Researchers: Estonia’s economy will grow, but risks are involved

The Estonian economy will continue to grow, although more moderately in the coming quarters; however, there are risks to the country’s competitive edge, BMI Research, a British research firm, says in its analysis.

“We remain upbeat on the Estonian economy despite forecasting a more moderate growth trajectory over the coming quarters,” the company said, adding that growth will be driven by strong domestic demand, in turn the result of robust investment and an upswing in private consumption. “The tightening labour market, alongside a slowdown in inflation and tax cuts, will boost household spending, albeit posing risks to the country’s competitive edge.”

“After peaking at an estimated 4.3% in 2017, we forecast real GDP growth to stand at 3.3% in 2018 and at 3.1% in 2019, mirroring closely the trajectory projected for the broader Baltic region,” BMI Research said. “The slowdown will be mainly the result of fading base effects, in particular driven by a normalisation in investment levels.”

Public finances to remain robust

The company also noted that public investment will remain strong over the coming quarters, further supported by the country’s robust pace of absorption of European Structural and Investment Funds for the period 2014-2020.

“Estonia has already spent over 10% of its share of allocated funds, relative to an average of 6% across the EU,” the research firm pointed out. “Over the next two years, the government will also roll-out an investment programme equalling 0.4% of GDP. The latter will contribute to a small increase in the country’s budget deficit in the years ahead, although public finances will remain robust, with public debt hovering around 9% of GDP. Meanwhile, Estonia will witness a pick-up in private investment, supported by higher corporate profits and surging business confidence, in turn underpinned by favourable economic and financial conditions.”

However, BMI research warns that while boding well for consumer spending, the tighter labour market also represents the biggest risk to Estonia’s economic outlook.

Salaries remain below the EU average

“Mounting pressures on labour costs, due to a rise in labour shortages as the economy nears full employment and also due to negative demographics, threaten the international competitiveness of Estonian companies,” the company’s analysis says.

“Adding to this, despite having risen significantly over the past few years, salary levels remain well below the European Union average. This disparity, reflected by a lower GDP per capita, somewhat curbs the country’s ability to attract labour from the broader EU market.”

BMI Research is a London-based research firm that provides macroeconomic, industry and financial market analysis, covering 24 industries and 200 global markets.

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Cover: A modern office in Estonia (image by Maris Tomba).

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About the author: Sten Hankewitz

Sten Hankewitz is a lifelong journalist and Deputy Editor of Estonian World. Having lived in Estonia, Spain and the UK, he now resides in the United States. He loves to write and besides contributing to Estonian World and some occasional blogging, he writes for other media outlets in Estonia, Israel and elsewhere. He has strong convictions and he shows them unashamedly. You can follow him on Twitter, friend him on Facebook or check out his personal blog. You can write to Sten at sten@estonianworld.com.