Estonia c.bank gives bleak economic outlook

It said the Nordic banks which now dominate the Estonian banking sector should be able to withstand the slowdown, but that if Estonia's export markets ran out of steam completely then its own downturn would continue for longer. So far the economic correction has been more abrupt than expected primarily due to decreasing domestic demand," the bank said in its new forecasts, updated from April.

It stuck to its outlook for inflation to drop to near the Maastricht Treaty level for the adoption of the euro by the end of 2010, but it also saw the budget deficit rising and urged the government to be prepared for further budget steps. It forecast a gross domestic product (GDP) drop this year of 1.8 percent and of 2.1 percent in 2009. Growth would resume the year after at 3 percent, it said.

Its previous forecast was for GDP rises of 2 percent, 3 percent and 5 percent respectively. However, "we expect in the forecast that growth in Estonia's main export markets will not die down totally and the mutual distrust in the global financial markets will pass," it said. If these expectations do not come true, we will have to be ready for a longer economic adjustment period." Continued..

Inflation would come in at 10.7 percent this year, easing to 4.8 percent in 2009 and 2.8 percent in 2010.

It saw the budget gap at 1.4 percent of GDP this year, 2.5 percent in 2009 and then easing to 1.3 percent in 2010.

"According to Eesti Pank's estimate, the consolidated state budget for 2008 and 2009 will be in a deficit, but owing to the reserves accumulated in previous years, public sector debt will grow minimally," it said.

A budget gap should be temporary and moderate, it added, and is acceptable so long as it does not pose a risk to the economy or the adoption of the euro as soon as possible. A new budget strategy would be needed, with a focus particularly on 2010.

The bank saw unemployment stable at 4.8 percent this year after 4.7 percent in 2007, but expected sharp rises to 7.0 percent in 2009 and to 8.3 percent the year after.

At the same time, it saw the current account gap falling due to the economic slowdown from an expected 11.1 percent this year to 6.5 percent in 2009, before edging up to 7.1 percent in 2010.

Source http://reuters.com/article/rbssfinancialservicesandrealestat~

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