Estonia Cuts Growth Forecast, Sees Faster Inflation

Estonia's Finance Ministry lowered its economic growth forecast for this year, citing slowing domestic demand and exports, and raised its inflation prediction, reported Bloomberg.

Gross domestic product will expand 8.1 percent this year and 7.3 percent in 2008, the ministry said in its review released at a news conference in the capital Tallinn today. In May, it had forecast 2007 growth of 9.2 percent and 2008 growth of 8.3 percent.

The $15.1 billion economy grew an annual 7.3 percent in the second quarter, the slowest pace in 2 1/2 years, as manufacturing output ebbed with rising wage costs, hampering exports, and as oil shipments from Russia declined. Banks tightened lending requirements, squeezing credit growth, easing concerns that the pace of the expansion is unsustainable.

``While there was talk of the economy's overheating in the spring, we are now in a stage of a steady cool-down,'' Finance Minister Ivari Padar told journalists. ``We can mainly see it in the property sector, even in radio commercials they are offering cars as incentive to buy a flat.''

Standard & Poor's last month lowered Estonia's ratings outlook to negative from stable, citing the increased risk of a ``hard landing'' after growth exceeding 11 percent last year stoked inflation and stretched the foreign trade gap to a record.

The ministry also raised this year's annual inflation rate forecast to 6.1 percent this year from 4.9 percent and next year's rate to 7.4 percent from 6 percent. Inflation will be stoked by a July increase in the value-added tax on heating to 18 percent from 5 percent, rising food prices and alcohol, tobacco and fuel tax increases at the start of next year, the ministry said.

Padar said it will be ``quite hard'' to meet the Maastricht inflation criteria for adopting the euro by 2011 as forecast in the four-year budget strategy in May. The ministry revised its inflation forecast for 2011 up to 3.5 percent from the earlier forecast of 3.1 percent.

All euro candidates need to keep price increases to within 1.5 percentage points of the 12-month average inflation rate of the three EU nations with the slowest consumer-price growth. In July, the EU limit in the 27-nation bloc was 2.93 percent, compared with Estonia's 12-month rate of 5.1 percent, according to Bloomberg calculations.

The ministry raised its forecast for budget surpluses in 2008-2011 to between 1.8 percent and 2.2 percent of GDP due to higher tax revenue expectations.

In May, the government had cut the earlier surplus target of 1.5 percent of GDP for the period to 0.5 percent, drawing criticism from central bank Governor Andres Lipstok and analysts such as Hansapank's Maris Lauri.

The budget surplus is expected to reach 3.4 percent of GDP this year, compared with 3.8 percent last year and the previous forecast of 1.9 percent, the ministry added.

The ministry also revised higher the forecast for its current-account deficit, the broadest measure of trade in goods and services, to 16.8 percent of expected GDP in 2007.

The central bank in June revised last year's record current- account gap up to 15.7 percent of GDP from an earlier estimate of 14.8 percent. The deficit will start shrinking from 2008, it said.

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