Recovery of the economic growth will be sluggish

Statistics Estonia revised the decline of GDP to 1.4% yoy (flash estimate showed decline by 1.9%) and to 0.7% qoq (flash estimate -1.2%). GDP nominal growth decelerated steeply from 5.7% in 4Q 2013 to only 2.6% in the first quarter this year.

Decline of the value added in transport, construction, energy and primary sectors inhibited economic growth the most. Decrease in transport and storage services due to the decline in transit has been behind the weak results of the transport sector. Decline of transport sector decelerated the economic growth last year the most and we expect that it will have negative contribution to the GDP growth this year as well. Weak results in energy sector were related to both less consumption and production of energy due to unusually warm weather, as well as partial substitution of locally produced electricity with imported one. Construction depends largely on public sector orders and foreign financing and we do not expect considerable improvement of these sources this year. Therefore, we expect that contribution of the construction sector will be negative to the GDP growth this year. Weak foreign demand and decrease in exports is behind the decrease in manufacturing value added. At the same time, electronics products predominantly contribute to the decline in exports. Besides mining, several services’ sector, incl. non-market activities supported the GDP growth. Although retail trade showed strong growth (12% yoy), value added in wholesale trade decreased by tenth.

Besides the decline in value added domestic demand increased with the support of the private consumption and investments (increased respectively by 2.3% and 3.5%). Although private consumption will remain the main contributor to the economic growth, its effect will decrease next year due to the expected deceleration of real growth of wages and decrease in employment. Growth of gross fixed capital formation came mainly from the non-financial corporations’ investments in transport equipment, while government sector investments decreased strongly.

Export of goods and services increased by 1.4% in real terms. Total exports were supported by strong growth of export of services, while export of goods still decreased. As import grew faster than exports, negative foreign trade balance inhibited the GDP growth.

We expect to face relatively weak and unstable foreign demand which will not enable robust export growth shortly. Besides that expected decrease in transport and construction sector value added will inhibit recovery of our economic growth. We shall revise downwards our GDP growth forecast for this year in the coming months.

Source: Swedbank

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