Nordea Markets sees Estonia's recovery gaining strength

30.08.2010, 12:25

In its new Economic Outlook, Nordea Markets expects the Estonian economy to return to growth in 2010, with the recovery gaining further foothold in 2011 as also domestic demand perks up. It will, however, take several years to offset the decline in GDP that took place in 2008 and 2009.

According to the report, Estonia's economy has remained relatively stable over the past year as exports have supported the economy, while private consumption and investment continued their downtrend until Q1 2010.

Overall strong global trade is vital for the recovery of the economy, and setbacks in especially the Nordic countries and Russia would clearly affect the recovery of the Estonian economy.

The high unemployment rate is one of the main problems facing the authorities over the next couple of years. Although some labour market indicators have pointed towards some easing in unemployment, the unemployment rate is still high and especially long-term unemployment as well as youth unemployment remains elevated. However, an improved labour market situation is necessary for sustainable growth in private consumption.

Inflation has recently started to give rise to concern again, reaching 3.5% y/y in June, driven to a large extent by energy, fuel and food prices. Further upward pressure on prices may be seen as the domestic economy recovers and wages start growing again. There is also a risk of food and energy prices rising further. Hence, the authorities also face a challenge in limiting price pressures in the
economy.

As expected, Estonia will join the euro-area in January 2011, with focus now on the practical preparations. Euro adoption is expected to increase confidence in the economy both at home and abroad, likely resulting in increased foreign investment. The positive atmosphere regarding euro adoption already shows through in the consumer confidence indicator, which has improved significantly over the past year. Despite ensured euro-area membership the authorities are expected to continue pursuing a strict fiscal policy in order to balance the government budget.