared with the April real growth estimate of 4.2 percent, it appears from the forecast published on Tuesday.

The forecast of CPI inflation for Estonia in the fresh estimate by Swedbank stands unchanged at 3.3 percent. The country is seen to experience inflation of 2.8 percent in 2014.

The 2013 full-year unemployment rate is estimated to be 8.9 percent, lower than the rate of 9.5 percent suggested by the April forecast. The jobless rate in 2014 is estimated to be 8.4 percent.

«In the first half of this year the economy contracted significantly more than expected, the average rate of economic growth this year is 1.2 percent,» Swedbank chief economist Tonu Mertsina said at the presentation of the forecast. «If we look at what has happened to nominal GDP growth or growth in current prices, there hasn't been a similar deceleration there. Growth has decelerated namely in constant prices.»

Economic growth this year was undermined by steeply decreased investments and lower demand at our main trading partners, primarily Russia and Finland, which have held back export growth for Estonia, Mertsina said.

«The electronics industry influences the Estonian economy a lot, over the last three quarters its contribution to GDP growth has been 0.6 percentage points, meaning that of the first quarter GDP growth of 1.1 percent roughly half originated in the electronics industry. It shows that many businesses were on a decline, for the electronics industry to be able to dominate that much,» said Mertsina. The profits of companies meanwhile remain relatively solid, he added.

Investments have decreased in all sectors. Notably, the government sector, which made the biggest contribution last year through investment of money earned from the sale of carbon credits, is investing less since the end of 2013 and the decrease is set to be even bigger this year.

Investments this year are seen to decline 0.6 percent. «When external demand starts to quietly pick up and companies experience the need to invest more, growth in investments should be restored in 2014 and 2015,» Mertsina said. Bigger growth is prevented by the decline in government sector investments.

Even though poor demand at Estonia's main trading partners has slowed down growth in export and import alike, export and import were still in a relatively good shape at the beginning of the year. It has to be remembered that at the beginning of the year export in nominal prices was boosted to a very high level by a one-off transaction with ferries, which was 155 million euros in exports and 90 million euros in imports. «This already raises the base for this year higher technically,» Mertsina said.

Swedbank expects Estonia to post export growth of 5-6 percent this year.