Domestic demand remains the driving force of the Estonian economy

According to the spring forecast of the Ministry of Finance, the Estonian economy will grow by 2 per cent this year and by 2.8 per cent in 2016. Domestic demand will remain the driving force of the economy.
The Ministry of Finance expects exports to pick up from 2016, but the contribution of domestic demand will also remain stable due to the recovery in investments. We expect economic growth to accelerate to 3.4 per cent by 2017. The Ministry of Finance has adjusted the economic forecast for this and next year downwards, mostly because of the deterioration in the growth prospects of Estonia’s main trading partners. The forecastfor 2017 and subsequent remain unaltered.
 
According to the forecast, average wages will increase by 4.8 per cent this year. The figure was adjusted downwards because the consumer price index will increase less than expected. Provided that foreign demand recovers, the growth rate of nominal wages should pick up pace from next year, while real wage growth will remain at around 3 per cent per year. The share of labour income in value added has risen to a relatively high level and should drop a little in the future.
 
Consumer prices are expected to fall in the first half of the year. Consumer prices will increase by 0.2 per cent in the year 2015. Inflation will accelerate to 2.2 per cent in 2016, mainly due to external factors: because oil futures are on the upward trend and food prices will also start to rise due to increasing demand. 
 
The increase in private consumption this year is being supported by several factors – average wages and employment will both increase and the reduction of the tax burden of labour will also increase net wages. The lack of inflation will also help – consumer prices will not increase in the first half of the year. The 4.8 per cent real growth in private consumption expected in 2015 will drop to 2.8 per cent in 2016 as a result of a pickup in inflation. The growth of private consumption may slow further due to the faster price increase and the decrease in employment. 
 
The increase in investments should recover this year. The investments made by companies also increased last year, except for the energy sector, and the start of the new EU funding period is will keep this level high in the government sector. As a whole, the increase in investments will probably remain modest in 2015 (2.7 per cent), but should increase to 4-5 per cent as the external environment improves.
 
The rate of unemployment will continue to decrease according to the forecast and will be less than 6 per cent from 2016 onwards. The number of employed people will increase by 0.6 per cent in 2015 and then fall by up to 0.5 per cent from the following year. Due to the decrease in the working-age population and the assumption that the participation rate in the workforce and employment are close to the maximum, the prospects of further increases in employment are modest.
 
The structural budget position of Estonia will remain balanced in the coming years. The general government nominal budget deficit will remain at 0.5 per cent of gross domestic product (GDP). It will increase to 0.6 per cent of GDP in 2016. General government budget position will improve constantly in the coming years and reach a 0.1 per cent surplus of GDP by 2018. 
 
According to the forecast, the level of tax receipts will remain quite good, partly due to the successful work of the Tax and Customs Board. The tax burden in Estonia will remain at 32.9 per cent in 2015 and increase to 33 per cent by 2019. Tax changes planned for the coming years will reduce the tax burden on labour and will be balanced with the better collection of taxes.
 
General government reserves comprised 10.4 per cent of GDP at the end of 2014. The reserves of the central government, social insurance funds and local authorities all increased in comparison to the previous year. General government debt increased to 10.6 per cent of GDP in 2014. The debt burden will decrease in the coming years and reach 8.2 per cent of GDP by 2018.
 
April 13, 2014
 
Press contact:
 
Ott Heinapuu
Public Relations Department
Ministry of Finance of Estonia
Phone +372 611 3035; +372 56 659 980
ott dot heinapuu at fin dot ee