Country Report Estonia June 2009

Outlook for 2009-10

• The current minority administration is highly unlikely to last out the forecast period. Conflicts with the opposition over fiscal policy will threaten its survival, possibly leading to a pre-term election.
• Political relations with Russia will remain tense, and this will have an adverse effect on the Estonian oil transit business.
• The economic downturn will lead to a shortfall in tax receipts in 2009. Spending pressures will remain high, despite continuing adjustments to budget expenditure plans.
• The budget deficit is set to exceed the Maastricht limit of 3% of GDP in 2009; we forecast that it will reach 3.7% of GDP. Our central scenario is that the 3% of GDP target will be met in 2010, but even this is subject to considerable doubt.
• A sharp contraction in domestic demand and poor export prospects are forecast to cause real GDP to fall by 13% in 2009 and by 3% in 2010.
• Weaker cost pressures and lower commodity prices will bring inflation down from 10.4% in 2008 to an annual average of less than 1% in 2009-10.
• As domestic demand weakens, the current-account deficit is set to narrow sharply, from 9.4% of GDP in 2008 to less than 3% of GDP in 2010.

Monthly review

• A dispute over unemployment benefits has led to the break-up of the three-party ruling coalition. The Reform Party and Pro Patria-Res Publica Union (IRL) are now attempting to govern in a minority administration.
• Trade unions organised a demonstration against new labour laws on June 3rd. The protest was only sparsely attended, but the trade unions are continuing with plans to hold a general strike on June 16th.
• The budget outturn was disappointing in the first four months of 2009, with revenue falling by 7.7% year on year and expenditure increasing, by 4.1%. Further spending cuts will be needed to try to rein in the budget deficit.
• Preliminary data show a contraction in real GDP of 15.6% year on year in the first quarter of 2009, following a fall of 9.7% in the final quarter of 2008. Retail sales data point to an even sharper downturn in the second quarter of 2009.
• Unemployment has continued to rise, and reached an eight-year high in the first quarter of 2009, at 11.4% of the labour force. Eurostat data for April show the rate in Estonia to have risen faster than in any other EU state.
• Wages have begun to fall, declining by 1.5% year on year in the first quarter of 2009, and by 4.5% in real terms.