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Estonian economy: recent developments and future outlook

Estonian economy: recent developments and future outlook. Märten Ross , Deputy Governor, Eesti Pank Tallinn, 25/11/2008. Broad picture: some structural facts. High growth rate was nice, but was expected to slow down by any economic logic.

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Estonian economy: recent developments and future outlook

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  1. Estonian economy:recent developments and future outlook Märten Ross, Deputy Governor, Eesti Pank Tallinn, 25/11/2008

  2. Broad picture: some structural facts

  3. High growth rate was nice, but was expected to slow down by any economic logic

  4. Inflation has been high in 2007, but price level growth in euros has been low in CEE

  5. Wages are still competitive vis-a-vis neighbours (average wage still below 900 EUR; but in Pisa tests: 5th) Source: Eurostat

  6. Even the prices of real estate never reached excessive levels in comparative terms

  7. Debt level is not very high in regional comparison(household debt to GDP (left scale) and change in debt-to-GDP ratio (right scale) in Nordic and Baltic countries)

  8. 2. Recent cycle: reasons for ups and downs

  9. What has driven recent developments? • Favourable external environment until 2007: • Period of relatively fast growth and low interest rates • EU accession: • Enhanced labor mobility and strengthened wage expectations • Increased productivity (incl in export sector) • Fastened financial integration, ie lower interest rates and longer maturities in lending • Economy adjusting already at least from 1st half of 2007 as these factors either matured (EU accession) or reversed (external sector)

  10. Exports have been doing fine at least until September

  11. Wage growth that was driven by labor market opening is cooling down

  12. Inflation declines as expected

  13. The banks' external financing need has decreased already due to lower credit growth

  14. Current account deficit has fallen already

  15. 3. Outlook

  16. External environment should keep us all conservative regarding the growth environment

  17. However, inflation outlook is already improving strongly and euro adoption has become real possibility

  18. Ability to withstand global shocks? • Labour market is flexible • wage setting uncentralised • (Local) financial sector capital and liquidity buffers are high • Reserve requirement to deposits is about 30% • Government financial position very sound • 2% debt vs over 9% foreign reserves

  19. Share of past due loans has picked up from very low level

  20. But good profitability of previous years has increased the capital buffers of banks

  21. Thanks! For further information please contact: Public Relations Office of Eesti PankLivia Kulm, Livia.Kulm@epbe.ee Tel: +372 6680745 www.eestipank.info

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