GDP fell by 0.7pct in 1stQ

According to Statistics Estonia, in the 1st quarter of 2020, the gross domestic product (GDP) fell by 0.7% compared to the 1st quarter of 2019. The GDP at current prices was 6.5 billion euros.

Value added grew by 2%, driven primarily by information and communication and construction. Economic growth was hindered mainly by the energy sector, mostly due to warm winter and reduced heating costs. Of larger economic activities, manufacturing, which began to decline already in the second half of 2019, had a negative impact on economic growth.

Read more and see the graph at Statistics Estonia

The crisis is a chance to push for bolder policies

  • The Nordic and Baltic economies will be hard hit by the Covid-19-induced shock due to their small size and relative openness.
  • Strong economic fundamentals and a timely reaction to the health crisis ensure that the countries are in an advantageous position to take on the challenge.
  • The crisis gives a chance to push for bolder and greener policies, as well as advance reforms aimed at streamlining the growing public sector and further tailoring the economy and human capital to the digital post-corona world.

Tackling and surviving the Covid-19 shock requires extra-fast thinking, and an innovative government response, as well as digitally apt, creative, and flexible businesses and citizens. The Nordics and Baltics are rather well prepared to take on the challenge.

However, the crisis sheds light on a number of pre-existing conditions that need to be addressed to ensure sustainable long-run growth in the post-corona world. These include, for example, the inadequately funded and unreformed health care system in the Baltics, Norway’s reliance on oil, Sweden’s polarised labour market, and the less-than-stellar educational outcomes in many of the region’s economies.

The crisis is a chance to push for bolder policies and reforms that have previously been postponed due to the lack of sense of urgency or political will. As a result, the Nordics and Baltics can emerge from this fight even stronger, more competitive, and more sustainable.

Some good thoughts I picked:

Green investment
The massive fiscal stimulus should also be geared towards green investment, especially in Norway and Estonia, whose ecological footprint is larger than that of other economies in the region.

Poor get poorer due to lack of IT knowledge?
The crisis has turbocharged the previous trend of moving towards a more digitalised way of life. This is good news for the Nordics since they are top scorers on digital readiness, while Latvia and Lithuania have some catching up to do in this regard. Within the countries, the less-digitally-savvy individuals and the ones most affected by the crisis are also typically those who are already at the bottom of the income and wealth distribution. Governments, especially in the Baltics, that score low on social inclusion should implement policies to prevent a part of the population from falling even farther behind.

New investments
All the region’s economies score well on the World Bank’s Doing Business; therefore, they are in a good position to benefit from the shortening of supply chains and likely relocation of production. Attracting new investment is crucial, especially for the catching-up Baltics.

Corporate lending and GDP growth differential
Estonia -8.6  and Finland +3.9

Public debt, % of GDP
Estonia 8,4 and Finland 59.4

Read more here

Source: Līva Zorgenfreija, Chief Economist in Latvia

Weaker economic activity lowers inflation

• Annual inflation reached 0.9% in March in Estonia.
• In 2020, we expect inflation to amount to 0.8%, or even 0.4%, if we include lower excise taxes proposed by the government.

Compared to February, consumer prices declined by 0.7%. Annual inflation slowed to 0.9% in March. Over the year, food, especially fruits and meat products, and entertainment became more expensive. While demand for food is expected to remain robust, demand for hobbies and leisure activities should weaken because of the lockdown, but later also due to higher unemployment and fallen incomes for many households.

In March, the prices of motor fuels declined but less than weak oil prices would have suggested. We expect oil prices to remain low, even when oil producers reach an agreement as oil reserves are large and a fall in oil demand in the first half of the year will be substantial.

In addition to diesel fuel, alcoholic beverages, electricity, and communication and water services became cheaper last month. Lower excise taxes affected the price of alcoholic beverages. Favourable weather has a large impact on the demand and supply of electricity in the Nordic market. March 2020 was 3.5 degrees warmer than March 2019 in Estonia.

The consumer price index for March largely reflects the situation before the declaration of the state of emergency, as price data was collected before the lockdown started.

