Estonia’s Growth to Slow Amid Prolonged European Slump, IMF Says

Growth in Estonia will slow this year and could be further hampered if the euro-area economy takes longer than expected to recover, according to the International Monetary Fund’s staff.

Risks to Estonia’s economic expansion, which the IMF sees slowing to about 3 percent this year after a 3.2 percent gain last year, are on the downside and stem from prolonged slow growth in the 17-country euro area, the IMF staff wrote in its annual assessment of Estonia’s economy. The IMF sees Estonia growing 3.2 percent in 2014.

“With little evidence of a turnaround in the euro area, the projected pickup in external demand remains to be confirmed,” according to the staff report, which was dated April 17 and released today. “Delays in the euro-area recovery can slow Estonia’s exports -- two-thirds of which are to the European Union -- reduce job creation and thereby limit household’s ability to service their loans.”

Estonia, the most recent euro member, has weathered Europe’s debt crisis as Swedish and Finnish demand helped its economy recover from a 20 percent contraction in the wake of Lehman Brothers Holdings Inc.’s 2008 demise.

Estonia had a preliminary budget deficit of 0.3 percent of gross domestic product last year after running surpluses in 2010-2011.

The country’s “fiscal position is strong, but strenuous efforts will be needed to resist calls on the public purse and avoid untimely fiscal stimulus in 2013,” according to the IMF staff, which also estimated that the real exchange rate “has remained broadly in line with fundamentals.”

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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