Dowjones Business News
Estonia's slump is likely to deepen in 2009, with the economy contracting by 3.5% rather than the 2.1% predicted previously, the finance ministry warned Thursday.
Estonia, which shifted rapidly from a communist command economy to the free market after independence from the Soviet bloc in 1991, has enjoyed a reputation as a "tiger" in the European Union, which it joined in 2004.
Growth in the country of 1.3 million people has been driven by robust domestic demand, fuelled by easy credit and a real estate bubble.
Estonia expanded 10.4% in 2006 and 6.3% in 2007 but has shuddered to a halt this year in the face of double-digit inflation and tighter credit while the global crisis hits exports of goods and services.
The economy grew just 0.2% in the first quarter compared with the same period of 2007, then contracted 1.1% in the second.
The slump deepened further in the third quarter, as output shrank by a 14-year record of 3.3%.
The national bank has forecast that the economy will contract 1.8% this year and 2.1% in 2009 before picking up again in 2010, when growth is predicted to be 3.0%.
The finance ministry, however, said the 2010 rebound may be less than forecast, reaching just 2.6%, but the economy should pick up steam again in 2011-2012.
The current downturn will spur a decline in annual average inflation to 4.2% in 2009, which is essential to enable the Baltic state to meet criteria for adopting the euro, Finance Minister Ivari Padar said in a statement Thursday.
By mid-2010, inflation should be down to 3%, close to the assumed target for adopting the euro, and remain there during 2011, senior ministry expert Andrus Saalik told AFP.
Estonia had hoped to make the switch from its national currency, the kroon, to the euro, at the start of 2007. But in April 2006 the government shifted the target to 2008 and was later forced to put the move on ice until at least 2011.
The delays came after Estonia failed to rein in inflation, which must be curbed under E.U. criteria for would-be eurozone members.
"Inflation has been so far the biggest hurdle in our path to joining the euro zone, but the recession will also put the brakes on rising prices," Padar said.
"It will also lead to a reduction in tax revenue, which will mean we have to keep a careful eye on the budget deficit to make sure it stays within the permitted margins," he said, referring to an E.U.-set deficit limit of three percent of gross domestic product required for the switch to the euro.