Estonian central bank slashes 2012 growth forecast to 1.9%

(TALLINN) - The central bank of eurozone newcomer Estonia slashed its economic growth forecast for 2012 on Wednesday by more than half to 1.9 percent, citing the impact of the debt crisis.

"The growth impetus is waning and uncertainties in the external environment are on the rise. Economic growth is decelerating sharply due to weaker external environment," the bank said in a statement.

"If the external situation deteriorates even more, a recession cannot be ruled out," it warned.

"The spreading debt crisis and the increasing contagion risk have seriously undermined economic sentiment in both Europe and the rest of the world."

"Political tensions in several euro-area countries, accompanied by market distrust in proposed economic policy measures, have also increased uncertainty," it added.

The bank's previous forecast for 2012 -- compared to output the previous year -- had been 4.2 percent.

However, it also underlined the extent of Estonia's robust recovery from one of the deepest recessions in Europe by upgrading its 2011 forecast to 7.9 percent from the previous 6.3 percent.

Both the 2011 and 2012 forecasts put Estonia well ahead of the eurozone average.

The bank noted that the 17-nation currency bloc was predicted to post growth of 1.5 percent this year followed by a contraction of 0.4 percent.

The Baltic nation of 1.3 million embraced the free market with gusto after independence from the crumbling Soviet Union in 1991.

But after years of breakneck growth, notably following European Union entry in 2004, it was hit hard by the global financial crisis, and its economy shrank by a jaw-dropping 14.3 percent in 2009.

An export-fuelled revival in 2010 helped the economy grow by 2.3 percent.

A rebound in manufacturing was the initial engine, but the recovery has become broader-based, with the construction, IT and communication sectors playing an increasing role.

Estonia's main trade partners are its fellow members of the 27-nation EU.

Estonia's centre-right government, known for conservative fiscal policies even before the slump, slashed spending to confront the crisis and maintain the successful drive to adopt the euro on January 1 this year.

Despite the eurozone's crisis, the authorities have insisted that such a small economy is better off inside the currency bloc alongside its partners, and underlined that the Estonian kroon was in any case pegged to the euro.