Growth in domestic demand increased the current account deficit

The current account deficit rose to 3.7% of GDP in the first quarter of this year. The deficit mainly worsened because the trade deficit increased. The earlier surplus on the goods and services account was replaced by a small deficit, which ran at 0.2% of GDP of the quarter. This reflects the relative strength of domestic demand compared to demand for exports. Domestic demand at current prices grew by 4.8% over the year, while GDP grew by 2.6%, and while GDP at constant prices fell by 1.4% over the year, domestic demand and its components increased.

The current account deficit as a share of GDP was the same size as at the start of 2011 and 2012. Such a deficit in one quarter in isolation does not give grounds for worry about balance in the economy, especially as the Estonian goods and services account was practically in balance and external demand was below its long-term trend. A positive point for the longer term is that the growth rate of investments in fixed capital was faster than that for private consumption and stood at 6.5% at current prices. Over a longer horizon this will improve the outlook for Estonian growth. It would be a cause for worry if the decline in the current account were to continue at the same rate in subsequent quarters, as an economy as open as the Estonian one cannot grow sustainably through domestic demand alone.

The financial account saw net inflows of capital of up to 2% of GDP, with non-debt generating cash flows dominating.

Source: Bank of Estonia

Author:  Andres Saarniit, Economist at Eesti Pank