Estonia Cuts 2007 GDP Growth Forecast To 8.1%

Aug 23, 2007 - Estonian authorities lowered their economic growth forecast for 2007 and 2008 and said inflation would accelerate, but the finance ministry said there was no need to worry.

Estonia's gross domestic product (GDP) is this year expected to increase by 8.1 pct compared with 2006, the country's finance ministry said, cutting back its earlier forecast of 9.2 pct.

And in 2008 the economy is expected to grow by 7.0 pct on the same basis, rather than the previously forecast 8.3 pct.

'There is no need to worry about Estonia's economy,' said Finance Minister Ivari Padar. 'Despite growth being less than predicted, the budget will be growing, and despite the decline of growth we still predict that we will get more money in the budget next year than we predicted this spring.'

Estonia's GDP grew by 11.4 pct in 2006, lagging just half a percentage point behind neighbouring Latvia, which topped the EU growth table last year.

But the ministry also said that inflation is set to be higher than expected.

Average annual inflation is likely to hit 6.1 pct this year, due to strong domestic demand and rising wages, outpacing the ministry's original forecast of 4.9 pct.

It is then expected to reach 7.4 pct in 2008, rather than the initially predicted 5.2 pct, but is likely to lose pace from 2009 and drop to 3.5 pct by 2011.

'The increase of prices is rapid but the increase of incomes continues also,' Padar said. 'We see it as a rather normal development that in a country with such a fast-growing economy, prices and salaries move closer to the EU average.'

But curbing inflation is a key plank of EU-set criteria for would-be eurozone members. Estonia's failure to keep its average annual rate under control put paid to the goal of adopting the European single currency at the start of this year.

Although no new date has been set for making the switch from the national currency to the euro, Estonian officials have suggested it may be possible by 2011.