Economic growth is faster according to the new methodology

GDP annual growth accelerated to 2.4% in 2Q from 0.3% in 1Q this year. Economic growth according to seasonally and calendar adjusted figures was even 2.9% annually and 1.1% quarter-to-quarter.

In the supply side, professional, scientific and technical activities, energy sector and retail trade, as well as increased receipts of VAT and excise taxes contributed the most to the economic growth. At the same time, GDP growth was inhibited by the decrease in value added in construction, transport, real estate sector, health care and water supply and waste management. Decrease in construction came mostly from the construction of structures, while construction volume of buildings increased. Land transport pulled down the growth of transport sector the most, while value added in water and air transport increased.

Due to the robust growth of real wages and improved consumer confidence private consumption kept growing fast (+3.6%) contributed by the fast growth of consumption of food products and alcoholic beverages. Less consumption on electricity and heating inhibited the growth of private consumption. Besides private consumption, considerable contribution to the GDP growth came from the increased stock building (change in inventories) and net export. Although export of goods has decreased already four quarters in a row, increased export of services contributed to the growth of total exports. Growth of investments has been quite volatile in recent quarters. In 2Q, corporations’ investments in buildings and structures increased the most, while corporate sector total investments grew only modestly and government sector investments decreased. Although investments grew only 0.7% annually in the second quarter, investments have increased already by 6% in 1H2014.

Second quarter has calculated according to the revised calculation principles and the new methodology. All EU member states are switching to the new methodology (ESA2010) for calculating national accounts. The revision increased nominal GDP in Estonia by 1.3% and 1.6% in 2012 and 2013, respectively. The largest impact came from the calculation of R&D in investments (previously in intermediate consumption). The revised methodologies lifted our recent GDP growth rates. If the GDP grew 0.8% in 2013 according to the old methodology, then the new methodologies increased it to 1.6%. In addition, the GDP decrease by 1.4% in 1Q this year according to the old methodology was changed to + by 0.3% according to the new methodology. Thus, economy has grown by 1.3% annually during 1H this year. Labour productivity, which decreased according to the old data, has increased well according to the new methodology. Statistics Estonia revised its deflation of net taxes on products, which changed the decreasing net taxes on products to the robust growth in recent quarters.

Economic growth in Estonia is contributed primarily by the domestic demand. Excluding 2Q of this year, contribution of net export has been negative or only moderate during the recent quarters. We expect foreign demand to weaken in the coming few quarters. We have revised downwards the economic growth rates of all of our main export partners (Sweden, Finland, Latvia, Lithuania and Russia) for this and the next year. At the same time we expect foreign demand to improve gradually next year, which should support our exports. However, geopolitical tensions have increased the risk of the deterioration of economic and political situation in coming months, whereas the economic growth in the second half of 2014 can be weaker than in 1H in Estonia.In the light of the new data we shall review our recent forecast published at the end of august (+0.8% in 2014 and 2.3% in 2015). If the risks mentioned above will not aggravate, we shall likely revise our GDP forecast upwards.

Source: Swedbank

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