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Estonia Business Forecast Report Q2 2010
Management Report
Published: February 2010
Pages: For full details, please email keithw@cmsinfo.com
Tables: For full details, please email keithw@cmsinfo.com
From: GBP 480.00 Buy Now!
Research from: Business Monitor International
Sector: Regional Markets
Despite the regional financial market rally since early 2009 and tentative signals of a global macroeconomicrecovery, we hold to our broadly negative long-term outlook for the Estonian economy.
Estonia is facing a structural economic contraction as it unwinds an asset and credit bubble builtthrough years of over-leverage in the pre-2008 period and this will mean that the country will notbe well positioned to take advantage of any significant improvement in external demand. Indeed,we hold to our forecast for Estonia to experience a third consecutive year of negative real GDPgrowth, with the economy expected to contract by 1.2% in 2010. Estonian politics will continue to be dominated by the issues of the recession and euro adoption in2010. While the protracted recession is likely to add risks to political stability, we stress that PrimeMinister Andrus Ansip’s success in accelerating the euro adoption time table could provide a majorboost to his government’s support leading into general elections in early 2011. Indeed, shouldEstonia successfully achieve euro adoption on schedule in January 2011, this would significantlyincrease the likelihood of the re-election of the Reform Party-led coalition.
We have substantially lowered our Estonian 2010 budget deficit forecast, although hold to our coreview that the budget shortfall will not fall below the 3.0% of GDP maximum limit for euro entry thisyear. Though the government has targeted a 2.8% shortfall, we maintain that general elections,due to be held in Q111, and a protracted recession, will elevate risks to expenditure and revenueprojections resulting in a 3.1% general government deficit. We highlight, though, that the risks toour deficit forecast are to the downside and thus caution that there is a possibility that Estonia willenter the eurozone in 2011.
Unemployment in Estonia hit a record 13.3% in December, up from 4.7% and 2.2% at end-2008and end-2007 respectively. Sharp contractions in industrial output and domestic demand linkedto a massive decline in local credit and a fiscal austerity programme, is resulting in a substantialloosening of the labour market. In 2010, we see little scope for a recovery, with unemploymentforecast to remain in the double digits alongside a continuation of the recession through H110. Whilehigh unemployment will lower wage costs in Estonia, it is also reflective of a deep and structuralcontraction in the size of the economy, which will substantially slow gross capital investments.
Estonia is facing a structural economic contraction as it unwinds an asset and credit bubble builtthrough years of over-leverage in the pre-2008 period and this will mean that the country will notbe well positioned to take advantage of any significant improvement in external demand. Indeed,we hold to our forecast for Estonia to experience a third consecutive year of negative real GDPgrowth, with the economy expected to contract by 1.2% in 2010. Estonian politics will continue to be dominated by the issues of the recession and euro adoption in2010. While the protracted recession is likely to add risks to political stability, we stress that PrimeMinister Andrus Ansip’s success in accelerating the euro adoption time table could provide a majorboost to his government’s support leading into general elections in early 2011. Indeed, shouldEstonia successfully achieve euro adoption on schedule in January 2011, this would significantlyincrease the likelihood of the re-election of the Reform Party-led coalition.
We have substantially lowered our Estonian 2010 budget deficit forecast, although hold to our coreview that the budget shortfall will not fall below the 3.0% of GDP maximum limit for euro entry thisyear. Though the government has targeted a 2.8% shortfall, we maintain that general elections,due to be held in Q111, and a protracted recession, will elevate risks to expenditure and revenueprojections resulting in a 3.1% general government deficit. We highlight, though, that the risks toour deficit forecast are to the downside and thus caution that there is a possibility that Estonia willenter the eurozone in 2011.
Unemployment in Estonia hit a record 13.3% in December, up from 4.7% and 2.2% at end-2008and end-2007 respectively. Sharp contractions in industrial output and domestic demand linkedto a massive decline in local credit and a fiscal austerity programme, is resulting in a substantialloosening of the labour market. In 2010, we see little scope for a recovery, with unemploymentforecast to remain in the double digits alongside a continuation of the recession through H110. Whilehigh unemployment will lower wage costs in Estonia, it is also reflective of a deep and structuralcontraction in the size of the economy, which will substantially slow gross capital investments.