Weak external environment caused negative growth

Data from Statistics Estonia show that the economy shrank by 1.9% from a year earlier in the first quarter, and by 1.2% from the fourth quarter of last year.

Economic development has been weaker than was forecast by Eesti Pank in December as external markets have done less well than was expected. An important role was also played in economic growth in the first quarter by short-term and one-off factors like the unusually warm weather, which reduced energy production, and a cut in general government investment.

Prices have risen more slowly in foreign markets than was expected in the Eesti Pank forecast published in December and demand has been lower, limiting the options for exporters. The situation is further complicated by increases in unit labour costs, which have led profit margins to fall. There is still a majority of companies that believe that their competitiveness has increased, but the percentage of such companies has declined.

The economies in Europe and the USA have generally been growing, but growth in Finland and Russia, important trading partners for Estonia, has not yet started to recover. However, the impact on the economic results for the first quarter of the heightened geopolitical tensions arising from the conflict in Ukraine was probably limited. It has had a negative impact on expectations, but there has been no fall in orders.

Domestic demand growth is being restrained by the reduction in orders from the public sector for construction, which has been offset to an extent by orders from the private sector. An increase in the role of the private sector in construction is also indicated by a change in the structure of the output of manufacturing companies. It is likely that a slowing in the rise in construction prices will support growth in orders from the private sector.

Read more from Bank of Estonia website

Author: Kaspar Oja, Economist at Eesti Pank

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