Economic growth decelerated in the 1st quarter

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased by 1% in the 1st quarter of 2013 compared to the same quarter of the previous year.

The seasonally and working-day adjusted GDP decreased by 1% compared to the 4th quarter of 2012.

In the 1st quarter, the biggest contributor to economic growth was the increase in the value added of information and communication, trade and manufacturing. The increase in the value added of trade was supported by the increase of retail sales.

Manufacturing is the largest sector in the Estonian economy. Its value added depends substantially on the export of the production, the growth of which has accelerated according to preliminary calculations. The real growth of export of goods of the total economy accelerated to 13%, mainly due to the increased exports of chemicals and chemical products, computers, electronic and optical products and other transport equipment. The import of goods grew 9% as well compared to the same period of the previous year. In January the foreign trade was influenced by the non-recurrent big-volume trade transactions with transport equipment.

In the last year the value added of construction was the main contributor to the economic growth, but in the 1st quarter it decelerated sharply. The main reason is the decrease of construction volumes after utilization of revenues from CO2 quota sales used for improving the energy efficiency of buildings last year. GDP growth was also negatively affected by the decrease of the value added in mining and quarrying and real estate activities. In addition to the above-mentioned economic activities, GDP growth was also significantly influenced by decreased receipt of excise taxes, which are a part of net taxes on products.

Source: Statistics Estonia

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Only 10 pct of companies pay VAT

According to statistics from the tax authority, only 10% of companies in Estonia that are registered to pay VAT to the state, ie they receive less VAT than they pay themselves, writes Äripäev.

Marek Helm, head of the tax authority and his deputy Egon Veermäe admit that they were shocked by such statistics.

A new report from the tax authority shows that out of 72,000 companies that are registered as VAT-payers, 5,690 companies paid any VAT last year in the total amount of EUR 2.08 billion.

The rest of the companies in the VAT register either pay very little VAT while a third of them receive VAT refunds from the state.

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Economic growth reflects a slowdown in investment growth

The flash estimate from Statistics Estonia shows the Estonian economy growing in the first quarter by 1% year on year, and shrinking by 1% quarter on quarter.

In recent quarters the contribution of the exporting sector to economic growth has strengthened somewhat, while developments in the non-tradable sector have diverged. The construction sector declined in the first quarter, reflecting a slowdown in investment growth. In contrast the retail sector grew, showing that household consumption growth continues, which is also supported by the high levels of confidence among households. Compared to the fourth quarter 2012, the contribution of net-taxes to growth was probably more subdued in the first quarter of this year.

Growth in exports was fast in the first quarter, though the relatively weak external environment does not yet favour broad-based growth in exports. Growth in the exporting sector is also restricted by the weak economy in Europe. This is also reflected in exports by the Estonian manufacturing sector, which mainly grew in the first quarter owing to markets outside the euro area, while manufacturing exports to the euro area remained at the previous year’s level. Growth in the European economy is expected from the second half of this year.

The weak economic position of Estonia’s main trading partners Finland, Sweden and Russia is a consequence of the general economic weakness in Europe. Although the expectations for growth in manufacturing in Finland and Sweden are higher than half a year ago, this has not yet had an impact on actual manufacturing output, which continued to decline in both countries in the first quarter. Russia’s economic growth is additionally inhibited by the low price of exported raw materials.

Faster growth in Estonian manufacturing output than in that of the main trading partners indicates a strong competitive position for Estonian manufacturers. Accelerated growth in labour costs in manufacturing in the past year may, however, restrict the competitiveness of exports in future. As price pressure in Europe is low at present, it is difficult to pass higher costs into prices in markets with tight competition.

Eesti Pank’s most recent forecast predicted that the economy will grow by 3% in 2013.

Author: Kaspar Oja, Economist at Eesti Pank

Source: Bank of Estonia