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Estonian Ministry of Finance 2010. Summer Forecast
August 25th 2010
Macroeconomic Forecast
Economic growth by 2% in 2010 and 3,6% in 2011 is relatively good outcome
Inflation 2,6% in 2010 and 2,5% in 2011
Economic growth stronger than expected supported by increased competitiveness and external demand
Current inflation mainly imported, fruther developments in accordance with economic growth and productivity
Employment increase stable, but more restrained than desired
Economic growth in 2010Q2
-3
-2
-1
0
1
2
3
4
5
Estonia Sweden Germany France Lithuania Latvia
2010Q2 Euro area average
1. Macroeconomic Forecast
Andrus SäälikHead of Macroeconomic Policy Department
Fundamentals of Forecast
Recovery from the crisis in 2010. faster than expected (export, industry)
Domestic demand starts to pick up in 2nd half of 2010 supported by investments
Consumption courage is increasing
In 2010. inflation higher than expected (commodities, bad weather conditions), further developments in accordance with economic growth
Uncertainty in respect to 2011. outlook has increased
-16
-12
-8
-4
0
4
8
12
2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
%
Economic growth (Summer 2010) Economic growth (Spring 2010)
Recovery from crisis is faster
1.1. External environment and trade
-50
-40
-30
-20
-10
0
10
20
30
40
2008 2009 2010
%, y-o-y
-50
-40
-30
-20
-10
0
10
20
30
40
EU total EE FISE LV DE
Exports has recovered rapidly in the EU, the growth rate reached almost 40% in the Baltics.
Source: Eurostat
-40
-30
-20
-10
0
10
20
30
40
2006 2007 2008 2009 2010
%
Mineral products Chemical products Plastics and rubber articlesWood and furniture Base metals Machinery and equipmentTransport equipment Other Total export growth
Growth of exports has been strong in last months, being affected by the internal readjustments of companies and the pick up of the foreign demand
1.2. Domestic demand
Consumers confident in state success
Convergence in households’ saving rate
Consumption recovering?
Upwards trend of VAT
-30
-20
-10
0
10
20
30
40
2006 2007 2008 2009 2010
%
Retail trade growthGrowth of VAT receipts from intra-community turnoverPrivate consumption real growth
1.3. Labour market and prices
5000 new wage-earners during one quarter
-15
-10
-5
0
5
10
2004 2005 2006 2007 2008 2009 2010
% y-o-y
Number of payments (Tax Board) Employment (ESA)
Registered unemployment on downward trend since April
0
2 000
4 000
6 000
8 000
10 000
12 000
2005 2006 2007 2008 2009 2010
%
02468101214161820
New registered unemployedRate of registered unemployment in labour force (right scale)Unemployment rate (right scale, ESA)Becoming employed
400
450
500
550
600
650
700
1996 1998 2000 2002 2004 2006 2008 2010* 2012* 2014*
thousand of people
0
3
6
9
12
15
18%
Employment Unemployment rate
Unemployment rate (Spring Forecast) Registered unemployed
Unemployment is falling, but the pace is more restrained than desired
Mostly foreign factors and severe weather conditions, also increases in indirect taxes are
behind the higher inflation
-1
0
1
2
3
4
5
6
-2
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
Monthly CPI (right sc) CPI Core inflation Euro zone (MUICP)
Inflation will fluctuate between 2.5–3% in near future, in line with the productivity and economic
growth
1.4. Risks
Outside Europe qoq growth loosing pace, pessimism is back
-5
-4
-3
-2
-1
0
1
2
2006 2007 2008 2009 2010
% qoq, SA
-10
-8
-6
-4
-2
0
2
4
EU27 US JP EE (right scale)
Risk scenario: exports will grow just one year?
Risk scenario: exports will grow just one year?
Risks Labour market
Improvement mostly due to seasonal factors
Economic growth based on increasing productivity – need for new workers?
Inflation boosting in short term, 4% at the end of year Several one-off factors and surprises
Expectations
Price convergence is continuing
Export Recovery effect up to 2011
Growth expectations in light of Q2 growth
Public Finance
Sven KirsipuuAdviser Public Finance and Strategies Department
Public Finance keywords in 2010–2014
The growth of economic activity increases the tax revenues
Requested 2011 budget expenditure exceeded the limit-amounts by 4.8 bln EEK
Selling of emmission quotas and associated investments influence the budget position
Budget balance by the end of the forecast period
Tax revenues exceed the budget by 2.0 bln EEK
2010 budge
t
Spring Foreca
st
Summer
Forecast
Summer vs
Spring
Taxes in total61
767.563
096.463
757.4661.0
incl. PIT3
220.03 210.0 3 150.0 -60.0
CIT2
425.03 400.0 3 190.0 -210.0
Social tax26
970.026
600.026
600.00.0
VAT19
030.019
000.019
400.0400.0
Excise on alcohol2
330.02 540.0 2 600.0 60.0
Excise on tobacco1
830.01 800.0 1 970.0 170.0
Excise on fuel4
870.05 420.0 5 660.0 240.0
Gambling tax 215.0 320.0 307.0 -13.0
Non-tax revenues 22
760.623
552.323
798.7246.4
One-offs increase the deficit in coming years
1.6% 1.6%2.3% 2.6%
-2.8%
-1.7%-1.3%
-1.6% -2.3%
-0.4%0.0%
-10
-8
-6
-4
-2
0
2
4
6
8
10
2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
bln EEK
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%% of GDP
Central government Social Security Funds
Local government General government budget position
No structural problem in the budget
1.6% 1.6%2.3% 2.6%
-2.8%
-1.7%-1.3%
-1.6% -2.3%
-0.4%0.0%
-10
-8
-6
-4
-2
0
2
4
6
8
10
2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
bln EEK
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%% of GDP
Central government Social Security FundsLocal government General government budget positionStructural budget position
0%
10%
20%
30%
40%
1995 1997 1999 2001 2003 2005 2007 2009 2011* 2013*
% of GDP
Labour taxes Consumption taxes Capital taxes European Union
Tax burden set to decline
Res
erve
s
-20
-15
-10
-5
0
5
10
15
2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
Deb
t
% of GDP
Central government Social Security Funds Local government Net assets/debt
Estonia still has net assets by the end of 2010
Thank you!
