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NEWS - 29. August 2017 16:50

Nordic Outlook: favourable trends in the global economy foster faster growth for Estonia

The economic trends have been favourable lately. In the first half of the year, Estonia’s economic growth reached figures we last saw in 2012, when we were recovering from the deep economic crisis. Estonia’s economy is very much dependent on the performance of other countries and the surprising economic activity at our main trade partners has allowed us to grow faster than we dared to hope earlier. In the light of the positive economic statistics, SEB has adjusted the growth prognoses of Estonia’s several important export countries upwards, which means that our welfare will be growing steadily also in 2018 and 2019.

Economic strength is returning to its pre-crisis level

For the next few years, the performance of the global economy will be influenced by the combination of dramatic political events and the course of the classic economic cycle. Uncertainty about the future of the economic cooperation between the European Union and the Great Britain and the unpredictable Trump administration are clearly increasing political insecurity, especially in foreign politics. Europe is looking towards Emmanuel Macron, the new French president with high hopes, expecting thorough reforms in France from him, put also the continuation of the European integration project. From the perspective of economic theory, our position in the great economic cycle and its potential duration raises questions. While the recovery from the financial crisis has lasted for almost a decade, the economy is still returning to its prior strength.’ The engagement of production capacity has achieved a level from where progression presumes large investments. At the same time job markets have strengthened significantly and unemployment has fallen below the balance point in many developed countries. While at the end of our prognosis period these factors may hinder the economic growth, history shows that the supply side of economy tends to offer positive surprises, which is why we presume that the slow-down will be gentle. Also, the economic growth of developing countries is gaining momentum again, which provides and additional contribution to the solid rise of the world economy in the coming years.

Economic figures of the euro zone are encouraging

For Estonia, possibly the brightest headline among the positive news is the continued strengthening of the economy of the euro zone. The gross domestic product of the euro zone increased 2.2% in Q2, which is more than in the Great Britain and the US. The growth of the economies of the euro zone is also very broad-based: the situation of the German economy continues to be solid, while the Southern European countries have improved their competitiveness. This is why we have made slight upward revisions in our prognosis figure and expect the economic growth of the euro zone to be 2.1% this year, 2.2% the next year and 2% in 2019.

The economic growth of the United States has underperformed its expectations slightly. The main reason for this is low private consumption, while export and investments into fixed assets are increasing steadily due to the weaker dollar and the enlivened oil industry. Expecting a strengthening of the economic growth in the second half of the year, we estimate the economic growth of the US to be 2.2% this year, which will accelerate to 2.4% in 2018 and fall back to 2.0% in 2019. Donald Trump’s person continues to be a source of turmoil in both the internal and external affairs of the US. The need to raise the federal debt ceiling this autumn is likely to invoke a big internal conflict. However, the lenient fiscal policy promised by Trump will be more modest than expected. Trump’s unpredictable foreign policy will be a feature in the economic news in the few years to come, but until now its impact on the real economy has been low.

After the slow-down of the economic growth of three years on the emerging markets, the growth is likely to gain momentum there again this year. While the Chinese economic growth will continue to slow down due to is higher level of development, it will be an extremely controlled and long-term process and the economic growth will remain above 6% during the whole prognosis period. In India, where important taxation reforms were carried out, the economic growth is likely to speed up and rise to 7.6% by 2019. The growth tempo of China and India will be far beyond the reach for Brazil and Russia, where the economies have taken a growth turn this year again, but who must accept that their economic growth will remain around 2% during the prognosis period.

Economic growth of export markets is raising Estonia’s GDP

Estonia has reasons to feel glad about the strong economic growth on our main export markets—Finland, Sweden and the other Baltic states. Finland has offered a particularly positive surprise, as this year’s economic growth has, against expectations, managed to increase faster than the euro zone’s average. Here, very good results have been displayed by the exporting industry that has had a strong impact on Estonia. We have raised Finland’s economic growth prognosis by almost a percentage, expecting a GDP growth of 2.5% this year. Sweden’s economic growth remains very fast and its slow-down will not happen as quickly as presumed earlier. At the end of the prognosis period in 2019, the Swedish economy will still grow by 2.4%. Similarly to Estonia, other Baltic countries have experienced very fast economic growth in the first half of the year, meaning that the Lithuanian GDP is expected to rise by 3.7% and the Latvian by a whole 4.1%. Favourable economic climate in the euro zone will enable the economic growth to exceed 3% in Latvia and Lithuania also in the nearest years to come.

Similarly to the other Baltic states, Estonia’s economic growth has accelerated significantly this year, supported by the strengthening economy of the euro zone and the surprisingly fast recovery of Finland. While the only component of the GDP that disappointed in Q1 was the slow growth of private consumption, the strong labour market and good retail trades statistics show that in the year as a whole, the consumption of households will provide a strong contribution to the economic growth. Together with the growth in exports and recovery of investments, it should raise this year’s economic growth to 3.6%. In the next two years the growth will slow down a bit, but will still remain significantly above the average of the euro zone: in 2018, the estimated economic growth will be 3.2 % and, in 2019, 3.0%.

More information in the Nordic Outlook


Mihkel Nestor
Economic Analyst, SEB


 

For more information:

Evelin Allas
Communications Manager
Marketing and Communications Division
SEB

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