Estonia: Estonia Outlook for 2013-17

The country (Estonia) is situated in Eastern Europe, bordering the Baltic Sea and Gulf of Finland, between Latvia and Russia.
It has borders with Latvia for 343km and Russia for 338.6km. Land in Estonia is marshy, lowlands; flat in the north, hilly in the south.

The climate is maritime with wet and moderate winters and cool summers.Estonian (official) 67.3%, Russian 29.7%, other 2.3%, unknown 0.7%.

Overview

The centre-right coalition has a parliamentary majority. It is expected to remain in power until the next election in 2015. Despite remaining tensions, political ties with Russia will normalise gradually. Politicians will continue to back the fiscally conservative German position on the deficit crisis. In the initial five months of 2013 national finances recorded a surplus. The budget deficit will remain well within the EU-mandated deficit limit of 3% of GDP in 2013-14.

Euro zone interest rates could prove too low for Estonia's transition economy, resulting in higher than expected inflation. In the initial quarter of 2013 real GDP increase slowed to 1.1%. Additional recent data show a pick-up in the second quarter. The Economist Intelligence Unit still expects an extra deceleration in real GDP in 2013, to 2.3%. Consumer prices picked up a little in June. Despite liberalisation of electricity prices, a low inflation environment and weaker economic increase will result in continued disinflation this year. Owing to a strong export performance in the initial half, the current-account gap will widen only modestly in 2013.

Political outlook

In mid-May 2013 Urmas Paet, the foreign minister, told the Foreign Affairs Committee of the Riigikogu (parliament) that Estonia had finally reached agreement on a new border treaty with Russia.

Economic policy outlook

In May the European Central Bank (ECB) cut the refinancing interest rate by 25 basis points, to 0.5%. In early July the head of the ECB, Mario Draghi, indicated that rates would remain low for an "extended period".

Economic forecast

The continuation of the euro zone recession into 2013 will dampen growth, but the resilience built up after 2008-09 puts Estonia's economy in a relatively good position in the medium term. We forecast average annual real GDP growth of 3.4% in 2014-17. In January-May 2013 the current-account deficit narrowed to EUR219m, from EUR241m a year earlier. We expect the deficit to widen in 2014-17, to an annual average of around 2.5% of GDP.

Outlook for 2013-17

    Since the election in March 2011, a centre-right coalition of the Reform Party and the Pro Patria-Res Publica Union (IRL) has had a parliamentary majority.
    Politicians will continue to back the fiscally conservative German position on the debt crisis. The budget deficit will remain well within the EU-mandated deficit limit of 3% of GDP in 2013-15, and return to surplus from 2016.
    The continuation of the euro zone recession into 2013 will dampen economic growth, but the resilience built up at considerable cost after 2008 puts Estonia's economy in a better position than many in the medium term.
    The Economist Intelligence Unit expects a further deceleration in real GDP in 2013, to 2.3%. We forecast average annual real GDP growth of 3.4% per year in 2014-17.
    Despite liberalisation of electricity prices, a low inflation environment and weaker economic growth will result in continued disinflation this year, but inflation will pick up in 2014-17, in part reflecting rising energy costs.
    Owing to a strong export performance in the first half of the year, the current-account gap will widen only modestly this year. We forecast further widening in 2014-17, to an annual average of around 2.5% of GDP.

Review

    In mid-May 2013 Urmas Paet, the foreign minister, told the Foreign Affairs Committee of the Riigikogu (parliament) that Estonia had finally reached agreement on a new border treaty with Russia.
    In the first five months of 2013 state finances recorded a surplus that was only a little down on the one recorded in January-May 2012.
    In May the European Central Bank (ECB) cut the refinancing interest rate by 25 basis points, to 0.5%. In early July, the head of the ECB, Mario Draghi, indicated that rates would remain low for an "extended period".
    In the first quarter of 2013 real GDP growth slowed to 1.1%, from 3.7% year on year in the fourth quarter of 2012. More recent data show a pick-up in the second quarter.
    Consumer prices picked up a little in June, accelerating to growth of 3.8%, again linked to a rise in electricity costs.
    In January-May 2013 goods exports grew by 4.1% year on year, compared with import growth of 2.7% year on year. In this period the current-account deficit narrowed to EUR219m, from EUR241m a year earlier.