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Estonia: Entering the low−growth environment
Wed, May 7 2008, 15:26 GMT
by Danske Research Team
• Growth slowed significantly in Q4 07 and we expect it to slow further. We downgrade our GDP growth forecast to 2.5% y/y for 2008 and to 3% y/y for 2009.
• The slowdown is broadly based, but the main driver is a significant slowdown in domestic demand, as the property market cools further. In 2007, the number of real estate transactions declined to the 2004 level and prices dropped by 10-15% y/y.
• Estonia's inflation rate fell back slightly in March to 10.9% y/y from 11.3% y/y in February. Despite the slowdown in domestic demand, we expect inflation to rise further in 2008, mainly due to high wage growth, but also due to rising excise duties and an increase in electricity prices. We expect inflation to average 10% y/y in 2008 and 6% y/y in 2009.
• In order to increase competitiveness and labour market flexibility, Estonia is going to implement a concept known as flexicurity in the labour market. This is not likely to be a miracle, but a step towards a more flexible model may be good decision in the slowing growth environment
• In 2007, credit growth decelerated significantly from more then 60% y/y in 2006 to 30% y/y currently, due to tighter credit conditions. We expect this trend to continue in 2008 as well.
• The slowdown in growth increases the risk that the budget surplus may not be achieved, thus an expenditure cut would be a correct policy option in our view.
Published on Wed, May 7 2008, 15:27 GMT
Danske Bank
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http://www.danskebank.com/ | danskeresearch@danskebank.com
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