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BNS - Swedbank in its economic outlook published on Tuesday raised the gross domestic product (GDP) growth forecast for Estonia for 2010 from 1.5 percent to 2.2 percent.
For both 2011 and 2012 Swedbank is predicting 4.5 percent annual GDP growth for Estonia.
Estonia's recovery is based on exports, which are benefitting from revived global trade and the regained competitiveness of local producers. Consumption has remained weak due to declining incomes; however, it has shown a slight pickup lately, as consumers' moods have turned positive. After an intensive period of destocking, inventories are now growing again.
"The recovery of Estonian economic growth is strongly dependent on external demand. As most of Estonia's main trading partners have recovered from the crisis faster than expected, Estonian exports have grown more than we forecast in April. This allows us to increase our expectations regarding export growth in 2010. We expect this to slow substantially in 2011, mostly due to a slowdown of growth in European markets but also due to capacity constraints in Estonian companies. Supported by the reviving global economy, we foresee Estonian export growth to increase in 2012," Swedbank said.
Swedbank expects investments to grow by approximately 11.5 percent this year as stocks are rising after a sharp correction in 2009. Gross fixed capital formation will continue to decline this year, although annual growth is expected to resume in the third quarter. Gross fixed capital formation will expand more than 11 percent next year, with growth then slowing to 10 percent in 2012.
The average unemployment rate forecast for 2010 - approximately 17.8 percent - is higher than the 14 percent forecast in spring. Swedbank expects the rate to decline to 12.5 percent by 2012.
The bank said it had increased its unemployment expectations mostly for two reasons. First, because the activity rate of the working-age population has remained unusually high, and it does not foresee it declining throughout the forecast period. Second, job creation in the first half of 2010 was not as strong as expected.
The official job-seeker rate has been falling since spring, suggesting that more people are looking for jobs themselves, are employed in the hidden economy, or are abroad. Working abroad, including through local companies, has grown in 2010, as shown by the growth of workers' remittances received, and Swedbank expects this to intensify in 2011-2012.
Swedbank economist Maris Laur said that while people's fear of joblessness has become smaller, there is no expectation of an improvement in the situation yet.
"People's consumption habits have changed. People are trying to reduce their debt burden and save, and this is affecting consumption as well," said Lauri.
Consumer demand is weak and will weaken further when prices rise. Continued high unemployment means that despite the strong improvement in consumer sentiment consumption will remain low and savings levels high.
Economic developments may differ from the forecast primarily as a result of developments on external markets.
"Developments there will be carried over to the Estonian economy rapidly through demand and prices, influencing production and consumption here," said the economist.
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