1. Eesti Pank Economic Statement
10 December 2014

2. Key points of the presentation
10.12.2014 Eesti Pank Economic Statement 2
• The external environment
• Review of the Estonian economy and forecast for the
coming years
• Economic policy conclusions

3. 10.12.2014 3
The global economy is growing more slowly than
expected
• Several institutions including the IMF, ECB and European Commission have adjusted
their outlooks for the global and euro area economies downwards
Eesti Pank Economic Statement
0%
1%
2%
3%
4%
5%
6%
2010 2011 2012 2013 2014 2015 2016
European Commission IMF ECB
Global economic growth
* Global growth without the euro area
Sources: IMF, European Commission, European Central Bank
-10%
-5%
0%
5%
10%
15%
2006 2008 2010 2012 2014 2016
Japan Russia China USA
Source: IMF WEO, October 2014
Growth in large economies

4. Euro area growth is accelerating slowly
4
• Inflation in the euro area has fallen more than expected in 2014 and will
remain subdued in future
Eesti Pank Economic Statement10.12.2014
HICP inflation, %
Sources: Eurostat, European Central Bank
Economic growth q/q, %
2013 2014 2015 2016
1.4 0.5% 0.7% 1.3%
2013 2014 2015 2016
-0.4% 0.8% 1.0% 1.5%

5. An accommodative monetary policy is helping
growth pick up in the euro area
5
• Given low inflation, interest rates are expected to remain low
• The Governing Council of the European Central Bank cut monetary policy interest rates in September
to their lowest ever levels, and deposit rates for commercial banks have been negative since June
• Standard and non-standard monetary policy measures have lowered the loan interest rates for the
non-financial sector
Eesti Pank Economic Statement10.12.2014
0.0%
0.4%
0.8%
1.2%
1.6%
2011 2012 2013 2014 2015 2016
3-month EURIBOR
Source: European Central Bank

6. The change in the euro exchange rate has affected trading
conditions in the euro area, including Estonia
6
• The Russian rouble has fallen by about 40% against the euro since the start of the year,
which has made Estonian exports less competitive on price in Russia
• The US dollar has appreciated against the euro, which has slowed the fall in prices of
motor fuels
Eesti Pank Economic Statement10.12.2014
Source: Bloomberg
80
90
100
110
120
130
140
150
01.2014
02.2014
03.2014
04.2014
05.2014
06.2014
07.2014
08.2014
09.2014
10.2014
11.2014
12.2014
Euro exchange rate against foreign currencies (January 2014 = 100)
US dollar British pound Swedish krona Russian rouble

7. The forecast assumes that demand will grow slowly, but
will see a stable acceleration in export markets especially
7
• The main restriction on export capacity in the years ahead will be weak demand in Finland and Russia
• The trade sanctions imposed by Russia have not significantly harmed the economy as a whole
Eesti Pank Economic Statement10.12.2014
-1%
0%
1%
2%
3%
4%
5%
2012 2013 2014 2015 2016
USA Germany Latvia & Lithuania Russia Finland Sweden other
Source: European Central Bank
Foreign demand growth

8. Prices of commodities have fallen on global
markets because of weak demand
10.12.2014 Eesti Pank Economic Statement 8
• Future transactions for oil at the time of writing suggested the oil price will remain below 90
dollars a barrel
• The volatility of the oil price could affect inflation strongly in either direction
• Prices for food and industrial commodities are forecast to remain close to their current levels
Sources: Ecowin, European Central Bank
20
30
40
50
60
70
80
90
100
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
crude oil price (euros per barrel) annual average price
Crude oil price (Brent)

9. Cheaper energy means that the consumer basket is
cheaper this year than last
9
• Prices will start to rise again from the start of 2015
• Food price inflation will accelerate in 2015 and 2016 when excise rates rise
• Low inflation will help increase the real purchasing power of households
Eesti Pank Economic Statement10.12.2014
-0.1%
0.8%
2.1%
-1%
0%
1%
2%
3%
4%
5%
6%
2011 2012 2013 2014 2015 2016
core inflation energy food CPI
Sources: Statistics Estonia, Eesti Pank
Consumer price index change

