The current account deficit narrowed in the second quarter to a very low level

Andres Saarniit
Andres Saarniit
Economist at Eesti Pank

In the second quarter of the year, the current account deficit shrank to 0.5% of the gross domestic product (GDP) of the quarter. The figure for the second quarter of the previous year was 3%.

Weak external demand meant that goods exports grew at a modest rate during the last year, and the rate fluctuated sharply over the quarters, ranging from 10% to -2%. In recent quarters, no group of goods or target market has shown constant success in sales. Data from the balance of payments show that around 4% more goods were exported in the second quarter than a year earlier. Exports grew faster than imports, and that meant that the deficit in the trade account was smaller than that in the previous year at 4.4% of GDP for the quarter. Exports grew faster than average to Estonia's main export partners – Sweden, Finland, Lithuania and Latvia – and the trade balance with those countries improved.

The situation was reversed for services as imports of services grew faster than exports in the second quarter. The main reason was that sales of transport services were lower than in the previous year and imports of services increased by one tenth. Overall the surplus on the goods and services account was smaller than in the second quarter of the previous year, falling to 2% of GDP, which indicates that domestic demand has picked up. Given weak external demand, this is good news for the sake of short-term economic growth. Unfortunately the strengthening of domestic demand was mainly due to growth in private consumption and not a consequence of investment, though it is positive to note that the share of investment from the private sector has increased.

A significant reduction in the current account deficit came because Estonian residents earned more income abroad than in the previous year, while income earned in Estonia by non-residents fell. The net outflow of income in the second quarter of 2013 was 3.2% of GDP, down from 8.1% in the second quarter of the previous year. The fall in the income account deficit offset the declines in the surpluses on the goods, services and current transfers accounts.

Eesti Pank's most recent forecast predicted that the current account deficit will be around 1% of GDP in 2013. Balance of payments data from the first half of the year are in line with the forecast.

See also: The Estonian Balance of Payments, International Investment Position and Gross External Debt for the Second Quarter 2013

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