Estonia slowdown to be sharper than expected

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Estonia’s economic growth will slow to just 2% this year from 7.1% in 2007, the central bank said on Wednesday, adding inflation should come down to close to levels needed to adopt the euro by late 2010.

All three Baltic countries are facing a new challenge of coping with a slowdown after years of double digit growth, and of avoiding a hard landing. The Estonian government is already having to make budget cuts due to lower than expected revenues and lower growth could put Latvia and Lithuania under fiscal pressure too.  “The long-awaited economic adjustment is under way in Estonia, but it is no longer as smooth as expected due to the less favorable external environment,” the central bank said. The 2008 growth outlook was down from a forecast, made in October last year, of 4.3%. It expected 2009 GDP growth of 3%, down from a forecast 5.7%.

Inflation was seen speeding up in 2008 to 9.8% from 6.8% in 2007, but falling to 3.0% by 2010. The rate of price rises has forced Estonia to delay its plan to adopt the euro, originally set for 2007. “The central bank expects the ... inflation rate to reach close to the Maastricht inflation criterion at the end of 2010. In order to meet the criterion, the timing of administrative measures influencing prices is extremely important,” it said.

The bank said that in the less favorable global environment, rising prices and uncertainty had hit domestic demand. The bank saw the current account gap at 10.2% of GDP this year and 7.5% in 2009 after 17.4% in 2007. It urged the government to support the economic adjustment by continuing to pursue responsible fiscal policies. It said spending had to be cut by about 3 billion kroons ($303.4 million) this year, otherwise the fiscal deficit would be more than 1% of GDP. “In order to balance the budget, planned expenditure should be cut by 8 and 11 billion kroons in the next two years, respectively,” it added. (Reuters)

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