10. Core inflation is being reduced by cheaper
communications and free higher education
10.12.2014 Eesti Pank Economic Statement 10
• Prices for domestic goods and services will be raised by rising wage costs
• Core inflation will fall temporarily in 2015 as the real estate market calms and rents
rise more slowly
Sources: Statistics Estonia, Eesti Pank
-4%
-2%
0%
2%
4%
6%
2009 2010 2011 2012 2013 2014 2015 2016
communications education tourism and recreation transport rent services inflation
Service price inflation

11. Wage growth has slowed but will remain above 5%
11
• Wages will rise in 2015 among other things because of a rise in the minimum wage and
the start of wage agreements in various sectors
• Employment will be brought down by the reduction in the working age population and
labour shortages will put ever more of a limit on production
Eesti Pank Economic Statement10.12.2014
-10%
-5%
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
employment growth growth rate of the average monthly gross wage
Wage and employment growth
Sources: Statistics Estonia, Eesti Pank

12. Finding employees will become ever harder
11.06.2014 Eesti Pank Economic Statement 12
• There will be 15,000 fewer people of working age in Estonia in two years than there
are now and in five years there will be 30,000 fewer
• Competition between companies for employees will become fiercer
900,000
910,000
920,000
930,000
940,000
950,000
960,000
970,000
980,000
990,000
1,000,000
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Population forecast for the working age population
Source: Statistics Estonia

13. Unemployment will barely fall
13
• The problem in unemployment is structural: a quarter of companies say* their biggest
challenge is that the skills of the labour force do not match their needs
Eesti Pank Economic Statement10.12.2014
* Estonian Institute for Economic Research
0%
4%
8%
12%
16%
20%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%ofthelabourforce
24 months and more 12 to 23 months 6 to 11 months
less than 6 months unemployment rate
Unemployment
Sources: Statistics Estonia, Eesti Pank

14. The disposable income of households will continue to
rise at the same rate as in the preceding years
11.06.2014 Eesti Pank Economic Statement 14
• Disposable income will be boosted in 2015 by a cut in income tax and a rise in pensions
and child benefit
• Wage growth will accelerate in 2016 as economic activity increases
6.0% 6.3%
5.3%
-2%
0%
2%
4%
6%
8%
2012 2013 2014 2015 2016
wage effective tax rate employment
social transfers other income statistical discrepancy
Growth in household disposable income
Sources: Statistics Estonia, Eesti Pank

15. The share of economic growth coming from investment
will increase
15
• Corporate investments have been low throughout 2014, partly because of the
uncertainty about demand growth
Eesti Pank Economic Statement10.12.2014
1.9%
2.1%
3.3%
-4%
-2%
0%
2%
4%
6%
8%
2012 2013 2014 2015 2016
household consumption (pp) gross fixed capital formation (pp) government consumption (pp)
net-exports (pp) stocks (pp) GDP growth at constant prices
Economic growth and its demand components
Sources: Statistics Estonia, Eesti Pank

16. Funding conditions for investment remain good
16
• The good financial position of the banks and increasing deposits will support lending
• Loan interest rates will remain low throughout the forecast horizon
• Credit growth will accelerate, but households and companies will continue to reduce
their loan burdens
Eesti Pank Economic Statement10.12.2014
-12%
-8%
-4%
0%
4%
8%
2010 2011 2012 2013 2014 2015 2016
total loan stock housing loans corporate loans
Source: Eesti Pank
Growth in the loan stock
0%
1%
2%
3%
4%
5%
6%
2010 2011 2012 2013 2014 2015 2016
3-month EURIBOR housing loans corporate loans
Sources: Eesti Pank, European Central Bank
Loan interest rates

17. Economic growth is picking up slowly in Estonia
17Eesti Pank Economic Statement10.12.2014
• The shrinking population means that GDP will grow more slowly than GDP per
capita
• The economy will reach its long-term sustainable growth rate by 2016
1.9%
2.1%
3.3%
2.3% 2.4%
3.5%
0%
1%
2%
3%
4%
5%
2012 2013 2014 2015 2016
GDP growth GDP per inhabitant growth
Real economic growth in Estonia
Sources: Statistics Estonia, Eesti Pank

