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A somewhat weaker fiscal stance envisaged The March 2011 issue of SEB's Eastern European Outlook envisages a somewhat weaker fiscal stance from the Estonian Government over the next four years.

Commenting the outcome of the March 6th election to the Estonian Parliament, the Outlook says; "...voters largely endorsed pro-European, responsible policymaking at the heavy cost of a fiscal consolidation package with an overall impact of over 8% on GDP. We thus expect no major changes in policy agenda or style. That said, we envisage a somewhat weaker fiscal stance over the next four years."

"First, the smaller coalition partner IRL campaigned this time on an overtly populist ticket," continues the SEB Outlook. "While the Reform party will try its best to persuade IRL to drop the costliest items, some of them will probably be enacted…" "Second, it is more difficult to argue for further consolidation now that the country is already in the euro zone. Third, part of what looked like aggressive cuts in 2008 and 2009 will turn out to be deferred spending in 2011-2015."

Headlined ‘The export boom continues', the Estonian part of SEB's Outlook says; "Estonia is in the midst of an export boom, with annual growth rates beating one record after another. In January, nominal exports were up by 57% year on year." "Together with a smooth transition to the euro, this has lifted spirits. A broad-based sentiment index has shown one of the sharpest upswings in the EU."

"Exports are benefiting from a combination of improved competitiveness, internal devaluation in recent years and a favourable trend in major markets, especially Sweden, which since autumn 2010 has been Estonia's largest export market."

Labour market stronger than expected

"One of our [SEB's] central theses in the October 2010 Outlook was a slow, drawn-out labour market recovery. The 5 percentage point fall in the unemployment rate during the third and fourth quarters was surprisingly large." "Joblessness was 13,6% at the end of 2010. The average 2010 rate was 16,9%. The impact of export-led recovery in 2010 made unemployment drop faster than expected."

Weak upturn in consumption due to inflation and deleveraging

"Stronger employment gains and associated increases in nominal wages, which have risen since the second quarter of 2010, will provide improved support for domestic demand. The impact is, however, being held back by a gradual erosion in purchasing power. Real wages have declined since end-2008 and there is continued deleveraging in the household sector; outstanding loans have shrunk by 6% since peaking at the end of 2008. The growth contribution of private demand has now been negative for three years in a row. In 2011 we expect a positive increase and a contribution of 1–2 percentage points."

"Inflation is still rising, with the year-on-year rate at 5,7% in February, primarily due to higher food prices (up by 16% in February). Looking ahead, we expect somewhat weaker price pressure in the coming quarters."

Austerity policy is over

"An easing of fiscal policy at the same time as the ECB's monetary policy is gradually tightening but still expansionary may prove risky. It is important to keep inflation from getting stuck at 4-5%, higher than in most other EU countries and far higher than the ECB's 2% target. Otherwise, there is a risk that Estonia's recently regained competitiveness may again be lost," concludes the Outlook.

SEB's March 2011 Eastern European Outlook is available online at