Estonia Economics February 2018

Domestic economic activity appears to have lost some steam in the fourth quarter from the previous one, but remained buoyant nonetheless. Industrial production in November expanded at the slowest pace in yearon-year terms since August 2016, and retail sales contracted in the same month owing in part to higher inflationary pressures. Retail sales were lower despite declining unemployment, which dropped in November to the lowest rate since June 2008. Contrasting slower growth in the domestic economy, growth in the external sector picked up. Exports expanded at a solid rate in both October and November thanks to improved demand from Estonia’s main trading partners. The expansions observed in the first two months of Q4 were spearheaded by robust sales of mineral products as the shale oil industry recovers on the back of higher prices for energy products. Economic growth is set to decelerate in 2018 and 2019 from 2017’s multi-year high but is expected to remain buoyant. Inflows of EU funds will boost growth investment, and changes to the income tax system will boost growth in private consumption. FocusEconomics panelists project that GDP will expand 3.1% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel expects GDP growth of 2.9%. HICP inflation moderated from November’s multi-year high of 4.5% to 3.8% in December. HICP inflation is expected to decline as the base effect from higher taxes and the rise in commodiup 0.2 percentage points from last month’s forecast. 

According to Statistics Estonia, growth in industrial production moderated from a revised working-day adjusted 6.0% year-on-year increase in October (previously reported: +6.2% year-on-year) to a 2.7% increase in November. The result marks the seventeenth consecutive monthly expansion and came on the back of an expansion in mining, which more than offset a contraction in energy production. A seasonally-adjusted month-on-month assessment shows that growth in industrial production swung from a 1.6% increase in October to a 1.4% contraction in November. Finally, the annual average variation in industrial production dropped from 8.6% in October to 8.0% in November. FocusEconomics Consensus Forecast panelists expect industrial production to grow 3.9% in 2018, which is up 0.3 percentage points from last month’s forecast. The panel foresees industrial production increasing 2.5% in 2019.

The Central Bank expects GDP to grow 4.2% in 2018 and 3.1% in 2019. FocusEconomics Consensus Forecast participants see the economy growing 3.1% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, economic growth is expected to grow 2.9%. MONETARY SECTOR | Inflation moderates in December Consumer prices dropped 0.3% in December compared to the previous month, contrasting the 0.5% month-on-month increase observed in November. According to Statistics Estonia, the monthly reading was driven by a price drop in 7 of the 12 components of the index. A steep decline in the prices of alcoholic beverages and tobacco was largely behind December’s month-onmonth drop. Inflation moderated from 4.2% in November to 3.4% in December. Annual average inflation increased from 3.3% in November to 3.4% in December. HICP inflation moderated from November’s over five and a half years high of 4.5% to 3.8% in December. Lastly, average HICP inched up from 3.5% in November to 3.6% in December. FocusEconomics Consensus Forecast panelists forecast harmonized inflation to average 3.1% in 2018, which is up 0.2 percentage points from last month’s forecast. In 2019, the panel expects harmonized inflation to average 2.8%.