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Monday, May 19, 2008

IMF Warn That The Estonian Economy May Contract In 2008

The IMF have this morning suggested in a report that the Estonian economy may in fact contract this year (whole year 2008) as consumption wanes and exports falter.

The report was presented at a conference held in the Estonian capital of Tallinn. The IMF have not yet posted the report on their website, but the conference is being covered by Bloomberg's Ott Ummelas.

Sensibly the IMF saying that it is ``too early'' to make new ``numerical forecasts'' on the economy (this is my own personal position) but todays report already marks a substantial shift from April's WEO forecast, where the IMF said it expected economic growth to slow to 3 percent this year from last year's 7.1 percent, before accelerating to 3.7 percent in 2009. I think all these numbers just got scratched.

Estonian Finance Minister Ivari Padar is quoted as saying "In principle, we agree with the IMF's conclusions".

The core of the issue is summarised in the IMF view that a recovery will depend on the competitiveness of local industries, and a revival of exports or investment, adding that the slowdown will ``test'' the banking system. This is something I have been arguing from this blog for the last six months now. Basically It was always unrealistic given the pace of the slowdown to anticipate positive growth (let alone 3% plus growth) in Estonia this year (and it is far too early to start talking about 2009). Essentially continuing inflation (in the context of the currency peg to the euro) is eating away month by month at the vitals of Estonian export competitiveness.

Since Estonian domestic demand now looks to stay flat for the foreseeably future, the economy willneed to have export competitiveness to attract the inbound investment component. So everything now depends on getting relative prices straight, and without changing the peg quite frankly I don't see how Estonia is going to do this.

Basically when Estonia emerges from this crisis my feeling is that we will see an export driven economy on the pattern we can already see in some Scandinavian countries, and the reason for my holding this view is based on an appreciation of consumer demand dynamics in the context of a rapidly ageing population.

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