Nordea economic outlooks

Nordea publishes annual economic outlooks, which cover all the important research fields of Nordea Markets and the capital markets. These outlooks are prepared by an outstanding team of experts.

In addition, the analysts at Nordea Estonia prepare economic outlooks specific to the local market and economic environment.

02.09.2015

According to Nordea`s new Economic Outlook, Estonian economy`s foreign demand recovery will continue at a slow pace, reflecting the uneven upturn in the Eurozone. Due to developments in the external environment, Estonian economic growth risks have increased. Nordea forecasts up to 2 per cent economic growth for Estonia in 2015 and 3 per cent in 2016.

“Global demand and trade are recovering at a slower pace than expected, to a large extent, due to developing markets. Estonia`s primary long-term growth risks are excessive dependence on domestic consumption and exporting companies` smaller investment volumes, which means we should not expect fast increase in productivity,“ said Tõnu Palm, Nordea Bank`s Chief Economist in Estonia.

Nordea estimates that the recovery of global economy will be slower despite stimulating monetary policy and almost halved crude oil price. The slowdown in US economy is temporary, though fickle developing markets` growth outlook also affects the US economy. Several developing countries` growth risks should not be underestimated. This primarily refers to several countries exporting crude oil, which have not contributed sufficiently to economic reforms and diversification of business in past years. For example, Russia and Brazil are experiencing an economic downturn and according to the forecast, will not return to former growth rates after the crisis. In the short-term, Chinese economy can expect moderate slowdown, but at the same time, signs point to a loan and real estate market bubble, the risk of a deeper downturn and the need to face structural problems in the economy.

“Global economy and trade growth risks restrict investment activity and this also limits the growth opportunities of exporting economies like Estonia. For Estonia, first and foremost, it means that our export partners` growth is largely led by domestic demand and therefore, there are fewer foreign orders for the Estonian exporting industry and investment goods` producers.  Consumption-focused economic growth is open to risks from the external environment. The price increase is slower due to energy and raw material prices, but next year it will slow down peoples` real income growth,“ thought Palm.

Eurozone economy will continue its cyclical upturn. ECB QE supports Eurozone recovery, which will also continue after September 2016. Nordic countries` economic growth is still divergent. Sweden is ahead of its neighbours in fast economic growth and increasing employment. Danish economy has also reached stable but moderate recovery. At the same time, the generally robust Norwegian economy is losing speed due to the drastic decline in crude oil price. Finland, which is a vital trade partner for Estonia, is in recession for the fourth year due to weak domestic demand and Russian developments. Russian economic downturn is deepening, but the effects on Estonian export are easing step-by-step.

“Activity levels of Estonian foreign economy will remain low, despite the Eurozone`s gradual recovery on account of a stimulating monetary policy. When it comes to large EU countries, then Germany, Spain and Great Britain have stronger growth outlook, where Estonian export volumes are limited. In addition, investment demand in Europe remains uneven and the pressure of a global price decline keeps export prices down,“ said Tõnu Palm.

In correspondence with Eurozone and Nordic economies` recovery, Estonian economic growth will become broader-based in the next years. Slowing consumption will be joined by the growing share of investments and export. Since 2009, Estonian economy has remained the net loan provider with respect to the foreign economy. Lots of savings have been made in the economy so now we require more investments in the exporting sector. The growth rate of Estonian households` deposits is vastly ahead of loan increase; in a year, the volume of deposits has grown 9% despite near zero interests.

Private consumption is supported by a stable labour market. The decrease in unemployment will slow down, but we can expect a pick-up in labour demand from exporting sectors in 2017.

“From the aspect of economic productivity, it is positive that labour activity among the youth (15-24-year-olds) will grow more in exporting sectors, not sectors directed at the domestic market. Aside from information technology, the popularity of processing industry could increase as well. With more job opportunities, we must not forget to contribute towards education,“ added Palm.

Read a more detailed overview here

02.09.2015

According to Nordea`s new Economic Outlook, Estonian economy`s foreign demand recovery will continue at a slow pace, reflecting the uneven upturn in the Eurozone. Due to developments in the external environment, Estonian economic growth risks have increased. Nordea forecasts up to 2 per cent economic growth for Estonia in 2015 and 3 per cent in 2016.