Main indicators
2009 2010*
2011*
2012*
2013* 2014*
Economic growth -14.1 2.0 3.6 4.0 3.8 3.5
GDP in current prices
214.8 218.2 230.4 245.5 261.5 278.3
CPI -0.1 2.6 2.5 2.6 2.7 2.7
Domestic demand -23.9 -0.2 4.3 4.1 4.7 4.6
Export -11.2 15.1 9.0 6.7 7.1 6.5
Employment growth
-9.2 -5.0 0.8 1.6 1.8 1.7
Real wage growth -4.5 -3.2 0.1 1.0 1.6 1.5
Unemployment rate
13.8 17.5 15.4 13.6 11.4 9.4
Current account 4.6 4.3 2.3 0.3 -2.1 -4.4
-6
-4
-2
0
2
4
6
8
2008 4 7 10 2009 4 7 10 2010 4 7 10
%
MoF BoE COM IMF OECDSwedBM SEB Nordea Danske IER
Forecast of Estonian economic growth for 2010
-6
-4
-2
0
2
4
6
8
2008 4 7 10 2009 4 7 10 2010 4 7 10
%
MoF BoE COM IMF OECDSwedBM SEB Nordea Danske IER
Forecast of Estonian economic growth for 2011
Economic growth in different regions
-20
-15
-10
-5
0
5
10
15
20
2004 2005 2006 2007 2008 2009 2010
%
Latvia Lithuania Finland Sweden USA
In 2010 foreign demand stronger than expected
2.82.6
1.30.3
-1.5
1.0
-1.0-1.0
-0.5
1.0
-2
0
2
4
Spring2008
Summer2008
Autumn2008
January2009
March2009
June2009
July2009
Nov2009
Febr2010
July2010
Estonian export markets' GDP - 2010, % Export markets' GDP - 2011, % 2012
Estonian exports growth vs developments of main trading partners
Spare production capacities’ reserve still there, export orders strong
40
50
60
70
80
90
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
current operating capacity, %
-30
-20
-10
0
10
20
30
40
50
60
70points
Industry Wood industryBuilding materials industry Export orders will over the 3 months (rhs)
2010–11: after crisis fast recovery
Current account surplus will turn to deficit because of the rise in import volumes and
increasing profitability of foreign investments
Share of private consumption remains lower
-25
-20
-15
-10
-5
0
5
10
15
2001 2003 2005 2007 2009 2011 2013
%
40
42
44
46
48
50
52
54
56% of GDP
Private consumption real growth, % Real GDP growth, % Private cons/GDP, %, rhs
Investments presumably recover
-40
-30
-20
-10
0
10
20
30
40
2001 2003 2005 2007 2009 2011 2013
20
22
24
26
28
30
32
34
36
GFCF real growth, % Real GDP growth, % GFCF/GDP, %, rhs
Employment by sectors
0
40
80
120
160
2005 2006 2007 2008 2009 2010
thousands of people
Agriculture ManufacturingConstruction Wholesale and retail tradeTransportation and storage Public administrationEducation Healthcare
Wage decline stopping
-10
-5
0
5
10
15
20
25
2004 2005 2006 2007 2008 2009 2010
%, y-o-y
Average payment (Tax Board) Average wage (ESA)
Average payment by sectors
0
10
20
30
40
2008 2009 2010
thousand EEK
Financial sector Info and communication EnergyManufacturing Construction
Average payment by sectors (2)
0
5
10
15
20
25
2008 2009 2010
thousand EEK
Public administration Education
Average wage
25
30
35
40
45
50
55
2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
% of GDP
-8
-4
0
4
8
12
16
Wage costs Real wage growth, % (rhs) Productivity growth, % (rhs)
Changes in tax policy– excise duty increases, VAT, state duties.
Other administrative changes – electricity, water, gas, heat energy.
Other goods and services – close to core inflation (2009-2010 without VAT increase).
Contribution to CPI