Economic growth in Estonia has been strong in the past three years, with real GDP expanding by +5.7% in 2017, +4.8% in 2018 and an average +4.3% y/y in the first three quarters of 2019. The favorable performance has been mainly driven by robust private consumption (average annual +3.2%) and rapid investment growth (+9.5%). Private consumption has been supported by a lasting improvement in purchasing power on the back of solid employment growth and declining unemployment, as well as strong wage growth amid a tightening labor market. Investment spending has benefited from EU-funded projects entering the implementation phase during the past few years. Meanwhile, external trade activity gradually gained momentum in 2017-2019 as the adverse effects of the Russia crisis in 2015-2016 faded and any negative impact from slowing Eurozone demand in 2019 remained limited. In the first three quarters of 2019, real exports increased by +5.7% y/y, outpacing import expansion at +4.6%, so that net exports added +1pp to growth in that period.

Going forward, investment growth is forecast to remain strong but to moderate somewhat as EU-funded projects will begin to mature and base effects from the strong rise in 2019 will materialize. Consumer spending is likely to remain robust but should ease somewhat as employment growth is nearing its limits. External trade activity is forecast to lose some momentum in 2020 due to slowing demand from the Eurozone before picking up again in 2021. Overall, we forecast average annual real GDP growth in Estonia to decelerate to around +3% in in 2020-2021.

Estonia’s current account balance is favorable as well. Annual surpluses have been recorded since 2013, with the one in 2019 estimated at +1.5% of GDP. As energy prices are expected to pick up moderately, the annual surplus is forecast to narrow to around +1% of GDP in 2020-2021.

Gross external debt remains the weak spot. It soared to an alarming level of 125% of GDP in 2009, built up by earlier large current account deficits. The ratio has since fallen to around 74% and is forecast to reach 70% in 2021. Despite the positive trajectory, this is still a relatively high ratio as compared to peers and thus requires monitoring.