“Global demand and trade are recovering at a slower pace than expected, to a large extent, due to developing markets. Estonia`s primary long-term growth risks are excessive dependence on domestic consumption and exporting companies` smaller investment volumes, which means we should not expect fast increase in productivity,“ said Tõnu Palm, Nordea Bank`s Chief Economist in Estonia.

Nordea estimates that the recovery of global economy will be slower despite stimulating monetary policy and almost halved crude oil price. The slowdown in US economy is temporary, though fickle developing markets` growth outlook also affects the US economy. Several developing countries` growth risks should not be underestimated. This primarily refers to several countries exporting crude oil, which have not contributed sufficiently to economic reforms and diversification of business in past years. For example, Russia and Brazil are experiencing an economic downturn and according to the forecast, will not return to former growth rates after the crisis. In the short-term, Chinese economy can expect moderate slowdown, but at the same time, signs point to a loan and real estate market bubble, the risk of a deeper downturn and the need to face structural problems in the economy.

“Global economy and trade growth risks restrict investment activity and this also limits the growth opportunities of exporting economies like Estonia. For Estonia, first and foremost, it means that our export partners` growth is largely led by domestic demand and therefore, there are fewer foreign orders for the Estonian exporting industry and investment goods` producers.  Consumption-focused economic growth is open to risks from the external environment. The price increase is slower due to energy and raw material prices, but next year it will slow down peoples` real income growth,“ thought Palm.

Eurozone economy will continue its cyclical upturn. ECB QE supports Eurozone recovery, which will also continue after September 2016. Nordic countries` economic growth is still divergent. Sweden is ahead of its neighbours in fast economic growth and increasing employment. Danish economy has also reached stable but moderate recovery. At the same time, the generally robust Norwegian economy is losing speed due to the drastic decline in crude oil price. Finland, which is a vital trade partner for Estonia, is in recession for the fourth year due to weak domestic demand and Russian developments. Russian economic downturn is deepening, but the effects on Estonian export are easing step-by-step.

“Activity levels of Estonian foreign economy will remain low, despite the Eurozone`s gradual recovery on account of a stimulating monetary policy. When it comes to large EU countries, then Germany, Spain and Great Britain have stronger growth outlook, where Estonian export volumes are limited. In addition, investment demand in Europe remains uneven and the pressure of a global price decline keeps export prices down,“ said Tõnu Palm.

In correspondence with Eurozone and Nordic economies` recovery, Estonian economic growth will become broader-based in the next years. Slowing consumption will be joined by the growing share of investments and export. Since 2009, Estonian economy has remained the net loan provider with respect to the foreign economy. Lots of savings have been made in the economy so now we require more investments in the exporting sector. The growth rate of Estonian households` deposits is vastly ahead of loan increase; in a year, the volume of deposits has grown 9% despite near zero interests.

Private consumption is supported by a stable labour market. The decrease in unemployment will slow down, but we can expect a pick-up in labour demand from exporting sectors in 2017.

“From the aspect of economic productivity, it is positive that labour activity among the youth (15-24-year-olds) will grow more in exporting sectors, not sectors directed at the domestic market. Aside from information technology, the popularity of processing industry could increase as well. With more job opportunities, we must not forget to contribute towards education,“ added Palm.

Read a more detailed overview here

 

17.06.2015
 
According to Nordea`s new economic forecast, recovery on Estonia`s export markets will be slow this year. Moderate economic growth in Estonia will continue – Nordea`s forecast for this year is 2.0 percent and 3.1 percent for 2016. Only higher investments and labour productivity can lead to long-term growth; this requires introduction of digital economy and new technologies in more traditional industries.  
 
Nordea`s Chief Economist, Tõnu Palm, believes domestic demand will continue to be the primary drive behind European countries` economic growth as the share of export remains modest due to the impact and risks of global economy. “At the same time, there are more and more signs that Estonia`s main export market will continue its cyclical recovery, primarily supported by affordable global crude oil prices and the Eurozone`s sizeable quantitative easing programme. Our export growth outlook will improve next year, when the scope of Eurozone demand will broaden,” said Palm.