In 2020, inflation is expected to reach 0.8%, according to current estimates. If we include the excise tax declines proposed by the government on diesel fuel, natural gas, and electricity, consumer prices would grow even less, only 0.4%. Lower inflation is good news for those who face pay cuts or job losses.

Source: Swedbank

Estonian GDP grew 4.3 pct in 2019

According to Statistics Estonia, the gross domestic product (GDP) of Estonia grew 4.3% in 2019. In the 4th quarter of 2019, the GDP grew 3.9% compared to the same period of the previous year. The Estonian GDP was 28 billion euros at current prices.

The high economic growth persisted from quarter to quarter, exceeding 4% for the third year in a row. The main contributor to the growth was information and communication, followed by wholesale and retail trade, and professional, scientific and technical activities. Manufacturing had a positive impact on the economic growth in the middle of the year, and the second half of the year saw a strong contribution from the previously modest agricultural sector. The only notable negative impact came from the energy sector.

Information and communication, finance and insurance, and professional, scientific and technical activities experienced the fastest growth in value added in a decade. Value added in information and communication grew as much as 28.6%. Value added dropped in mining and quarrying and in the energy sector.

Domestic demand grew at the fastest rate in seven years. The growth was led by investments that grew 13.1% mostly in the first half of the year. The growth of investments was broad-based and supported by all economic activities and sectors, except for the government sector. The biggest positive impact came from the investments of non-financial corporations into buildings and structures and transportation equipment. Households’ investments into dwellings were also notable. Household consumption grew 3.1%.

Exports grew 4.9%. The exports of goods and services grew at a similar pace. The main contributors were the sale of computer services and the export of motor vehicles and wood products. Imports grew 3.7%, mainly on account of the purchase of construction and transportation services.

The number of persons employed continued to grow and the productivity per person employed increased 3%. Productivity per hour worked increased 3.7%. The labour unit cost grew 4.6%.

In the 4th quarter of 2019, the seasonally and working day adjusted GDP grew 0.9% compared to the previous quarter. Compared to the 4th quarter of 2018, the seasonally and working day adjusted GDP grew 4%.

A notable portion of the economic growth came from information and communication. The growth was also supported by agriculture, fishing and forestry, and wholesale and retail trade. The energy sector continued to have a negative impact on the growth due to the warm winter. A notable positive impact, however, came from the net product taxes.

The growth of domestic demand, supported by investments, was 3.3%. Household consumption grew 1.7%.

Foreign trade experienced a small decline at the end of the year. Exports (–0.6%) and imports

(–0.5%) declined at a similar pace and net exports remained positive at 2.1% of the GDP.

As the economic growth slowed slightly in the 4th quarter, so did the productivity. Productivity per person employed grew 2.6% and productivity per hour worked grew 3.8%. Unit labour cost increased 2.8%.

Source: Statistics Estonia

See the table of economic sectors here

Last year’s economic growth surprised on the upside

n 2019, Estonian GDP growth was 4.3% y/y in real terms and 7.7% y/y in nominal terms. Although, the growth slowed from previous year, it was still strong and exceeded our expectations – our forecast, published in January, was 3.7%. In addition, GDP growth of the first three quarters was revised up (the third quarter growth was revised up by 0.6 pp).

In the fourth quarter economy grew by 3.9% y/y in real terms and 5.9% y/y in nominal terms. Seasonally and working day adjusted GDP grew by 0.9% q/q.

Economic growth was driven by ICT sector

In 2019, the main contributor to GDP growth was ICT sector – almost 30% of the growth came from this sector. Last year, higher contribution came also from professional and technical activities, wholesale and retail trade, agriculture and forestry, and manufacturing. Unusually high contribution to the growth came from net taxes on products, which was affected by VAT and excise duty on fuels. Manufacturing, which contributed positively in the first three quarters, did not contribute to economic growth in the fourth quarter. However, the slowdown was expected due to weakened foreign demand and worsened industrial confidence. Construction sector, that has been one of the main contributors to the economic growth in previous three years, contributed negatively last year. The largest negative impact to the growth came mainly from energy sector as electricity production declined due to the sharp rise in CO2 quota price.

