economic policy statement of eesti pank · 12 december 2012 economic policy statement of eesti pank...

Economic Policy Statement of Eesti Pank 12 December 2012

Key points of the presentation

12 December 2012 Economic Policy Statement of Eesti Pank 2

• The external environment • The Estonian economy until now and in the next few years • Economic policy implications

The euro area debt crisis is hanging around stubbornly

12 December 2012 Eesti Pank Economic Comment 3

• The economy of the euro area has not recovered at the expected rate • Confidence and economic activity have fallen of late in most of Estonia’s main partners • Eesti Pank’s baseline forecast works on the assumption that the measures taken to solve the debt crisis will slowly lead to a resolution of it

Inflation has slowed in the euro area but remains above its target of slightly below 2%


Sources: Eurostat

Growth in the euro area has turned negative

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2005 2006 2007 2008 2009 2010 2011 2012

euroa area GDP growth, y-o-y euroa area inflation, y-o-y

Markets expect interest rates to remain very low and to fall further in 2013


Source: ECB

0%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

december 2012 forecast june 2012 forecast

3-month EURIBOR

The economic forecast drawn up jointly by the central banks of the euro area is significantly more pessimistic than earlier forecasts


• Uncertainty about future developments in the euro area is still high • The euro area economy will start to recover in the middle of 2013 • Inflation will slow as prices for energy and food rise less rapidly

Sources: Eurostat, ECB

Euro area real economic growth Euro area inflation

growth, y-o-y forecast range, December 2012 forecast range, September 2012

Market expectations for oil prices have declined


Source: ECB

50

60

70

80

90

100

110

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

detsembriprognoos 2012 juuniprognoos 2012

Naftahind, USA dollarit barreli kohta

The outlook for external demand has worsened for Estonia


Source: ECB

The fall in external demand will hit particularly hard in 2013

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

december 2012 forecast june 2012 forecast Sari3

External demand growth

If growth in Estonia is to accelerate, it is important that external demand recover


Sources: Statistics Estonia, Eesti Pank

The development of exporting industries is directly linked to the economic situation in destination countries

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

real GDP growth real domestic demand growth real growth in goods and services exports

Estonia’s economy will grow more slowly in 2012 than it did in 2011



• Growth in 2012 will be higher than was forecast in June • From 2013 growth will accelerate slowly

-16%

-12%

-8%

-4%

0%

4%

8%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

june 2012 forecast december 2012 forecast

Real economic growth in Estonia

Wage growth will remain high, growth in employment will slow down



•Growing labour productivity will provide a base for economic growth • Increased productivity will support wage growth

-10%

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

growth in average nominal gross wages employment growth

Long-term unemployment has fallen as a share of unemployment, even as general unemployment is declining



Unemployment has fallen to its equilibrium level

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010 2011 2012

less than 6 months 6-11 months

12-24 months …24 months or more

non-accelerating wage rate of unemployment total unemployment rate

Inflation continues to fall



• Core inflation driven by domestic factors has remained low • The rise in electricity prices will have an impact on inflation in 2013 • Inflation will be eased by falls in global prices for oil and food commodities

0%

2%

4%

6%

8%

10%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

core inflation food energy harmonised consumer price inflation

The general government budget will be close to balance by 2014



-3%

-2%

-1%

0%

1%

2%

3%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

general government budget balance

Conclusions of the Economic Forecast


Estonia’s economy is close to balance…


• Core inflation remains low and stable • Unemployment is at a level which does not accelerate wage growth • The general government budget deficit is small and will contract further • Gross domestic production is close to its long-term trend • The current account deficit is historically low • The net external debt position is close to balance

… but balance is fragile


• New imbalances can easily arise

• low interest rates could cause excessively fast credit growth • high structural unemployment and labour shortages could cause upward wage pressures and encourage inflation • global oil prices might run higher than expected and drive up inflation

Future growth will depend on the external environment


• If the external environment becomes more unfavourable than forecast, this could have an immediate impact on economic activity in Estonia • For growth to accelerate and for sustainable growth to be achieved, it is important that the debt crisis in the euro area be resolved • Continuation of the debt crisis will threaten Estonia’s main trading partners, who have so far escaped the worst of the crisis, and this could then threaten export demand and growth for Estonia

Following from the measures taken in the euro area, it is vital that states with high levels of debt comply with the agreed budget programmes

The public sector has an important role to play in maintaining confidence


• Strict budget discipline and rational public sector financing are key sources of confidence in uncertain times

• The public sector must not abandon its target of reaching a budget surplus in 2014

• Active labour market policies need to be applied to bring down structural unemployment and ensure long-term economic growth

Key figures for Eesti Pank’s economic forecast


2011 2012 2013 2014

GDP (billion euros) 16.0 17.0 18.2 19.5

GDP change in real terms (%) 8.3 2.9 3.0 4.0

Inflation (%) 5.1 4.3 3.6 2.4

Unemployment (%) 12.5 10.2 9.4 8.9

Change in average gross wages (%) 5.4 5.7 5.4 6.8

Budget balance (% of GDP) 1.1 -1.0 -0.5 -0.1


economic policy statement of eesti pank · 12 december 2012 economic policy statement of eesti pank...

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