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Estonia's Economy Expected To Shrink 12.3 Pct

The Associated Press

TALLINN, Estonia (AP) — Estonia's economy will shrink by over 12 percent this year as the country and its trading partners are hit hard by the global economic downturn, the central bank predicted Wednesday.

The forecast is a steep revision from an earlier prediction for a 5.5 percent drop in gross domestic product. It also underscores the pessimistic outlook for the Baltic economies, which have slumped amid the global downturn after years of strong growth in the wake of their European Union membership in 2004.

Last year, Estonia's GDP contracted 3.6 percent due to a slowdown in industrial production and domestic demand. The situation is even worse in neighboring Latvia, where the economy shrank by 4.6 percent last year and is forecast to contract by as much as 13 percent this year. Latvia has been forced to seek a €7.5 billion ($10.8 billion) bailout loan from international lenders.

"It is not clear yet how broad-based and how long the current recession will be," Estonia's central bank said in a statement. "If our trading partners' growth recovered faster, it would also give impetus to Estonia's economic activity."

Estonia's main trading partners are Finland and Sweden, which also have downgraded their economic forecasts due to the financial crisis.

While the bank's base scenario predicted a 12.3 percent drop in GDP, it said a quick recovery among trading partners could limit the drop to 8.4 percent — which is in line with a Finance Ministry forecast last month.

In the worst case scenario, the country of 1.3 million would see economic activity shrink by as much as 15 percent in what is considered the most severe recession since independence in 1991.

The bank on Wednesday also revised its annual inflation forecast for 2009 to 0.5 percent from 2 percent.