Nordea forecasts just 1.3 per cent economic growth for the Eurozone in 2015. The expectation for 2017 is 1.6 per cent.

“At the same time, Estonia`s moderate but balanced economic growth is reason for optimism and an opportunity to focus on developing sectors that promote long-term growth. A key challenge is increasing productivity. We are among the fastest growing Eurozone countries, however, Estonian labour`s hourly productivity still remains considerably below the Eurozone. In recent years, productivity growth rate has remained slower than longer period (2001 until 2013) averages, which characterise a number of other Eurozone countries,” added Palm.

For a small open economy like Estonia, the challenge is to use technology to achieve higher added value and move towards an export-oriented industry and economy of services. When it comes to developing technology and its application in industry strategy, Tõnu Palm recommends following the example of one of Europe`s most successful exporters – Germany. Though, the growth and innovation development strategies that bring a real increase in added value are very individual.         

“Like Germany, Estonia is directed at export and therefore, depends on global competition. The share of industry and processing industry in economy is high in both countries, but when we compare economic structures, then we see that the added value from our research and technology sector contributes much less to our economy,” said Palm. “Estonia`s long-term growth strategy should also foresee reforms on how to introduce digital economy and new technology to other industries in a cost efficient way.”

“The European Commission also focuses its activities on invigorating the single energy, digital and capital market and private sector investments, which fits in with Estonia`s long-term challenges. Changes toward a digital economy will continue to affect labour demand, organisations` business models and the environment at large more and more. This encompasses smart cities, transportation solutions, energy and communication networks, smart industries and different personalised services,” thought Palm.

Read a more detailed overview herePDF

11.03.2015

According to Nordea`s most recent Economic Outlook, Estonia`s growth prospects are set to improve over the next few years with the support of Eurozone recovery, low interest rates and moderate price increase. Close to 5 per cent growth in real wages continues to boost robust domestic consumption.  Nordea forecasts up to 2 per cent economic growth for Estonia in 2015; in 2016, the growth will accelerate to at least 3.2 per cent as export markets and investments pick up.  

Global economic recovery has been spurred by central banks` extremely stimulating monetary policy, plus the current low oil prices. At the same time, Nordea`s economic outlook expects global economic growth to remain lower than before the last recession, also in the longer term. This trend is rooted in the changing demographics in Western countries, moderate investments and slowdown in global trade growth.  

In 2015, Nordea expects to see a temporary drop in prices in Estonia; however, in the second half of the year, as commodity prices rise, this will be replaced by a moderate price increase. “In the second half of the year, strong private consumption will be complemented by recovering export demand in Scandinavia and the Eurozone. Over the following years, economic growth risks are up once again,“ said Nordea bank`s Chief Economist in Estonia, Tõnu Palm “At the beginning of the year, geopolitically driven high uncertainty, deepening Russian economic downturn and low energy prices will probably still hold growth in export income back, however, the second half of the year looks more promising with Eurozone and Scandinavian foreign demand. European central banks` robust measures, weaker currencies and higher risk appetite support economic upswing“. The main risks for Estonia`s open economy in the near future continue to be geopolitical risks and related uncertainty in the external environment.  

The European Central Bank’s policy to invigorate the economy with quantitative easing is an untraditional one, which will probably bring a long period of extremely affordable Euro-interests. The Euro will weaken even further.
A quicker economic growth requires a perk up in investments, which is related to a long-term challenge for the Estonian economy to further increase productivity in the face of an ageing and declining work force. Negative demographic trends also threaten the speed of a number of other developed countries` economic growth. In the following years, the demand for qualified labour in foreign markets will grow, and competition will stiffen.

“In the past ten years, Estonia’s population has decreased by 3.7% and the share of the elderly (65 and older) has increased by 9%. The share of the youngest members of society has gone down by close to 25% in the last decade. Investments in Human Resources, including in-service training, retraining, also development of the education system with the broader objective of supporting structural changes in economy and support export development will become even more important. We need more entrepreneurial spirit,“ said Palm.

