Central bank expects lower growth, faster inflation

28.04.2010, 13:15

Estonia’s economy may grow at a slower pace than previously forecast as domestic demand remains weak, the central bank Eesti Pank said today. Gross domestic product will rise 1 percent this year and 4 percent in 2011, compared with the previous outlook for 1.4 percent growth in 2010 and a 4.6 percent increase next year, reported Bloomberg.

However, economic growth will slow in 2012 to 3.3 percent from 4 percent the previous year, accocding to deputy governor Märten Ross. Ross said at a news conference held in Tallinn that the government won’t need to cut spending further in 2010, and that there may be a ‘slight’ rise in 2011 budget spending.

The bank said in its new outlook that economic stabilization has so far been mainly driven by external demand, with the sectors oriented to domestic demand displaying only limited signs of a rebound. “If growth resumes faster than expected, it shouldn’t be viewed as a return to a steady state since investment activity hasn’t yet recovered,” it said.

Average annual inflation will be 1.3 percent this year and 1.1 percent in 2011, the bank said. In October, it forecast average 2010 deflation of 0.4 percent and inflation of 1.7 percent the year after.

“The fact that the sharp decline in the relative income level in Estonia hasn’t been accompanied by a notable change in the relative price level will ease inflationary pressures over a longer period of time,” the bank said.

Speaking of the Greek spillover, central bank governor Andres Lipstok said that Estonia probably won’t see any impact from the Greek debt crisis.  “The Greek crisis is very far from us, it is very difficult to see any concrete contagion channels,” he said. “The Greek story is Greece’s. Estonia has it’s own story.”

However, Lipstok added that Estonia’s government needed to freeze spending at 2010 levels to be able to achieve a fiscal surplus by 2013.