Country Report Estonia March 2009

Outlook for 2009-10

• Strains within the ruling coalition are likely to deepen over the next two years, possibly threatening its stability. Continuing conflicts over fiscal policy are likely to exacerbate tensions.
• 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 shortfall in tax receipts in 2009. The general government budget deficit is set to rise above the Maastricht limit of 3% of GDP in 2009, but we expect it to fall back to 2.9% of GDP in 2010.
• A sharper than previously expected contraction in domestic demand and much poorer export prospects are now forecast to cause real GDP to fall by 8% in 2009 and by 1.5% in 2009.
• Weaker cost pressures and lower commodity prices will bring inflation down from 10.4% in 2008 to 1% in 2009 and 2% in 2010.
• As domestic demand weakens, the current-account deficit is set to narrow. However, it will contract more slowly than previously forecast, owing to a less favourable outlook for exports.

Monthly review

• Controversy over the best approach to the economic downturn has brought tensions within the ruling coalition to the fore. However, the government remains intact and has faced down the opposition in parliament.
• The opposition Centre Party has been thwarted in an attempt to redesign the electoral map in the capital, Tallinn, which would have probably boosted its support in the local elections due in October 2009.
• In the face of a much steeper economic downturn than expected, the government has pushed through a package of expenditure cuts, in an attempt to stabilise the public finances.
• The Bank of Estonia (BoE, the central bank) has highlighted the downside risks to its current economic forecast and warned that further fiscal tightening may be necessary if budget revenue performs worse than expected.
• Real GDP fell by 9.4% in the fourth quarter of 2008, bringing the full-year contraction in real GDP to 3.5%, a more rapid slowdown than expected. Most sectors of the economy recorded a decline in output.
• Unemployment has continued to rise, reaching 7.6% in the final quarter of 2008, according to labour force surveys. EU data put unemployment at 9.2% in December 2008.

This report covers the following industry codes:
SIC Code: 53;82;49;60;48
NAICS Code: 44;61;22;52;517