When we compare Eurozone countries, then Estonia has a good growth outlook. Aside from long-term challenges, we expect a stronger upswing in Estonian economy already in 2016 due to growth in export and investments.

Nordic economic outlook

An upturn in Nordic countries is stimulated by monetary policies, low interests and exchange currencies weakened to the Euro. Danish and Swedish central banks have implemented untraditional methods to invigorate the economy, which have turned short-term interests negative. Probably, both the Norwegian and the Swedish central bank will lower interest rates even more. Danish economy has seen an upturn after several years. The dip in crude oil prices and investments has cooled the Norwegian economy. On the other hand, Estonia`s major trading partner Finland has overcome the low point and next year, a 1.5 per cent growth is expected.   

Read a more detailed overview herePDF

02.12.2014

Nordea Estonian Outlook: investments in human capital key for faster development

According to Nordea’s newest economic forecast, Estonia’s economy will continue to grow moderately, even on the background of the undesired low growth patch of the Euro area. Nordea increased this year’s growth forecast to 1.7%; the expected growth for 2015 is 2.2% and for 2016 – 3.4%. Due to geopolitical risks, recovery of Estonia’s main export markets will be slower than expected next year. Investments in human capital and export potential of the economy will serve as an engine of faster growth.
 
Concerning the current year, Nordea’s Chief Economist Tõnu Palm concluded that as expected, the direct impact of the Russia-Ukraine crisis on Estonia has remained limited; e.g. in nine months, export of goods to Russia has dropped by 9% y/y in current prices. Rouble has weakened ca 20% against the euro. As expected, the sector that has suffered most has been the export of dairy products with a 20% quarterly drop.
                                                                                   
“This year’s growth in Estonia (the Q2 and Q3 average exceeded 2% y/y) twice exceeds that of the Euro area. In addition to solid private consumption growth, the Q3 growth was also supported by net exports. Investment growth will remain subdued throughout next year and a speed-up remains necessary. Slow recovery of external markets and exports will continue, however the geopolitical risks make it insufficient for granting a faster increase in investments,” Palm noted.

According to Palm, the biggest change in the external environment undoubtedly has to do with the record drop in crude oil and commodity prices, while further room for decrease remains: “A general reduction in prices, caused largely by a drop in energy, commodity and food prices in conjunction with record low interest rates will, in general, benefit Estonia’s open economy. Slow recovery of external price pressures allows to forecast an inflation rate of around 1% for 2015. Inflation risk will remain low also in 2016.”

Besides the turn towards slower inflation, the ca 4% continued growth of real income will also be supported by a gradual increase of tensions in the labour market. This is indicated by the consolidation of the short and long-term unemployment gap around the boom levels.

According to Tõnu Palm, negative demographics make it increasingly important to increase the employment rate, which could be done mainly through increasing the contribution of the young and the elderly. When we compare ourselves to Germany, we can see a potential  of increasing employment by ca 4-5%; while among youth (age group 15-24) Germany’s employment rate exceeds us by a whopping 14 pp. “The key factor for retaining Estonia’s faster growth throughout the next decade can be seen in investments in human capital and export potential. The upcoming parliamentary elections in spring 2015 will probably bring about a reduction in the tax burden of both low-wage employees and the workforce in general. It is time to privilege investments in human capital on order to increase welfare and put breaks on emigration. This creates conditions for structural changes in the economy and for continuing with an income growth above the EU average,” Palm says.

A more detailed overview is available herePDF.

03.09.2014

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

 11.06.2014

Nordea Estonia economic review: Estonian economy`s slower upturn

According to Nordea`s most recent economic outlook, Estonia`s economic growth will remain at 1.2 per cent this year. The upturn of Estonian economy has been slowed down by rapid cooling of the economy in the first quarter of the year, slow recovery of foreign markets and emergence of geopolitical risks in relation to events between Russia and Ukraine. With recovery of export markets, utilisation of European Union new programming period funds and growth in investments, Estonian GDP growth will accelerate to 3.2 per cent in 2015. Growth risks will remain to the downside.

