Growth in 2Q was better than expected

The flash estimate from Statistics Estonia shows that the economy grew in the second quarter by 0.5% quarter-on-quarter and 2.2% year-on-year. Eesti Pank had forecast an acceleration of economic growth in the second quarter.

The manufacturing sector made a positive contribution to annual and quarterly economic growth. Expectations for manufacturing output fell directly after the events in Crimea, but developments in manufacturing have been relatively stable. The economy grew faster than in the first quarter as the temporary impact of the mild winter on the energy sector receded. Strong retail sales continue to have a positive impact on growth and are themselves supported by strong confidence among households.

The outlook for economic growth has become more pessimistic due to the conflict between Ukraine and Russia. If the amplification of Russian sanctions through consumption and investment is not considered, the direct impact of sanctions will be 0.2%–0.3% of GDP. This effect is from import restrictions that will directly affect exporters to Russia and also other Estonian companies that provide inputs in Estonia and abroad for the production of goods bound for Russia. Sanctions will primarily lead to changes in food processing and agriculture, but they will also affect other sectors such as wholesale and transport, and will affect around 1500-2000 jobs.

Sanctions will affect production chains throughout the European Union meaning they may affect Estonian external demand and impact the economy not only via Russia but also by indirectly reducing Estonian exports to other destinations.

The flash estimate of GDP is based on an updated time series and so is not directly comparable with the most recent Eesti Pank forecast. The aggregate time series using the new methodology will be published by Statistics Estonia in September. Eesti Pank’s forecast expects economic growth for 2014 as a whole to stand at 0.7%.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

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