Country Report Estonia May 2009

Outlook for 2009-10

• Strains within the ruling coalition are likely to deepen over the next two years, threatening its stability. Continuing conflicts over fiscal policy will exacerbate tensions.
• Political relations with Russia will remain tense, and this will have an adverse effect on Estonia's oil transit business.
• The economic downturn will lead to a shortfall in tax receipts in 2009. The general government budget deficit is set to exceed the Maastricht limit of 3% of GDP in 2009, but we expect it to narrow to 2.9% of GDP in 2010.
• A sharp contraction in domestic demand and poor export prospects are forecast to cause real GDP to fall by 10% in 2009 and by 2.5% 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 2% of GDP in 2010.

Monthly review

• The campaign for the election to the European Parliament, scheduled for June7th, is increasing tensions both within the ruling coalition and between government and opposition parties.
• Disagreements within the coalition over how best to narrow the budget deficit have become more frequent. The prime minister has dismissed calls for an early election.
• The government has proposed plans for even deeper cuts in budget expenditure, following the passage of a supplementary budget in February.
• Contributions to the second-pillar pension scheme will be suspended for most workers until 2011. Unemployment insurance premiums will rise to the current maximum permitted level in June; further increases remain possible.
• Consumer prices fell month on month in March for the fifth consecutive month. Year-on-year inflation fell to 2%, the lowest rate since EU accession. Prices for manufactured goods and fuel led the downswing in inflation.
• The rate of unemployment has continued to increase, reaching 8.4% in March, compared with 2.7% a year earlier. Eurostat data put the rate even higher, at 10%.
• Preliminary data from the central bank show a 75% contraction of the trade deficit in February. This led a narrowing of the current-account deficit to US$22m, the smallest monthly deficit since May 2005.