Domestic demand was driven by strong investment growth

Last year, the growth of domestic demand accelerated to 5%. The main contribution came from investments, which increased by 13%. 3/4 of investment growth came from business sector investments, which was partly due to the base effect. The largest increase of business investments was in buildings and structures, and means of transport. Households’ investments also increased rapidly, while government investments decreased compared to previous year. The growth of private consumption gradually slowed and was 3% last year. We expect private consumption to slow this year as real growth of net wages should ease somewhat. However, private consumption should still be supported by high consumer confidence and strong financial situation of households.

As foreign demand worsened last year, export of goods has started to decline in the fourth quarter, while the growth of exports of services slowed. However, in the first three quarters of the year, the growth of exports of goods and services was very strong, which held the growth of total exports at 5% last year. We expect that weakening of the foreign demand should carry forward into this year and export growth should slow. As the growth of export exceeded import growth, the contribution from net export to the economy was positive.

Economic growth in Estonia is expected to slow

According to our latest Swedbank Economic Outlook published in January, economic growth in Estonia is expected to slow to 2.4% this year. Our forecast does not include possible impact of planned pension reform. It is also too early to measure possible impact of coronavirus, but if the spread of the virus would be soon under control, the impact to the euro area economy will be limited.

Source: Swedbank

The consumer price index increased by 2.3 pct in 2019

According to Statistics Estonia, the consumer price index increased by 2.3% in 2019 compared to the average of 2018.

In 2019, the consumer price index was affected the most by food and non-alcoholic beverages. The biggest impact on the latter came from 17% more expensive vegetables and 4.9% more expensive flour and cereal products. The prices of petrol and diesel fuel increased by 0.5% and 1.5%, respectively, while alcoholic beverages were 3% cheaper than in 2018.

In 2019, compared to the average of 2018, the biggest price increases among food products were seen for potatoes (27.9%), fresh vegetables (24.1%) and rice (10.6%).

Change of consumer price index by commodity group, 2019
Commodity group 2018–2019, %
TOTAL 2.3
Food and non-alcoholic beverages 3.0
Alcoholic beverages and tobacco 0.1
Clothing and footwear 0.7
Housing 2.9
Household goods 1.9
Health 2.5
Transport 0.7
Communications -2.9
Recreation and culture 5.8
Education 5.5
Hotels, cafés and restaurants 3.8
Miscellaneous goods and services 2.7

 

Read more from Statistics Estonia

65 pct of the Estonian gross value added was created in Harju county

According to Statistics Estonia, in 2018, 65% of the Estonian gross value added was created in Harju county, but the rest of the country is slowly catching up with Harju county.

In 2018, the gross domestic product (GDP) of Estonia was 26 billion euros at current prices. The contribution of Harju county amounted to 17 billion euros, 14 billion euros of which came from Tallinn. Harju county was followed by Tartu county and Ida-Viru county, the shares of which in Estonia’s GDP stood at 10% and 6%, respectively. Hiiu and Põlva counties had the smallest shares in 2018 – both contributed less than 1% to the Estonian GDP.

In 2018, 69% of the gross value added of Estonia was created in the service sector. The share of services was the biggest in Harju county (77%) and Tartu county (69%), mainly due to the influence of the cities of Tallinn and Tartu. Overall, the sector’s share in value added either remained on its previous level or decreased slightly. An exception to this was Järva county. The fastest decreases in the share of the sector took place in Valga, Viljandi and Võru counties.

Industry and construction accounted for 28% of the gross value added of Estonia in 2018. The highest share in value added is in Ida-Viru county (58%). The smallest shares of the sector are in Harju (22%), Tartu (27%) and Põlva (28%) counties. For the country as a whole, the share of the sector in value added remained at the level of 2017. However, between counties the picture was more complex. While in Põlva and Saare counties the share of the sector experienced a notable rise, the trend for Pärnu, Valga and Võru counties was opposite.

