Domestic demand alone will not be sufficient to drive economic growth

Kaspar Oja
Kaspar Oja
Economist at Eesti Pank

The preliminary estimate of Statistics Estonia shows that the Estonian economy grew by 3.7% year-on-year in the fourth quarter of 2012, and 0.9% quarter-on-quarter. In 2012 as a whole, the economy grew by 3.2%, which is faster than Eesti Pank had forecast. Growth in the next quarters will depend on how the economies of the euro area and the Nordic countries recover from their current lows.

Domestic demand offset the weakening in exports in 2012, but balanced economic growth needs strong exports because the ability of households to keep increasing their consumption is limited. In the third quarter of 2012, household consumption increased notably faster than incomes, and savings fell to a low level. Data for the fourth quarter suggest that the rise in domestic demand indicators like retail sales has slowed, and the annual growth in indicators relating to exports, like industrial production, has accelerated.

Industrial production fluctuated a lot from month to month in the fourth quarter and saw sharp rises and falls, suggesting that the recovery in external demand is still fragile. The industrial production and exports of Estonia's main trading partners do not indicate that the situation will improve rapidly, though the economic confidence indexes and output expectations of the manufacturing sector have picked up in recent months in the Nordic countries, which indicates that pessimism has fallen among businesses in that region.

Eesti Pank's forecast in December predicted that the economy will grow by 3% in 2013.

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