Boston, MA -- (SBWIRE) -- 08/16/2012 -- Core Views Estonia's economic growth will slow to 2.7% in 2012 in real GDP terms, from 7.6% in 2011. While this remains the strongest economic growth figure in the eurozone, the economy is not immune from the weakened external demand in the bloc, which we expect to contract by an aggregate 0.5% this year. A high degree of uncertainty over the future of eurozone economic growth will feed through to lower private consumption and investment growth, both of which have been integral drivers of economic recovery in the Baltic country. We expect the fiscal deficit to widen in 2012 before narrowing in 2013 and coming into balance in 2016. Moreover, while we expect government plans to use fiscal reserves to cover the deficit to be sufficient, in the event that international debt markets must be tapped, we believe it would be on favourable terms to Estonia owing to the country's strong fiscal credentials and the lowest public debt load in the eurozone. The recent rise in popular support for opposition parties in Estonia is a trend likely to continue during the centre-right coalition's term. An increasingly challenging economic environment combined with ongoing fiscal austerity will stoke public dissatisfaction with the ruling coalition. However, we do not expect this to unseat the government. Major Forecast Changes We have revised our forecast for Estonia's real GDP growth in 2012 to 2.7% from 3.1% previously following 7.6% real GDP growth in 2011. A persistently deteriorating economic outlook in the eurozone stemming from a failure by policymakers to comprehensively address the eurozone sovereign debt crisis will weigh on external demand for Estonian exports. Owing to strong inflationary pressures in Estonia at the start of the year, we have revised our forecast for average consumer price inflation up to 4.2% in 2012 from 3.5% previously. This is due to an anticipated combination of elevated energy and food prices over the course of 2012. Key Risks To Outlook As a member of the eurozone, Estonia remains highly exposed to the sovereign debt crisis, an intensification of which would have a deleterious impact on Estonia's macroeconomic outlook.
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