Country Report Estonia December 2008

Outlook for 2009-10

• Strains within the ruling coalition are likely to deepen over the next two years, possibly threatening its stability. However, even if the government were to collapse, there would be few significant changes in economic policy.
• Political relations with Russia will remain tense, and this will have an adverse effect on Estonia's oil transit business with Russia. However, this is unlikely to have a significant impact on the economy overall.
• The economic slowdown will lead to a significant shortfall in tax receipts in 2008-09. Despite spending cuts, the general government budget will record deficits in 2009 and 2010.
• A sharper than previously expected contraction in domestic demand and poorer export prospects are forecast to cause real GDP to shrink by 2% in 2008 and by a further 2.5% in 2009 (previously 1.5% and 1.1%, respectively).
• The economy should recover from late 2009 as domestic demand stabilises and exports grow slowly. Real GDP is expected to rise by 2.1% in 2010.
• Higher excise duties, rising commodity prices and rapid wage growth pushed inflation up to 10.5% in 2008. Weaker domestic cost pressures and lower oil prices will allow inflation to drop to 5.8% in 2009 and 3.9% in 2010.
• As domestic demand weakens, the current-account deficit is set to narrow sharply, from 18.1% of GDP in 2007 to an estimated 11.9% of GDP in 2008, 6.3% of GDP in 2009 and 4.8% of GDP in 2010.

Monthly review

• An opinion poll at the end of October showed that support for the Reform Party, the leading party in the governing coalition, was lower than that for the opposition Centre Party for the first time since the election in March 2007.
• The deteriorating economic outlook is forcing the government to consider new cuts to spending in the 2009 budget in order to keep the budget deficit below the 3% of GDP limit set out in the Maastricht treaty.
• Real GDP fell by 3.3% year on year in the third quarter of 2008, a sharper fall than expected. Although output continues to increase in some goods-exporting branches, domestic demand is weakening further.
• Consumer price inflation fell to 9.8% in October, with lower fuel prices and an easing in core inflation pressures contributing to the drop in inflation.
• The current-account deficit narrowed year on year in the third quarter, but the international financial crisis is raising questions about the financing of the deficit. Foreign reserves fell in September but recovered in October.

This report covers the following industry codes:
SIC Code: 59;70;49;60;10
NAICS Code: 44;72;22;52;212