Despite low GDP growth, households and companies are more optimistic



The flash estimate from Statistics Estonia shows that the economy grew in the third quarter by 0.5% year-on-year and was down 0.5% quarter-on-quarter. The flash estimate gives a worse picture of growth than might have been expected from the monthly data. Weakness in the industrial sector and in exports indicates that the rise in production costs in recent years may have harmed competitiveness.

Households and companies do not expect the economy to worsen in the coming months. Although growth overall in the economy was weak in the third quarter, the confidence surveys of the European Commission and the Estonian Institute of Economic Research have ticked up in recent months. Confidence has risen in industry and services, and among customers. The main reason for the improvement in industry was that sentiment towards estimates for orders became more positive than it was last summer.

Lower production volumes in the industrial sector were one of the main reasons why growth was lower in the third quarter than in the second. On top of the weakness in industry, value added probably fell in intermediation sectors like transport and storage and wholesale. Seasonally adjusted data put industrial production 1.1% lower in the third quarter than in the second. Monthly data indicate that production fell throughout the whole of the third quarter in almost half of the sectors of industry. A major factor in this was the drop in production in the energy sector in response to the low price of electricity in the Nordic markets in the summer.

In contrast to industrial production, retail sales continued to grow fast, picking up strength from rising household incomes. Increasing household consumption has supported revenues from indirect taxes, which can be seen in the significant contribution of net product taxes to GDP, though this has also been affected by improved tax collection. Data from VAT declarations show that corporate investment declined more slowly than it did in the second quarter, as corporate spending on investment was almost the same in nominal terms as it was a year earlier. Investment has mainly fallen because major projects in the energy sector have been completed, while investment has grown in other sectors.

One of the biggest contradictions in the GDP flash estimate is the apparent rise in exports. The comment from Statistics Estonia puts the growth in goods exports over the year at 3% at constant prices, which indicates that GDP growth in the third quarter was based on exports and domestic demand was weak. This is not backed up though by the quite modest development in the third quarter in the industrial sector, and other data sources even report that exports were down. Domestic demand was more of a contributor to growth and was supported by increased consumption and a smaller fall in investment.

Eesti Pank will publish a new forecast in December.

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Piret Putko
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