Nordea economic forecast: Estonian economic recovery is hindered by geopolitical developments
According to Nordea`s recent economic forecast, Estonian economic growth in the second half of 2014 will be primarily stumped by slow uptake on major export markets and new geopolitical risks. As a result, the expected economic growth this year is up to 0.7%. The labour market and domestic consumption have remained strong as expected; consumption is supported by near-zero price increase, which remains below average in the Eurozone.
Global economy development has been slower than expected this year. Large developed nations` economic indicators refer to gradual improvement of global economy in 2015, but due to developing markets` weakness and considerable geopolitical risks (including the Russian-Ukrainian conflict that has escalated recently), development remains volatile. Due to intensification of external risks and slower recovery of foreign demand, Nordea lowered Estonia`s 2014 economic growth forecast from 1.2% to 0.7%.
“As to the following years` growth outlook, risks remain downward. Sustainable growth can come from export demand, new investments into raising productivity and expansion to new export markets. But even our stronger trade partners` investments are barely growing in the current economic environment. Private consumption, which in Estonia reaches close to 50% of GDP, remains strong because of extraordinarily low inflation and salary increase that is faster than the Eurozone average, but that alone is insufficient for more robust growth,“ found Nordea Estonia Chief Economist Tõnu Palm.
As export markets recover, Nordea forecasts up to 2.7% economic growth for Estonia in 2015. Uncertainty remains high, and we shouldn`t expect export demand to pick up til the end of next year.
Russian- Ukrainian conflict impact on economic outlook
According to Tõnu Palm, the impacts of the Russian-Ukrainian conflict on Estonian trading partners and Estonia have been limited up until now, as global economy is continuing to recover and economic growth is supported by domestic consumption to a greater degree than before: “Looking at the decrease of Estonia`s cargo export to Russia compared to the same period last year (2014 II Q -14% y/y), the proportion is the same as for the whole Eurozone. At the same time, we shouldn`t underestimate the indirect impact arising from greater uncertainty if the conflict draws out. The pillar of Estonian export, the confidence of the processing industry, has remained relatively stable up until now. Over the last three months, the annual growth of the volume of the processing industry has remained on the plus side (May- July average growth +3% y/y). Estonian export is primarily influenced by the demand and outlook of the Eurozone and Scandinavia“.
In light of increased risk, there might be temporary setbacks on the labour market, but the longer term tendency of unemployment falling will continue when the economic growth perks up. Robust consumer confidence reflects real income growth and a stable labour market. Though consumer wariness regarding following years` economic outlook has clearly diminished over recent months, prior consideration when making large purchases has increased somewhat compared to last year. The latter is confirmed by real estate and car sales` results and stable volumes of household loans.
“Lower economic growth and fast salary increase affect Estonian companies` profit margins negatively. In connection with weak external price pressure, price increase risks will remain modest in Estonia also in the longer prospect. Low energy demand in Europe is putting pressure on energy prices. Companies will have limited opportunities to raise prices on foreign markets. This will force entrepreneurs to contribute to raising efficiency and diversifying export markets,“ said Palm.
Eurozone and Nordic outlook
According to Nordea`s fresh economic outlook, Eurozone economy will grow at a slower pace than expected.
“We lowered the Eurozone`s 2015 economic growth outlook from 1.5% to 1.1%, which reflects a more conservative growth outlook for France and Italy and also, the external environment`s impact on German economy. Nordea believes price growth to pick up slightly in the Eurozone, and to remain below 2% over the next two years. The upcoming divergence of US and Eurozone money policy supports the euro weakening,“ explained Palm.
Swedish economy continues to have the best growth prospects among Nordic countries, mainly led by robust domestic consumption. Hereafter, we can only expect modest export growth. Due to shrinking energy sector investments, Norwegian economic growth will slow down temporarily next year, only to exceed two per cent growth rate in 2016. Finnish economy will grow just 0.3% next year due to higher external environment risks and weak domestic demand. Russian sanctions and greater uncertainty stifle investments and important trade partners` import demand does not show significant improvements.
All in all, we can expect the slow upward trend to continue in Nordic economies influenced heavily by global economic developments.
You can find a longer analysis on Nordea Group webpage