Central bank revises growth forecast for 2021 upwards to at least 5.3 percent | economy

Given the less steep growth forecast for 2021, this would lead to higher growth in 2022 (4.9 percent) or, in the faster growth scenario, to a lower growth rate (3.8 percent) for the next year.

Central Bank Deputy Governor Ãœlo Kaasik said: “If we look at global economic growth as a whole, growth rates suggest that we will have higher economic growth this year than we did before the crisis.”

Estonia’s recovery from the downturn caused by the pandemic is among the fastest in Europe, second only to Ireland, growing 3.3 percent between the final quarter of 2019 and the first quarter of this year.

After restrictive setbacks, economic growth will be strong in the second half of the year, benefiting from the use of the savings accumulated during the crisis and exempted from the so-called second pillar of the Estonian pension insurance as well as improvements in foreign markets.

In its spring outlook, the central bank had forecast growth of 2.7 percent, but has since revised it upwards.

Inflation forecast in the range of 2.5 to 2.7 percent for 2021

Conversely, the Estonian Central Bank now expects an inflation rate of 2.5 to 2.7 percent this year, compared to 1.6 percent in March.

Unemployment is expected to remain at 6.1 percent in the “soft growth” scenario, while it would fall to 5.7 percent in the “sharp growth” scenario – compared to 7.9 percent forecast in March. This will lead to a labor shortage, says the central bank, which will prop up wage growth, which is expected to stay above the 5 percent mark.

However, these effects have not yet materialized, said Ãœlo Kaasik.

“The rapidly recovering growth has not yet reached the labor market. We can see that employment in the first quarter was well below the pre-crisis level.”

At the same time, the uncertainty remains somewhat alleviated by the current vaccination program, but remains high so that the recently relaxed anti-coronavirus restrictions do not recur.

The pace of growth also depends on the extent to which consumers take advantage of the savings that the central bank says it has accumulated – but if this happens on a large scale, there is a risk of economic overheating, the bank said.

Central bank: public sector borrowing, spending should be curtailed in good times

Eesti Pank also recommended that the state limit public spending growth in good times, adding that better-than-expected tax revenue should be used to reduce public sector deficits faster than originally expected.

The head of the Estonian Bank, Madis Müller, said: “In a situation where a government is spending extra money on loans” [that it takes out]and with the economy already at full capacity, this will ultimately be reflected in faster price increases and a decline in the competitiveness of Estonian companies. “

“All of this – both the economic recovery and active government spending will ultimately be reflected in rising prices,” he added.

“If the economy recovers faster, the budget deficit will also shrink, so our recommendation to the government would be to take this opportunity to improve the budgetary position of Estonia and because of the improved [tax] Collection of income “, Müller continues.

Bank governor: Estonia’s deficit reduction plan is more conservative than that of other euro countries

While the previous coalition, Center / EKRE / Isamaa, had generally taken out loans when it arrived in 2020 to mitigate the effects of the pandemic, the Reform Party, whose austerity has long been a buzzword, took office in January (along with Center) .

In May, a government budget strategy was published that included substantial spending cuts in the public sector.

Estonia’s deficit reduction plan is less ambitious than that of some other European countries, said Madis Müller.

He said: “If we look at similar budgetary strategies with other countries and their budget deficits planned for 2022, it is possible to gauge the relative ambition of governments in improving their budgetary position by how much lower the 2022 deficit is Estonia’s.

“Estonia is improving its budgetary position, but it is still slower and less ambitious than many other European countries,” continued Müller, without naming the countries concerned.

The euro zone is showing the first green shoots of recovery, added Müller, while aiming to reduce inflation to 2 percent

“For the [European] The central bank’s goal is primarily a price growth limit of 2 percent, which it wants to maintain and achieve with its policy. “

“Given that this price hike is expected to stay below the two percent mark, after a short-term acceleration phase, the central bank is unlikely to hike rates in the next few years,” he added.

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