1. Economic Forecast for 2014
Ardo Hansson
Eesti Pank
Äriplaan 2014
Nokia kontserdimaja, Tallinn

2. • The crisis is showing signs of retreating, but the recovery is not equal
around the world
• Low economic growth in Estonia is overshadowing a picture of strong
manufacturing activity
• Future growth in Estonia will increasingly be determined by how the
current shortage of human resources is handled
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3. The current state of the economic space
around us
• A revival in economic activity is discernible in the euro area
– The economic decline ended after six months, the longest period of
recession in the history of the single currency
– The exit from the crisis has been driven by the measures taken by the
institutions of the European Union
• The initial positive signs do not give grounds for excessive confidence
– Financial capacity has shrunk as the private and public sectors reduce
their debt levels and improve their balance sheets
– Eliminating the imbalances that have built up over years will take time
• The recovery has not happened equally around the world
– The position of developed countries has strengthened while developing
countries are plagued by growing pains
– At the end of summer several organisations lowered their growth
forecasts for developing countries
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4. The global economy is becoming more active
Sources: IMF, WEO Spring 2013,* European Central Bank Autumn Projection, ** Eesti Pank June
Forecast
4Äriplaan 2014
Economic growth (%)
Emerging economies WorldEuro area *Advanced economiesEstonia**

5. The reforms already passed are bearing fruit
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Source: European Commission
• Budget deficits are falling in Europe and in other areas
• The European Commission forecasts that this will continue
Budget balance Budget balance
Germany
Spain
Greece
Italy
Portugal
Cyprus
United Kingdom Japan USA Euro area
%ofGDP
%ofGDP

6. Estonia is well-placed on the map of European
growth
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Allikas: Euroopa Komisjon
20142013 GROWTH IN EUROPEAN COUNTRIES
Source: European Commission
• Among the main trading partners it is the performance of Finland that is causing concern
negative
0% - 1%
1% - 2%
2% - 3%
3% or more

7. There are structural problems facing the economy
of Finland, Estonia’s main trading partner
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0
1
2
3
4
5
6
1975 1980 1985 1990 1995 2000 2005 2010
Paper production Electronics
Share of GDP, %
Allikas: Suomen Tilastokeskus, Soome Pank 24877
• The paper and electronic production that has been important for Finland has disappeared
Sources: Finnish statistical office, Finnish central bank

8. The Finnish economy is weighed down by
growth in labour costs
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• Labour costs have grown rapidly in the last decade and this has reduced the
competitiveness of the economy
Source: Eurostat
Austria Denmark Euro area Germany
Finland Netherlands Sweden
Nominal ULC, change over 2005, %, euros

9. Rapid rises in labour costs can also be felt in
Estonia
Äriplaan 2014 9
Source: Statistics Estonia, Eesti Pank calculations
• Labour costs are carried over into end product prices, especially in the services sector
• Average gross wages grew by 8.5% in the second quarter of 2013 while prices for services
other than communications rose by 4.2% in August
• It is harder for manufacturing firms that face foreign competition to meet the wage pressure
and raise prices as this would lower competitiveness
Average gross wage (%, y-o-y), left axis Price of services (%, y-o-y), right axis

10. Estonian wages are under pressure from labour
shortages
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Source: European Commission
• Companies consider demand to be the main factor restricting production, but the
importance of labour shortages has increased
• Manufacturing companies do not consider financing conditions to be an obstacle to
development
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Tööstusettevõtete toodangukasvu piiravad faktorid
piiranguid pole ebapiisav nõudlus tööjõu puudus
materjali/seadmete puudus muud finantsprobleemid
Factors that limit industrial production
No limits
Lack of materials
Insufficient demand
Other
Lack of labour supply
Financial problems

11. Unused buffers still remain
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• There are about 60 thousand under-utilised people who have not yet found work
• For this resource to be used will probably demand more flexible working conditions
• The reservation wage, the minimum wage for which the currently unemployed are
prepared to take a job, has risen sharply, by between 11.4% and 15.4% depending on
education
Source: Statistics Estonia
Under-employed and non-actives who wish to work but have not searched for it
Thousands

12. Rising labour costs are starting to lift core
inflation
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-2%
0%
2%
4%
6%
8%
10%
12%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
alusinflatsioon majapidamiste energia toiduained kütused tarbijahinnaindeks
Sources: Statistics Estonia, Eesti Pank
• Core inflation has so far remained low as prices for communications services continue to fall
and prices for manufactured goods have risen slowly
• The impact from energy price rises will be notably smaller next year than this, having
supplied one percentage point, or about one third, of inflation in 2013.
core inflation household energy food fuel CPI inflation

13. The low economic growth in Estonia has been
strongly affected by one area of economic
activity
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Sources: Statistics Estonia, Eesti Pank calculations
• Economic growth fell in the second quarter to 1% but the deceleration was not broad based
• Excluding transport and warehousing, the rest of the economy grew by 2.4%
• Value added grew by 3.4% if transport and warehousing are excluded, and growth has
accelerated
GDP growth
GDP growth without transportation and storage
Growth of value added without transportation and storage
Economy without transportation and storage

14. A rise in economic activity is to be expected in
the coming years
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Sources: Statistics Estonia, Eesti Pank calculations
• Economic growth will reach 4% next year, which is near to the long-term level expected for
Estonia
Estonian economic growth, y-o-y forecast

15. The European economy is recovering only
gradually
• Our economic environment has changed and there is no reason to
expect surprising leaps of growth anywhere in the world
• The moderate recovery in economic activity in the euro area will
continue as interest rates remain low, allowing the central bank to
keep rates down
• The European Central Bank has confirmed that interest rates may
remain at their current levels or lower in the short term
• The positive impact of other economic policies has started to be
felt; the fiscal position of the euro area has improved and
competitiveness has increased, even in countries with difficulties
• The current signs of recovery in the euro area are fragile and the
earlier risks are still there
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16. Estonia needs to focus on its strengths but further
development will require an awareness of weak
points
• Estonia is at a very different stage of development to where it was in the
past decade and growth of 3-4% could be achieved next year
• Estonia still has the potential to grow faster than the rest of the euro area
• Growth was surprisingly weak in Estonia in the first half of the year, but
there is not a broad-based foundation for this
• Estonia’s advantage over other European countries is that it has exited the
crisis without a burden of debt and the national debt continues to be the
smallest in Europe; this provides stability to the tax system
• Estonia’s development will be affected more than ever by human
factors, as the number of people living in Estonia is falling and so is the
working age population
• The central question in increasing output in the coming years will be not
only the size of labour resources but also their deployment
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17. Äriplaan 2014 17
2012 2013 2014 2015
GDP (billion euros) 17.0 17.9 19.2 20.7
GDP change in constant prices (%) 3.2 2.0 4.2 4.3
CPI inflation (%) 3.9 3.0 2.5 2.7
Unemployment (%) 10.2 9.2 8.8 8.5
Average gross monthly wage change (%) 5.9 5.1 6.4 7.4
Budget balance (% of GDP) -0.3 -0.3 0.0 0.2
Key indicators from the economic forecast
Sources: Statistics Estonia, Eesti Pank
Key indicators from the Eesti Pank June
Forecast