18. The general government budget will remain in
deficit
18
• Tax changes next year and higher pensions and child benefits will widen the
budget deficit further
• Eesti Pank calculations show the budget will also be in structural deficit as
spending will grow faster than the long-term potential growth of the economy
Eesti Pank Economic Statement10.12.2014
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2010 2011 2012 2013 2014 2015 2016
structural budget balance nominal budget balance
Budget position (% of GDP)
Sources: Statistics Estonia, Eesti Pank

19. Conclusions from the Economic Forecast
19Eesti Pank Economic Statement10.12.2014

20. The recovery in global economic activity is uncertain
• Global growth has been modest this year and growth in the euro
area has been sluggish
• The outlook for growth in the euro area will be improved by an
accommodative monetary policy, a reduced need for budget
consolidation, lower limits on credit and a fall in the exchange rate
for the euro
• There are long-term problems for growth in several important
export markets for Estonia
• The poor outlook for Russia and the depreciation of the rouble
affect the Estonian economy little; sanctions have not noticeably
harmed the Estonian economy yet
20Eesti Pank Economic Statement10.12.2014

21. Economic growth is picking up slowly in Estonia
• The Estonian economy has done relatively well this year, and in
future growth will pick up slowly
• Consumers have not yet felt the effect of the weak economic climate
• Wages and private consumption will grow at the forecast speed if
economic growth allows companies to regain profitability
• Certainty about the recovery of growth in foreign demand is
important if investment activity is to increase
• The Estonian economy is in a different phase of development from
ten years ago and the sustainable growth rate is 3–4%
21Eesti Pank Economic Statement10.12.2014

22. The key issue for economic growth is new sources of
growth
• The shrinking working age population will make it ever harder to find
employees, and pressure on wages will not ease
• It is getting ever harder for companies with low productivity to cope
• The shortage of labour resources makes investment in increasing
efficiency important
• Expansion into new markets would lead to opportunities for export
growth and would support economic growth
• Deflation in the short-term will not cause any major problems for the
Estonian economy
22Eesti Pank Economic Statement10.12.2014

23. Risks to Estonian economic growth
• The Estonian economy has become more balanced and better
protected against risks
• The risks from real estate prices are smaller than they were six
months ago
• The risks from excessive growth in labour costs have eased a lot
• It is forecast that the economic impact of the crisis between Russia
and Ukraine will diminish, assuming the conflict does not worsen
• Uncertainty about growth in the economic environment around
Estonia has increased
• Overall the risks to economic growth are on the downside
23Eesti Pank Economic Statement10.12.2014

24. The general government needs to be guided
by long-term sustainability
• The funding of the Estonian state is good by international
comparison
• Rapid growth in wages and private consumption has improved
the state finances despite the weakness in the economic
climate
• The government budget will be in deficit in 2014, and the
deficit will widen further next year
• To escape from a structural budget deficit the government
may need to raise taxes or restrain spending in future
• The difference in growth rates in wages in the public and
private sectors will need to be reduced for wage pressures to
be lowered
24Eesti Pank Economic Statement10.12.2014

25. Key indicators for the Eesti Pank economic
forecast
25
Sources: Statistics Estonia, Eesti Pank
Eesti Pank Economic Statement
Economic forecast by key indicators
2013 2014 2015 2016
GDP at current prices (EUR billion) 18.74 19.52 20.44 21.64
GDP change at constant prices (%) 1.6 1.9 2.1 3.3
GDP growth per person employed (%) 0.4 2.0 2.7 4.0
CPI inflation (%) 2.8 -0.1 0.8 2.1
Unemployment rate (%) 8.6 7.7 7.9 7.7
Average gross monthly wages, change (%) 7.8 5.4 5.4 6.0
Budget balance (% of GDP) -0.5 -0.3 -0.6 -0.4
10.12.2014