Estonian GDP in the third quarter was 0.9% larger than a year earlier and 0.4% larger than in the second quarter. Growth in industrial output and retail sales was slower than in the second quarter, but the overall opinion of companies about the state of the economy has improved. They find that the lack of demand is still greater than in the past on average, but their assessments are less negative than in the preceding quarters. This is in line with the general improvement in the economy.

Growth in demand in the third quarter came mainly from the public sector. Consumption by the government sector was the main driver of growth in the economy. Public sector investment also increased, but private consumption was lower than a year earlier in contrast. Corporate investment fell to even less than in the second quarter.

The fall in private consumption was probably at least partly caused by the rise in VAT in July, which led to the timing of consumption being brought forward into the preceding quarter. Stronger growth in the economy moving forwards may be accompanied by growth in private consumption. The drop in consumption was also seen in the value added of companies, and it was companies in retail and wholesale trade that made the largest negative contribution to growth. Quarterly statistics for business show though that retail performed somewhat better in the third quarter. Value added fell in sales of vehicles, but it increased in the other parts of retail.

Transport vehicles was also the asset class that saw the biggest drop in investment. More broadly though, the decline in corporate investment can be linked to the assessment by companies of the business cycle, since there is little reason for businesses to make new investments at a time when they consider demand to be weaker than usual while production capacity is only partly in use. Investment may be expected when demand strengthens and the production capacity that is partly standing idle becomes insufficient to allow output volumes to grow.

Exports grew by more than imports in the third quarter, which is in line with the decline in corporate investment and the growth in general government consumption. Investment by companies usually has quite a high level of import intensity, while government consumption makes greater use of domestic resources and less of imports. The increase of around 6% in export volumes was a positive surprise, since the export turnover index for manufacturing was up by only 1.6% in the third quarter.

The development of the whole industrial sector shown by GDP was much more positive than is indicated by the monthly indexes for industrial output. GDP shows that value added in manufacturing was around 8% more in volume in the third quarter than a year earlier, while growth in the volume index for manufacturing output at the same time was below 2%. Value added in the energy sector at constant prices was above 20%, but the volume index for industrial output for the same sector fell by more than 20%.

Domestic demand should help boost economic growth next year. The disposable income of households will be increased by the planned loosening of fiscal policy, and because this will be a permanent rise in incomes, it should lift private consumption and consequently demand overall. Such an increase in demand brings the risk that inflation could rise and the production inputs needed by the exporting sector will be shifted towards the sector targeting the domestic market. The business cycle is below its historical average position at the same time though and unemployment is relatively high, which should restrain inflation. A looser fiscal policy should in such circumstances help the economy regain its track of long-term growth.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
Press enquiries: [email protected]