SEB predicts 2.2 percent economic growth for Estonia in 2017. The Nordic living standard remained far out of reach, though the general situation had improved. The government’s timing and the random nature of its tax changes did not help, analyst Mihkel Nestor explained.

While there was no great increase in European cooperation to be expected, the general economic climate across the union was good, with shrinking unemployment numbers and the highest consumer confidence indicators of the last few years, SEB analyst Mihkel Nestor said introducing the bank’s growth Estimate for Estonia.

SEB expects the euro zone to show 2 percent growth this year, with both domestic consumtion and exports improving further. Interests on the part of the central bank are expected to rise from -0.4 to -0.25 percent.

General situation favorable

Confidence had increased across sectors, with the exception of retail, where it had already been high, Nestor said. The construction sector was waiting for the state to commission infrastructure projects, and the industries were responding to increased demand. With the general improvement of the economy, people’s fear of losing their jobs had somewhat receded as well.

Differing greatly from recent statements by the Estonian Employers’ Confederation as well as the Chamber of Commerce and Industry, Nestor sees the government change as a contributing factor to the increased optimism in the economy.

The growth in Estonia’s industrial output has been the fastest since 2011, driven by the wood processing and metal sectors.

Conditions on the external markets were improving, with the euro zone’s growth speeding up. Construction in the Nordic countries was on the increase, investments back at previous levels, and the global price of oil stable.

Investments up, though potentially in the wrong sectors

Estonia’s investments have been substantial in proportional comparison with EU member states, but are falling behind in terms of the union on the whole. The focus is still on construction and vehicle parks, investment in technology and intellectual assets continues to be low. Imports of new technologies have not increased.

Inflation had balanced off, and the consumer price index had grown by 3 percent in the first quarter of 2017, Nestor said, though the reason for the rise could be found in higher excise duties and how they were reflected in fuels and food prices. Expected inflation over the next few years shouldn’t exceed 3 percent.

The Estonian economy has been kept afloat by high domestic consumption, which is now slowing due to inflation. The increase in consumption was driven by growing salaries as well as almost no inflation. The ongoing labor tax reform is expected to influence consumer behavior next year.

7.5 percent unemployment in 2017

Unemployment reached 6.8 percent in 2016, while there were more than 10,000 vacant positions. This number is expected to grow further this year. Due to the ongoing work ability reform, both unemployment as well as the lack of qualified professionals are on the increase at the moment.

SEB projects 7.5 percent unemployment for 2017, and 8 percent for 2018.

According to Nestor, despite the government’s expressly “dogma-free economic policy” a surprising interference of dogma had taken place. The insecurity affected companies, and the government’s tax changes not effective. The government listened to experts selectively, and didn’t look for new sources of revenue where it was “logical”, Nestor said.

Beyond that, the bad timing of the introduced changes could damage Estonia’s growth potential in the long term. The government’s focus was on short-term improvement instead of the longer term, without investment in higher education and research and development, which would lead to long-term growth and profits, Nestor added.

Nordic living standard remains out of reach

For 2017 the bank predicts 2.2 percent economic growth, and another 3.1 percent in 2018. “The main question is how to increase the economic growth potential, as in case of a continued development like this we don’t see [how we could reach ]a Nordic living standard,” Nestor said, adding that Estonia needed to be more ambitious.

Depending on the perspective, Finland was 50 to 80 years ahead of Estonia based on current growth indicators, Nestor said. Estonia’s gross domestic product (GDP) would need to increase over the coming years if rising to the living standard of the Nordic countries was the aim.