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NEWS - 27. August 2019 12:00

World economy has reached a crossroads

There are still optimistic scenarios for the future of the world economy

The weird times in the world economy have been going on for quite some time now. Trade war, Brexit, negative interest rates, German industrial destitution – there are enough problems to discuss, and hence paint a grim outlook. Pessimists confirm their doomsday predictions of the unnatural movement of interest rates, where at times a short-term loan bears higher interest than a long-term one, and fluctuations in the stock market. However, there are still optimists who, in today’s situation, see both the public and the private sector as an opportunity to borrow on highly-favourable terms and thus make the necessary investments in environmental savings and technology.

Politics alone does not cause economic recession

Many current concerns are caused by political decisions. Overtrumping each other with customs tariffs and import restrictions threatens companies’ global cooperation, while a failure to manage Brexit-like processes creates a lot of insecurity in investment making. While political insecurity is high, history shows that this alone is not enough to provoke an economic crisis. SEB, therefore, estimates that the global economic downturn can be avoided in the coming years. Leading central banks have taken a clear course towards the further relaxation of monetary policy, which provides breathing space for struggling economies. High employment and employers’ continued demand for additional labour force will have a positive impact on labour markets, pushing down the “natural” level of unemployment and involving an increasing proportion of society in the labour market.

The European Central Bank eases monetary policy further

The key issue for Estonia is the further development of the euro area economy, which, so far, has been highly varied in scope. The industrial sector, with Germany at the head, is facing difficulties due to poor demand. In the secondary sector, however, business is still good, supported by very high employment and wage growth. The key issue for the European economy shortly is whether the difficulties faced by the industry in internal consumption are being overcome, and to what extent. The European Central Bank is doing its utmost to support the economy by lowering the negative interest rate on deposits to -0.6% by the end of the year. For this reason, we dare to predict an improvement in growth in Europe for the coming year, which, from 1% this year, should reach 1.3% by 2021. The economies of our main trading partners, Finland and Sweden, have slowed and will grow moderately in the coming years, on average to 1.5% a year.

Economic growth in Estonia is slowing down

Although 2019 started very well for Estonia, several indicators raise concerns about the future. The economic security of industrial enterprises, which has fallen sharply and which deserves the most attention, suggests the problems that have affected European industry have arrived here today. In addition to temporary problems with demand, the industry is affected by the significant appreciation of Estonian labourlabour in recent years, which makes several businesses uncompetitive. For these reasons, the contribution of industry and exports to growth in the coming years will be modest. Like many other countries, the secondary sector remains in good care, which, unlike industry, has also won a great deal from rapid wage growth in recent years. The major importance of industry in employment and its expected compression will inevitably continue to limit the growth of private consumption. The increase in unemployment is still modest due to the demographic trend.

The future of the construction sector is also under question. Despite the shrinking potential clientele, the real estate sector has remained strong enough to plan for the future. However, a sharp decline in the number of young people at home buying age may well curb this optimism. The future of public investment in the sector in a situation, where the European Union’s financial performance is expected to be greatly reduced, creates further insecurity.

In summary, Estonia has entered a slower phase of growth. SEB estimates that the Estonian economy will grow by another 3% thanks to the strong start of the year, but GDP growth will fall by 2.3% by 2020 and by 2% by 2021.


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