Increased foreign trade deficit contributed to the GDP decline the most

According to the flash estimates, GDP decreased by 1.9% yoy and by 1.2% qoq ( qoq seasonally and working day adjusted) in the 1Q this year. Although we estimated some decrease in GDP based on less exports and widening foreign trade deficit, such fall was below our expectations. Last time GDP decreased 4 years ago, in the 1Q of 2010 when Estonia was on the way to exit from recession. 

Increase in foreign trade deficit contributed to the decrease in GDP the most. Exports of goods decreased by 1.8%, but imports increased by 1.2%. Besides weak foreign demand, one-off large transaction with ferries in January last year raised the comparison base and contributed considerably to the decrease in exports. Without this transaction GDP decrease in the first quarter this year should have been only marginal. 

By economic activities decrease in transport and energy sector value added contributed the most to the GDP decline. Transport sector is affected negatively by the decrease in transit trade. According to our estimates, transport sector continues to contribute negatively to the economic growth this year. Decrease in energy sector value added comes from less consumption and production of energy due to warmer weather than usually and increased substitution of electricity produced in Estonia with imported electricity. Construction sector which depends considerably on public orders and foreign financing decreased as well. According to our estimates construction sector will stay weak this year, as we do not expect improvement of the above mentioned sources of financing shortly. Growth of manufacturing value added decelerated in the last quarter. Growth of manufacturing is inhibited by decrease in export sales due to still weak foreign demand. 

Domestic demand was robust. According to our estimates, real wages continued to grow fast in the first quarter, contributing to the strong growth of private consumption, as well as retail trade. Increase in investments wasn’t broad-based, having contribution only from few economic activities. However, based on lower comparison base in the first quarter last year, we expect that investments had moderate growth in the beginning of this year.

Continually weak foreign demand will not support substantial improvement in export growth in the second quarter. However, the disappearance of the impact from the higher comparison base of exports in last year should help to bring Estonian economy out of recession. According to our forecast foreign demand will improve modestly towards the end 

Source: Swedbank

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