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Friday, April 4, 2008

Estonia Growth Forecast and Budget Changes 2008

Estonia's Finance Ministry cut its 2008 economic growth forecast for the third time in under a year earlier this week, while indicating that lower tax revenue will require spending cuts to balance the budget through 2011.

Gross domestic product is now expected to expand by 3.7 percent this year and 6.4 percent in 2009. Last November, it had forecast 2008 growth of 5.2 percent and 2008 growth of 6.1 percent. I think we can safely leave the 2009 forecasts on one side at the moment, since frankly I am sure that no one at this point can see as far ahead as 2009. That is to say these forecasts are not really worth the paper they are written on.

3.7 percent is certainly a much more realistic figure for 2008 than the ones we have been seeing up to now, although even this may well turn out to be rather on the high side.As far as the present quarter goes it is not impossible that we will see some sort of bounce back from last quarters 0.8% quarterly growth rate. Certainly industrial output has been a lot better in the first two months of this year than it was in the last two of 2007. Retail sales are however down over the same months, and exports were better in January than in December, but the rate of increase was still below that achieved in October and November of 2007.

But if we look at the the Estonian Institute for Economic Research surveys of Construction and Services and Construction activity, we see that the level of activity is not noticeably better, if at all, from that registered in the last three months of last year. So the position is far from being clearcut.

So I'm not sticking my neck out and actually saying that growth will be up this quarter, but it may not decline as quickly as it has been doing in the past. However as we move beyond Q1 2008 the numbers get ever more difficult to foresee, but given that the EU, eurozone and global economies are all slowing noticeably at this point, downside risk must abound here, so while we may see something in the region of 1% quarter on quarter growth in Q1, this may well be the strongest growth Estonia gets all year, so that 3.7% current forecast looks subject to revision, and lots of it, as far as I can see.

Meanwhile Finance Minister Ivari Padar told a news conference this week that the government will have to cut spending all the way through to 2011 to balance the budget. The government previously had a policy of targeting budget surpluses. He said the government had already decided to cut 2008 spending by 3.1 billion krooni, or 1.1 percent of gross domestic product. Parliament adopted the 2008 budget in December with a surplus of 2.7 billion krooni ($270 million), or 1.3 percent of planned GDP.

Prime Minister Andrus Ansip said last week public spending cuts are ``unavoidable'' given a slowing economy and waning tax revenue. Estonia uses budget policy as its main tool for controlling inflation because the Baltic nation has a fixed exchange rate under a currency board system, and in addition the Estonian government is legally constrained from willingly running a deficit, a feature which may well make it difficult to move in and offer support should the situation deteriorate more substantially later this year than any of us are currently forseeing.

The government have also revised their inflation forecast and prices, as now measured on the EU HICP, are now expected to rise an average 9.1 percent this year and 5.3 percent next, the ministry said. The previous inflation forecast had been for a 2008 inflation rate of 8.5 percent, and a 5.5 percent one for 2009.

Of course, I would be grateful if someone could explain to me how Estonia is going to be able to generate the level of export increase necessary to sustain the economy in the face of what will soon be long term very constrained domestic demand and maintain the currency peg with this kind of inflation over this length of time. Something here simply doesn't add up.

Update Tuesday 8 April 2008

Prime Minister Andrus Ansip said today that Estonia should delay any 2008 spending cuts until September, by which time the Cabinet will have a better understanding of how much needs to be trimmed. Ansip said in an interview with public broadcaster Eesti Televisioon that it may be necessary to cut more than the 3 billion krooni ($302 million) suggested last week by Finance Minister Ivari Padar. Even if cuts are delayed, ministers will have to find savings of 7 percent to 9 percent of their budgets by next week, the prime minister said. Ansip's coalition partners in the Reform Party, the Pro Patria and Res Publica Union and Padar's Social Democrats, support the passage of budget cuts in parliament as soon as possible, according to the Baltic News Service yesterday.

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