Data from Statistics Estonia show that Estonian GDP was 3.2% smaller in the first quarter than it was a year earlier, and adjusted seasonally and for the number of working days it was 0.6% smaller than in the previous quarter.

Given how far the various activity indexes fell in the first quarter, a decline of 3.2% was actually not that large. The industrial production index and the turnover index for retail businesses were both down by some 9% at the same time. A sector that made a contribution to growth in the economy was agriculture, which added 1.6 percentage points, having unexpectedly lost value added last year. Without agriculture, GDP would have dropped by around 5% in the first quarter.

Value added at constant prices fell in the majority of sectors, indicating that the decline in the economy was broadly based. Value added was also down in the information and communications sector, which has led the Estonian economy in recent years. The economy was reined back last year by rapidly rising energy prices and the pressure put on supply chains by the war started by Russia, but monetary policy is probably playing an increased role now through its efforts to restrain inflation. Earlier analysis has shown that monetary policy affects Estonia through the usual weakening of demand and also through exports, as there is an impact from demand weakening in other countries because of high interest rates.

The Estonian economy still has strong domestic price pressures despite the downturn, and this is a threat to the future capacity for growth. Inflation was mainly driven last year by external factors, but prices rose faster in the first quarter for exported goods and domestic consumption than for imports. This shows that it is now mainly domestic factors that are behind inflation.

The energy sector is among the most influential for GDP growth. The downturn in that sector can be partially explained by energy savings in the winter, but the general fall in energy prices has also played a part. Falling energy prices also mean that the local energy sector becomes less competitive, since the profitability of electricity production from oil shale is linked to the price of gas. Electricity production in Estonia and exports of electricity were down in the first quarter by more than electricity consumption.

Forecasts in other countries generally expect the external environment to strengthen gradually, which should help Estonian exports grow, but corporate expectations are more pessimistic, at least for the coming months. Given that the largest decline in the industrial sector occurred last summer, economic growth over the year may improve substantially in the third quarter if there is no new shock to the economy.

Additional information:
Viljar Rääsk
Head of Communications
Eesti Pank
6680 745, 5275 055
Email: [email protected]

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