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Estonia’s Central Bank ‘Can’t Rule Out’ Recession Next Year

Estonia’s central bank cut its forecast for economic growth next year and said a recession can’t be ruled out if Europe’s sovereign debt crisis worsens.

Gross domestic product will probably grow 1.9 percent next year, compared with a June forecast of 4.2 percent, the Tallinn-based Eesti Pank said in an e-mail today. It reduced the 2013 forecast to 3.6 percent from 4.2 percent.

“The slowdown will mainly be due to a worse external environment, although Estonia’s ability to withstand external worsening has significantly improved since the last crisis as domestic imbalances have disappeared,” Deputy Governor Ulo Kaasik said at a news conference in Tallinn. “There is clearly a danger of a recession in the euro zone.”

Estonia, the first former Soviet republic to adopt the euro when it made the switch in January, is the fastest-growing economy in the 27-member European Union this year. The $19 billion economy has been driven by demand in neighboring Sweden and Finland for its electronics and machinery exports.

Estonian industrial production grew last month at the slowest pace since it returned to expansion in January 2010 as Europe’s debt crisis damped export demand. In October, 31 percent of Estonia’s exports went to the euro region and 64 percent of exports went to the larger EU.

Next Year’s Contraction

The economy may contract 4 percent next year under the central bank’s negative scenario, which foresees a 1 percent contraction in the average weighted demand by its main trade partners, instead of 5 percent growth in the base scenario.

The central bank raised its 2011 growth forecast to 7.9 percent from 6.3 percent seen in June.

Average annual inflation will slow to 2.8 percent next year from 5.1 percent this year, the bank said. It previously forecast 2011 inflation at 4.7 percent and 2012 price growth at 2.5 percent.

The government’s goal of a budget surplus by 2013 is “becoming more doubtful,” Governor Andres Lipstok said at the same news conference. Without cutting spending, the Cabinet may face a “large” deficit if the negative scenario materializes, he said.

The bank forecast a budget deficit of 2 percent of GDP for next year, compared with an expected surplus of 0.7 percent this year. The deficit may shrink to 0.7 percent in 2013, it said.

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