Bank of Estonia: export growth boosted by improving conditions in neighboring countries

The Bank of Estonia says the country's economy is recovering after a downturn, driven mainly by export growth linked to an improving economic situation in neighboring countries. Growing optimism among producers and consumers, along with a modest rise in real household incomes, is also supporting the recovery.

Metalworking company Radius Machining is one example of a firm whose order book has been expanding recently. Speaking to Estonian broadcaster's "Aktuaalne Kaamera," director Ahti Talts said clients in the company's main markets, Finland and Germany, have become notably more active, meaning sales volumes are set to rise next year. The firm is already preparing to expand exports further, including by purchasing new machinery.

Central bank's outlook

Bank of Estonia vice president Martti Randveer said export growth is being helped by improving conditions in Latvia, Lithuania and Sweden, as well as in Finland, which struggled in recent years but has shown signs of a turnaround this year. He noted a direct link: the better the economic situation in neighboring countries, the faster Estonian exports to those markets grow.

Bank president Ülo Kaasik noted that inflation in Estonia had been relatively high in the recent past, but this year price growth has been the slowest in Europe. Given current fuel prices, inflation could accelerate again, but if fuel prices fall as analysts predict, inflation should not exceed 2-3% annually, since no rapid wage growth or additional tax hikes are currently planned.

The bank forecasts economic growth of 2.6% this year and 2.4% annually over the following two years. Prices are expected to rise 3.1% this year, 2.3% next year and 2.1% in 2028. Average wages are projected to grow 5.5% this year, 4.6% next year and 4.8% the year after. However, rapidly rising government debt remains a longer-term problem: the budget deficit is expected to reach 4.5% of GDP this year, 4.8% next year and 4.5% again in 2028. Both central bank officials and business representatives acknowledge that unstable international conditions and volatile energy and transport prices make such forecasts uncertain.