The agricultural sector accounted for 3% of the gross value added of Estonia in 2018. This sector had the largest share in Viljandi (22%) and Jõgeva counties (19%). Similar to 2017, the sector increased its share in value added again in 2018. The biggest impacts were seen in Valga, Viljandi and Võru counties.

In 2018, GDP per capita was 19,695 euros, which was 1,647 euros more than a year earlier. GDP per capita was the biggest in Harju county – 144% of the Estonian average. Harju County was followed by Tartu and Viljandi counties, where GDP per capita amounted to  91% and 67% of the Estonian average, respectively. The lowest level of GDP per capita was recorded in Põlva county – 42% of the Estonian average. In recent years, some counties have gotten notably closer to the Estonian average GDP per capita. This is most notable in Hiiu, Jõgeva, Rapla and Tartu counties. At the same time, Harju county has gotten closer to the Estonian average as well.

Agricultural sector – agriculture, forestry and fishing.

Industry and construction – mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities; construction.

Service sector – wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities; information and communication; financial and insurance activities; real estate activities; professional, scientific and technical activities; administrative and support service activities; public administration and defence; compulsory social security; education; human health and social work activities; arts, entertainment and recreation; other service activities.

Source: Statistics Estonia

See graph here

Economic growth is still strong despite weakened foreign demand

In the second quarter of 2019, Estonian GDP growth slowed to 3.6% y/y in real terms and to 7.9% y/y in nominal terms. In the first half of this year, GDP growth was 4.2% in real terms. Although, the growth moderated from the last year’s heights, it was still strong despite weakened foreign demand. Seasonally and working day adjusted GDP grew by 0.4% q/q.

Statistics Estonia revised the national accounts time series for 1995–2019Q1. According to the revised data, in the first quarter of this year, real GDP growth was 0.5 pp higher – 5.0%. As a result of the revision, GDP for 2017 was revised up by 0.9 pp to 5.7% and for 2018 – by 0.9 pp to 4.8%.

Economic growth was dominated by ICT sector

In the second quarter of 2019, the main contribution to GDP growth came from ICT – almost half of the growth came from this sector. Higher contribution came also from professional and technical activities, wholesale and retail trade, and manufacturing. Manufacturing, which was the main contributor in the first quarter, contributed less in the second quarter. However, slower growth of manufacturing sector was expected due to weakened foreign demand and faltering industrial confidence. Construction sector, that was the main contributor to the economic growth in previous years, did not contribute in the first half of this year. Negative impact to the growth came mainly from energy sector.

Domestic demand is still strong

In the second quarter, the growth of domestic demand decelerated somewhat, but was still very strong – 6%. The main contribution came from investments, which increased by 25%. Investments of business sector and households’ increased, while government investments decreased. The growth of private consumption has slowed and was 1% in the second quarter, which was affected by last year’s base effect. However, private consumption should be supported by strong wage growth, low interest rates, moderate inflation and high consumer confidence going forward.

The growth of foreign demand has slid from the peak. However, in the first half of the year, the growth of export of goods was still strong – 7%. Total export growth was 4% in the first half of the year. We expect that weakened foreign demand should offer less export opportunities in the second half of the year.

Economic growth in Estonia is expected to slow

According to our latest Swedbank Economic Outlook published in August, economic growth in Estonia is expected to decelerate in the second half of this year, primarily due to unfavourable foreign demand. We also expect slower economic growth in the next two years. As our August forecast was made before the revision of the GDP time series, we shall revise our forecast in our next economic outlook in autumn.

Source: Swedbank

Estonia’s 1st quarter GDP at 6.7 bEUR

According to Statistics Estonia, the year-on-year growth of the gross domestic product (GDP) of Estonia was 4.5% in the first quarter of 2019.

Seasonally and working day adjusted GDP grew 0.5% compared to the previous quarter and 4.6% compared to the 1st quarter of 2018.

