1. Eesti Pank Economic Statement
11 June 2014

2. Key points of the presentation
11.06.2014 Eesti Pank Economic Statement 2
• The external environment
• Review of the Estonian economy and
forecast for the coming years
• Economic policy implications

3. 11.06.2014 3
Activity is increasing in the global economy as a whole, the
outlook for growth in advanced countries is improved
• Structural problems and imbalances are restricting growth in developing markets
• Markets expect the oil price to fall to close to 98 dollars in 2016
Eesti Pank Economic Statement
-10%
-5%
0%
5%
10%
15%
2006 2008 2010 2012 2014 2016
euro area Japan China USA
Output growth of larger economies
Source: IMF WEO, April 2014
0.0
0.5
1.0
1.5
2.0
2.5
2007 2008 2009 2010 2011 2012 2013 2014
food industrial commodities energy
Source: HWWI
Commodity price indices* (January 2007=1)
* last observation 16.05.2014

4. Growth is starting to recover in the euro area
4
• Euro area growth is accelerating slowly
• Inflation has fallen more than expected in the first half of 2014, price
pressures will remain subdued in future
Eesti Pank Economic Statement11.06.2014
HICP inflation, %
Sources: Eurostat, European Central Bank
Quarterly economic growth, %
2013 2014 2015 2016
1.4 0.7% 1.1% 1.4%
2013 2014 2015 2016
-0.4% 1.0% 1.7% 1.8%

5. Growth is picking up in the euro area with
support from low interest rates
5
• Weak price pressures mean that financial markets expect interest rates to remain very
low
• The Governing Council of the ECB lowered the monetary policy interest rate in June,
setting a negative interest rate for deposits from commercial banks
Eesti Pank Economic Statement11.06.2014
0.0%
0.5%
1.0%
1.5%
2.0%
2011 2012 2013 2014 2015 2016
December forecast 2013 June forecast 2014
3-month EURIBOR
Source: European Central Bank

6. The growth in demand in Estonia’s main
export markets is getting faster
6
• Growth in external demand has proved weaker than was forecast in December
• The main restriction on export capacity in the years ahead will be weak demand in Finland and Russia
Eesti Pank Economic Statement11.06.2014
-1%
0%
1%
2%
3%
4%
5%
2012 2013 2014 2015 2016
Lithuania Latvia
Russia Finland
Sweden other
external demand growth
Source: ECB
External demand growth
0%
1%
2%
3%
4%
5%
6%
2012 2013 2014 2015 2016
Finland Russia Germany
other countries Latvia 2013 October
2014 April
Change in external demand growth
Sources: IMF WEO, Statistics Estonia, Eesti Pank

7. Different markets have different
effects on the Estonian economy
7
• Goods exports to Scandinavia contain a much higher proportion of Estonian
production output, and economic developments there have a larger impact on Estonia
Eesti Pank Economic Statement11.06.2014
0
500
1000
1500
2000
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
2007
2009
2011
2013
Estonian exports of goods from other countries of Estonian origin
Sources: Statistics Estonia, Eesti Pank
Estonian exports of goods in current prices to main destination countries
EURmillion
Russia Finland Sweden Latvia Lithuania

8. The strengthening of the euro has significantly
affected trading conditions in Estonia
8
• Since the start of 2013 the euro has appreciated by 23% against the Russian rouble,
4% against the US dollar and 5% against the Swedish krona
• Estonian exports have become relatively more expensive and imports cheaper –
this has slowed inflation but harmed price-based competitiveness
Eesti Pank Economic Statement11.06.2014
0.95
1.00
1.05
1.10
1.15
1.20
1.25
2013 2014
Swedish krona US dollar Russian rouble
Source: Eurostat
Euro exchange rate (January 2013 = 1)

9. Unemployment will decline slowly
9
• The decline in unemployment has stalled
• High structural unemployment poses a problem for the development of the economy
Eesti Pank Economic Statement11.06.2014
0%
4%
8%
12%
16%
20%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%oflabourforce
24 months and more 12 to 23 months
6 to 11 months less than 6 months
unemployment rate natural rate of unemployment
Unemployment rate
Sources: Statistics Estonia, Eesti Pank

10. Wage growth is slowing
10
• The decline in the working age population will lead to a fall in employment
• Structural unemployment and the shrinking population have steadily improved the position of
workers in wage negotiations
Eesti Pank Economic Statement11.06.2014
40%
42%
44%
46%
48%
50%
52%
-10%
-5%
0%
5%
10%
15%
20%
25%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
share of labour costs in GDP (right scale) employment growth growth rate of the average monthly gross wage
Growth in wages and employment
Sources: Statistics Estonia, Eesti Pank

