The Estonian Ministry of Finance summer forecast predicts economic growth of 2% in 2010 and 3.6% in 2011, with inflation around 2.5-2.6% both years. Exports have recovered rapidly due to increased competitiveness and external demand. While employment is increasing, the pace is more restrained than desired. Risks to the outlook include uncertainty about export growth continuing in 2011 and higher than expected inflation in the short term.

1. Estonian Ministry of Finance 2010. Summer Forecast A ugust 25 th 2010

2. Macroeconomic Forecast Economic growth by 2% in 2010 and 3,6% in 2011 is relatively good outcome Inflation 2,6% in 2010 and 2,5% in 2011 Economic growth stronger than expected supported by increased competitiveness and external demand Current inflation mainly imported, fruther developments in accordance with economic growth and productivity Employment increase stable, but more restrained than desired

3. Economic growth in 2010Q2

4. 1. Macroeconomic Forecast Andrus Säälik Head of Macroeconomic Policy Department

5. Fundamentals of Forecast Recovery from the crisis in 2010. faster than expected (export, industry) Domestic demand starts to pick up in 2nd half of 2010 supported by investments Consumption courage is increasing In 2010. inflation higher than expected (commodities, bad weather conditions), further developments in accordance with economic growth Uncertainty in respect to 2011. outlook has increased

6. Recovery from crisis is faster

7. 1.1. External environment and trade

8. Source: Eurostat Exports has recovered rapidly in the EU, the growth rate reached almost 40% in the Baltics.

9. Growth of exports has been strong in last months, being affected by the internal readjustments of companies and the pick up of the foreign demand

10. 1.2. Domestic demand

11. Consumers confident in state success

12. Convergence in households’ saving rate

13. Consumption recovering?

14. Upwards trend of VAT

15. 1.3. Labour market and prices

16. 5000 new wage-earners during one quarter

17. Registered unemployment on downward trend since April

18. Unemployment is falling, but the pace is more restrained than desired

19. Mostly foreign factors and severe weather conditions, also increases in indirect taxes are behind the higher inflation

20. Inflation will fluctuate between 2.5–3% in near future, in line with the productivity and economic growth

21. 1.4. Risks

22. Outside Europe qoq growth loosing pace, pessimism is back

23. Risk scenario: exports will grow just one year?

24. Risk scenario: exports will grow just one year?

25. Risks Labour market Improvement mostly due to seasonal factors Economic growth based on increasing productivity – need for new workers? Inflation boosting in short term, 4% at the end of year Several one-off factors and surprises Expectations Price convergence is continuing Export Recovery effect up to 2011 Growth expectations in light of Q2 growth

26. Public Finance Sven Kirsipuu Adviser Public Finance and Strategies Department

27. Public Finance keywords in 2010–2014 The growth of economic activity increases the tax revenues Requested 2011 budget expenditure exceeded the limit-amounts by 4.8 bln EEK Selling of emmission quotas and associated investments influence the budget position Budget balance by the end of the forecast period

28. Tax revenues exceed the budget by 2.0 bln EEK 2010 budget Spring Forecast Summer Forecast Summer vs Spring Taxes in total 61 767.5 63 096.4 63 757.4 661.0 incl. PIT 3 220.0 3 210.0 3 150.0 -60.0 CIT 2 425.0 3 400.0 3 190.0 -210.0 Social tax 26 970.0 26 600.0 26 600.0 0.0 VAT 19 030.0 19 000.0 19 400.0 400.0 Excise on alcohol 2 330.0 2 540.0 2 600.0 60.0 Excise on tobacco 1 830.0 1 800.0 1 970.0 170.0 Excise on fuel 4 870.0 5 420.0 5 660.0 240.0 Gambling tax 215.0 320.0 307.0 -13.0 Non-tax revenues 22 760.6 23 552.3 23 798.7 246.4

29. One-offs increase the deficit in coming years

30. No structural problem in the budget

31. Tax burden set to decline

32. Estonia still has net assets by the end of 2010

33. Thank you!

34. Main indicators 2009 2010* 2011* 2012* 2013* 2014* Economic growth -14.1 2.0 3.6 4.0 3.8 3.5 GDP in current prices 214.8 218.2 230.4 245.5 261.5 278.3 CPI -0.1 2.6 2.5 2.6 2.7 2.7 Domestic demand -23.9 -0.2 4.3 4.1 4.7 4.6 Export -11.2 15.1 9.0 6.7 7.1 6.5 Employment growth -9.2 -5.0 0.8 1.6 1.8 1.7 Real wage growth -4.5 -3.2 0.1 1.0 1.6 1.5 Unemployment rate 13.8 17.5 15.4 13.6 11.4 9.4 Current account 4.6 4.3 2.3 0.3 -2.1 -4.4

35. Forecast of Estonian economic growth for 2010

36. Forecast of Estonian economic growth for 2011

37. Economic growth in different regions

38. In 2010 foreign demand stronger than expected

39. Estonian exports growth vs developments of main trading partners

40. Spare production capacities’ reserve still there, export orders strong

41. 2010–11: after crisis fast recovery

42. Current account surplus will turn to deficit because of the rise in import volumes and increasing profitability of foreign investments

43. Share of private consumption remains lower

44. Investments presumably recover

45. Employment by sectors

46. Wage decline stopping

47. Average payment by sectors

48. Average payment by sectors (2)

49. Average wage

50. Changes in tax policy– excise duty increases, VAT, state duties. Other administrative changes – electricity, water, gas, heat energy. Other goods and services – close to core inflation (2009-2010 without VAT increase). Contribution to CPI