Economic growth was driven by manufacturing. The last time that manufacturing had such an impact was four years ago, in the 2nd quarter of 2015. Nevertheless, economic growth in the 1st quarter was broad-based, as five other economic activities made notable positive contributions. These were information and communication; professional, scientific and technical activities; wholesale and retail trade; agriculture, forestry and fishing, and transportation and storage. The value added in construction, which had driven economic growth for the last two and a half years, did not increase in the 1st quarter, remaining at the previous year’s level. The only significant negative impact on economic growth came from electricity, gas, steam and air conditioning supply.

Domestic demand grew 4.6% in the first quarter. The slower growth compared to the previous quarters was mainly on account of household final consumption (2.8%). The fast growth of gross fixed capital formation, which had started at the end of the previous year, continued in the 1st quarter, at 20.4%. This was primarily the result of investments by nonfinancial enterprises into transportation equipment, and machinery and other equipment. Household investments into dwellings grew notably as well.

The exports of goods and services grew 4.6% in the first quarter. The exports of goods grew 6.9%, the fastest pace in the last two years. Biggest contributions to growth came from the exports of coke, petroleum products and computer, electrical and optical equipment. The exports of services, which have usually grown faster than the exports of goods, experienced a slight decline (-0.4%). This was the result of the decline of exports of construction and freight rail transport services. The imports of goods and services grew 3.8%. The import of goods grew 4.8%, largely due to the imports of metal products and electrical equipment. The imports of services grew 0.5%. The share of net exports in GDP was 3% in the first quarter of 2019.

In the 1st quarter, both the number of employed persons and worked hours increased. As a result, the productivity per person employed grew 2.7% and the productivity per hours worked grew 3.3%. The growth of unit labour cost was the same as the GDP growth rate, at 4.6%.

Source: Statistics Estonia

See graph here 

 

Strong beginning of 2019 exceeded expectations

Economic growth remained very strong at the beginning of 2019. In the first quarter of 2019, GDP growth in Estonia accelerated to 4.5% yoy in real terms and to 8.5% yoy in nominal terms. Strong first quarter growth exceeded our expectations. Seasonally and working day adjusted GDP grew by 0.5% compared to the previous quarter. In addition, the fourth quarter GDP growth was revised up by 0.1 pp to 4.3%. However, these are preliminary numbers, which will be revised several times.

Construction sector growth running out of momentum

Economic growth in the first quarter was broad-based. After a moderate growth of the last three years, manufacturing shot up again by 11%. Manufacturing was the main contributor to GDP growth in the first quarter and accounted for roughly one third. Previously, the main driver of economic growth had been construction sector, which did not contribute to economic growth in the first quarter. However, the slowdown of construction sector growth was expected. Strong contribution to GDP growth came also from agriculture; professional and technical activities; wholesale and retail trade; transportation and ICT sectors. Negative impact to the growth came mainly from energy sector.

Foreign demand still supporting Estonian economy

The growth of foreign demand has slid from the peak, but still offered good export opportunities. In the first quarter, export of goods has accelerated to 7%, while export of services has decelerated for the first time in three years. Total export increased by 5% and exceeded total import growth.

The growth of domestic demand decelerated to 4% in the first quarter. The growth of private consumption slid from the last year’s strong growth and decelerated to 2.8%. This was surprisingly weak growth considering that in the first quarter retail sales were strong, rapid wage growth continued and refunds of the excess income tax amounts were made. Investments showed strong growth for the second quarter in a row, increasing by 17% in the first quarter of 2019. The main contribution was the growth of investments of non-financial corporations due to base effect.

Economic growth in Estonia is expected to slow this year

According to our latest Swedbank Economic Outlook published in April, economic growth in Estonia is expected to decelerate to 3% this year. The main reason of the slowdown is expected weakening of the foreign demand. Economic growth has been above its long-term potential for already three years in a row and slower growth should be more sustainable for the economy. Although, due to the rapid growth of the beginning of the year we should revise up our April forecast, the next large revision this year by the Statistical Office will probably change the GDP time series.

Source: Swedbank