11. There is a strong link between labour costs
and rising prices for services
11.06.2014 Eesti Pank Economic Statement 11
• Estonian consumer prices were about 72% of the European Union average in 2013
• The gap is larger in the closed sector, or service sector, where Estonian prices are about
60% of the EU average
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
-10%
-5%
0%
5%
10%
15%
20%
25%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
annual growth in average gross wages service price inflation without communications (right scale)
Sources: Eurostat, Statistics Estonia
Wage growth and service price inflation

12. Inflation will rise but will remain
moderate in the coming years
12
• Core inflation will rise as prices rise faster for services and imported products
• The inflation forecast assumes a fall in the world oil price
• Higher excise taxes will raise food price inflation
Eesti Pank Economic Statement11.06.2014
0.8%
2.4%
2.7%
-1%
0%
1%
2%
3%
4%
5%
6%
2011 2012 2013 2014 2015 2016
core inflation household energy fuels food CPI
Sources: Statistics Estonia, Eesti Pank
CPI growth

13. Economic growth in 2014 will be less than
expected
13Eesti Pank Economic Statement11.06.2014
• Growth in 2015 will be close to the earlier forecasts
• In 2015 nominal GDP will be about 500 million euros lower than was previously forecast
0.7%
3.9%
3.6%
0%
2%
4%
6%
8%
10%
2010 2011 2012 2013 2014 2015 2016
Real economic growth in Estonia
Sources: Statistics Estonia, Eesti Pank
12.9
13.4
13.9
10
11
12
13
14
15
2010 2011 2012 2013 2014 2015 2016
June forecast 2014 December forecast 2013
Estonian GDP at constant prices (EUR billion)
Sources: Statistics Estonia, Eesti Pank

14. Economic growth will pick up this year
11.06.2014 Eesti Pank Economic Statement 14
• The negative contribution of the energy sector will fade in the second quarter
• The negative contribution of transportation and storage will also be reduced
from the second quarter due to the change in comparison base
• The economy will be boosted by the steady recovery in external demand,
which has been the biggest restraint on higher production
-3%
-2%
-1%
0%
1%
2%
3%
4%
Q1 Q2 Q3 Q4 Q1
2013 2014
net production taxes trade
manufacturing transportation and storage
construction energy
other GDP at market prices
GDP growth by sector
Source: Statistics Estonia
0
200
400
600
800
1000
1200
1400
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
land, air and water transport
support activites for transportation and storage
transportation and storage
Sales income, EUR million
Source: Statistics Estonia

15. Nominal economic growth has been strong
15Eesti Pank Economic Statement11.06.2014
• Wage growth has diverged from productivity growth and has fuelled growth
in the nominal size of the economy, household incomes and state budget
revenues, but has started to hinder price-based competitiveness
• Further economic development can only be supported by faster real growth
0%
5%
10%
15%
20%
25%
0%
2%
4%
6%
8%
10%
12%
14%
2010 2011 2012 2013 2014 2015 2016
GDP deflator growth nominal GDP growth real GDP growth growth of average monthly gross wage
Growth in GDP and GDP deflator
Source: Eesti Pank

16. The share of economic growth coming
from investment will increase
16
• Corporate investment will pass its low point in 2014, which has mainly been
caused by uncertainty about the future
• Private consumption will continue to grow quickly throughout the forecast horizon
Eesti Pank Economic Statement11.06.2014
0.7%
3.9% 3.6%
-4%
-2%
0%
2%
4%
6%
8%
2012 2013 2014 2015 2016
household consumption (pp) gross fixed capital formation (pp)
government consumption (pp) net exports (pp)
stocks (pp) GDP growth at constant prices
GDP growth by expenditure method
Sources: Statistics Estonia, Eesti Pank

17. Credit growth will accelerate, but the loan burden in
the economy will be reduced
17
• The good financial position of the banks and increasing
deposits will support the supply of credit
• Loan interest rates will remain low to the end of the
forecast horizon
Eesti Pank Economic Statement11.06.2014
-15%
-10%
-5%
0%
5%
10%
2010 2011 2012 2013 2014 2015 2016
corporate credit growth household credit growth
Source: Eesti Pank
Credit growth

18. The general government budget will be in
deficit throughout the forecast horizon
18
• Eesti Pank estimations show the budget will also be in structural deficit
Eesti Pank Economic Statement11.06.2014
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2010 2011 2012 2013 2014 2015 2016
structural budget balance nominal budget balance
Fiscal stance (% of GDP)
Sources: Statistics Estonia, Eesti Pank