The key issue for Eurozone and Estonian economic policy is acceleration of economic growth. Economies require faster nominal growth in order to reduce the crisis-driven high debt burden and lower unemployment. In 2013, Estonia had the fastest increase in nominal growth in the Eurozone (Estonia +5.9% y/y; Finland +0.6 y/y; Eurozone +1% y/y ).

Acceleration of inflation in Estonia will remain slow, supporting GDP real growth.

The anticipated slowdown in consumer price inflation was realised in Estonia. In the last quarter of 2014, price growth will accelerate at a moderate pace. All in all inflation will remain at Eurozone average. Nordea forecasts a 1.0 per cent price increase this year and moderate acceleration to 2.6 per cent in 2015. Nordea Chief Economist Tõnu Palm believes that, to a large extent, the slowdown in price increase has taken place on account of deceleration of energy prices. “Weakness of global economy alongside a strong euro exchange rate has curbed import and raw material prices in Europe and Estonia. Export prices and industrial goods` manufacturing prices continue to drop in Estonia, which reflects a broad-based slowdown in price increase. The surge of construction and real estate prices will decelerate. There are however signs of increasing price pressures in stronger economies (including US producer prices). Industrials start to show strength to pass some of the price increases to consumers. Expected pick-up in wages alongside lower unemployment levels will support a start of a new inflation cycle.“

Temporary but fast cooling of Estonian economy in the first quarter was caused by concurrence of several factors. “The main reason for the -1,4 per cent y/y drop in GDP growth in the first quarter of this year was trade partners` low import demand, a big drop in the added value of transport and logistics (including decline in carriage of goods in warehousing and transportation supporting sectors, drop in rail transport volumes), a warm winter, a rise in electricity import and fast price increase in the real estate sector,“ said Palm. “Trade partners` low import and energy demand had a lot to do with Estonia`s modest export volumes.“

“In order to grow, Estonia`s open economy requires a more robust upturn in the Eurozone and Nordic countries, led not only by private consumption but also export and investments,“ said Palm. “Germany, Sweden and the UK have the most favourable growth outlook out of Estonia`s trade partners. The latter are affected by ongoing recovery of the Eurozone and at least a 3% GDP growth in the US in the second half of the year. In order to boost economic growth, and considering developments in Russia and Ukraine, Estonia should continue to diversify export markets and expand activities on export markets which are heading towards broad-based recovery.“

With global economy recovering turnaround is at sight. Improved economic confidence promises to deliver gradual upturn in Estonia`s export markets in 2015.

A strong labour market and robust increase in income continues to support private consumption. Despite the moderation in wage growth as a result of temporarily cooling economy, Nordea believes that the drop in inflation will lead to still robust ca 5% growth of real wages on average for current year.

“Slowdown of private consumption will remain moderate in the forecast horizon due to support to real income growth from lower inflation. However, consumption alone will not be enough to deliver fast growth,“ stated Palm. “The labour market is strained in the long-term because the number of working age people is going down, affected primarily by a negative migration balance. In order to retain the same level of employment, the rate of employment should increase. This is difficult to achieve. In order to soften the decline in the number of employed, continuing education should be aided by motivation of older people to stay on the labour market longer. Why not support valuable exchange of experience between generations, and considering the low level of savings, motivate people to earn a higher income also at retirement age. Elderly are likely to spend more than save, which we need for growth“.

Estonia`s untapped potential in rapid growth of e-economy. In Estonia`s case, e-commerce penetration has remained slower than in several European countries, which refers to untapped opportunities to widen choices and thereby, support better price competition in a small market. According to Tõnu Palm, Estonia has a good starting position to develop e-economy, considering the strong potential in our ICT sector: “Work towards this end takes place in public private partnership, however, bigger breakthroughs require a bigger leap forward in volumes, which is only possible if foreign partners are involved.

E-residence is a step in the right direction. This could be complemented by potential other initiatives, such as an export driven e-healthcare service, which would promote healthcare tourism in Estonia. Europe is faced with an ageing population and personalised healthcare services will draw attention and see a rapid price increase.“

Detailed review

12.03.2014

Nordea’s economic outlook: the slow recovery of Estonian economy depends on improving export outlook

According to Nordea’s recent economic forecast, domestic consumption will be supported by robust slowdown in price surge, which will mean a moderate economic growth up to 2.8% for Estonia this year. Due to gradual improvement in foreign demand, Estonia can expect acceleration of economic growth up to 3.8% in 2015. The main challenges exporters will face include risks related to the foreign environment, weakness of emerging markets, strong euro exchange rate and slow and uneven recovery of Eurozone economies.

