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Strong growth in Estonia
Estonia’s GDP grew 7.0% in 2007, following 11.8% in 2006 and 10.5% growth in 2005. Average GDP growth has been over 9% for the last eight years. Growth is projected to be 5% in 2008. The contribution of domestic demand to growth has increased markedly since 2005, as consumption has been fuelled by wagesgrowing over 15% per year, strong consumer confidence and large increases in private debt. Unemployment is at historical
lows at 4.7% in 2007.
Retail sales grew 15% in 2007. Consumption is beginning to slow, however, as wage growth decelerates, and banks tighten lending to the consumer sector.
As there are no longer any barriers to trade or migration with Scandinavia or Western Europe, prices and wages are rising quickly to converge with Western levels. Inflation reached 9.6% by the end of 2007, which was much higher than analysts had earlier predicted. However, prices still have room to rise to fully converge with Western Europe - thus consensus estimates are that inflation will be 6-8% in 2008 and 4-5% in 2009.
Although the adoption of the euro is a key economic goal of Estonia, high inflation rates will make the adoption of the single European currency unlikely before 2011-2012.