19. Conclusions from the economic forecast
19Eesti Pank Economic Statement11.06.2014

20. Global economic activity will increase
• Global economic growth has become steadily stronger, but in the coming
years it will continue to rotate from developing markets to advanced
markets.
• Growth in the euro area has recovered as expected, reforms to improve
competitiveness must be continued
• Economies in the afflicted countries in the euro area have clearly revived
• Growth rates are uneven across the euro area and Estonia has been strongly
affected and will continue to be affected by the performance of Finland,
which was worse than expected
• Low price pressures mean that euro area monetary policy will remain
accommodative and supportive of growth for a long time
• The main impact so far on Estonia from the conflict between Ukraine and
Russia has been a reduction in confidence, the effect on the economy as a
whole has been small
• The outlook for growth in Russia is weak, but this does not have a
widespread impact on the Estonian economy as exports to Russia are mainly
of products from other countries
20Eesti Pank Economic Statement11.06.2014

21. The decline in the Estonian economy at the beginning of
the year was only temporary
• Economic growth in Estonia will accelerate this year as the negative
contributions of the energy sector and of transportation and storage
will start to fade
• The lack of demand, which has been the biggest barrier to increased
production, will disappear as external demand improves steadily
• Wage growth has remained strong at the start of this year and
private consumption will keep domestic demand growing strongly
this year and in the coming years
• Good financing conditions will support the increase in investment
activity this year, loan interest rates will remain low throughout the
whole forecast period
21Eesti Pank Economic Statement11.06.2014

22. The key issue for economic growth is productivity
• For the Estonian economy to continue developing, the state budget to
remain good and household incomes to continue rising, real growth in
the economy needs to accelerate, and this is dependent on the ability
of companies to raise labour productivity
• Making production more efficient is an important issue for economic
growth, as the shortage of qualified labour and the resulting pressure
on wages are not going to ease
• Wage growth will slow somewhat, as the increase in the share of
companies that are losing competitiveness, the fall in corporate
profitability, and the slow growth in prices in foreign markets make it
harder to pass wage costs into prices
• It is getting ever harder for companies with low productivity to cope as
labour moves to companies that create more value added
• Economic growth, inflation abroad and tax rises will raise inflation in
Estonia, but it will remain moderate throughout the forecast horizon
22Eesti Pank Economic Statement11.06.2014

23. Potential risks
• The dangers related to the recovery in the global economy and the euro
area are smaller than before, but growth in Estonia's main export markets
and sources of risk are polarised
• This economic forecast does not consider a deepening of the crisis between
Russia and Ukraine, though this is a real danger that could delay the
recovery in Estonian economic growth
• To be able to cope with unexpected developments in export markets,
companies will need to be flexible in the range and substitutability of their
products and target markets
• If household expectations for real estate purchases are too optimistic, a
repeat of the fall in prices that accompanied the previous boom cannot be
ruled out
• Structural unemployment and labour shortages could delay an adjustment
in the growth of wage costs in the short term at the expense of earlier
profits, which would be followed by a sharper slowdown than forecast
23Eesti Pank Economic Statement11.06.2014

24. The public finances remain strong, but government
targets are more relaxed than before
• Growth in tax revenues and the assessment of the economic cycle
have diverged significantly, so Eesti Pank finds that structural budget
balance will not be achieved under current assumptions during the
forecast horizon
• Government budget targets should allow enough leeway that any
unforeseen deterioration in circumstances should not necessitate
unexpected changes in tax policy
• The tax environment needs to be predictable for both companies and
households
• The appearance of wage pressures even while unemployment is
relatively high indicates that structural unemployment is a problem.
To address this, the government will need to continue with its active
labour market policies, with support from regional, education and
population policies
• If wage growth slows in the private sector, the public sector needs to
be ready for it to slow there too
24Eesti Pank Economic Statement11.06.2014

25. Key indicators for the Eesti Pank economic forecast
25
Sources: Statistics Estonia, Eesti Pank
Eesti Pank Economic Statement
Economic forecast by key indicators
2013 2014 2015 2016
Nominal GDP at current prices (EUR billion) 18.43 19.19 20.45 21.79
GDP change at constant prices (%) 0.8 0.7 3.9 3.6
CPI inflation (%) 2.8 0.8 2.4 2.7
Unemployment rate (%) 8.6 8.5 8.5 8.3
Average gross monthly wage, change (%) 7.8 6.0 6.2 6.7
Budget balance (% of GDP) -0.2 -0.6 -0.8 -0.3
11.06.2014