The United States will lead global economic recovery, however, due to emerging markets` weakness and political instability, growth risks must be considered in the first half of the year. Nordea lowered Estonia`s 2014 economic growth forecast from 3.1% to 2.8% due to slow recovery of foreign demand.

“Acceleration of Estonia`s economic growth depends on export destination countries` demand, new investments and expanding export to newer markets. One important challenge in promoting Estonia`s economy will be maintaining moderate price growth also next year, when global economy starts to gradually perk up,“ said Nordea Estonia Chief Economist Tõnu Palm. “Slow price growth in the first half of 2014 will increase Estonian residents` real purchasing power, and thereby, support robust private consumption. Estonia`s economic activity and price increase risks will continue to stay below the basis forecast for this year, because we need recovery of export for faster growth.“

Nordea foresees a moderate 1.9% price increase for Estonia in 2014 and a hike in inflation up to 3.0% in 2015, which compared to incomes, will be two times lower than growth in gross salaries. External price pressures in the Eurozone and Nordic countries will remain low next year allowing for a lower price increase in Estonia.

Estonian economy`s short-term risks and opportunities

“Estonian economy`s short-term risks are mainly related to global and Eurozone economic developments. The biggest risk is long-term lower growth on foreign markets, which Estonia can counterbalance by consistently contributing to new growth,“ said Palm. “A tightening labour market requires making more and more strategic decisions in Estonia. In order to remain competitive, entrepreneurs must engage in developing productivity, technology and Human Resources, but also expand branches and markets of export.“

Palm thinks that Scandinavian countries continue to remain high potential and stabile export markets for Estonia due to the size of their markets, higher purchasing power and integrated economies: “Last year clearly demonstrated that competitiveness allows Estonian entrepreneurs to increase their market share in Scandinavian countries even in a situation where Nordic economies are experiencing temporary weakness. There was a much bigger setback on the Russian market, where in addition to greater fluctuations in economy, the currency and credit risks are also higher. At the same time, with sound risk management, emerging markets offer high development potential.“

According to Palm, the precondition of sustainable economic growth, in addition to employment growth, is recovery on the real estate markets, which raises the value of people`s assets, confidence and thereby, consumption: “In a context of low loan volumes, recovery of the real estate sector is continuing on our market, which is currently still quite rare in the Eurozone, if we leave aside some major European hubs.“

Swedish and Danish experience shows that peoples` bigger savings and investments help manage a decline on foreign markets better, because private consumers haven`t had to cut consumption as much.

Role of ICT in economic growth

The contribution of information and communication technology companies will play an increasingly important role in Estonia`s knowledge-based economy. The number of people employed in ICT companies is still 3% of total employment, but the potential is much higher if we can raise labour supply and create synergy between ICT and other branches of economy. ICT companies` turnover growth has been two times faster than the average in business. Tõnu Palm believes ICT, electronics and automatics, medicine, the chemical industry and other knowledge-intensive branches to be key to raising the standard of living in Estonia.

Eurozone and Nordic countries` outlook

Nordea’s Economic Outlook foresees a slow recovery is the Eurozone with Germany in the lead. Southern European countries are already seeing slight growth and the Eurozone`s fiscal policy also sets fewer constraints on growth. However, economic growth in Eurozone countries is uneven, depending largely on execution of structural reforms, labour market outlooks and global competitiveness. The biggest risks for recovery are related to emerging markets and developments in the geopolitical situation. In the Nordics, Sweden has the best growth prospects, and we foresee an increase in private consumption and export volumes. Norway is slightly different from other Nordic countries because economic activity levels declined due to real estate markets cooling and a moderate volume of investments. Denmark is experiencing slow recovery this year. Similarly to Estonia, Finland expects exports to pick up.

Please find a longer analysis here.