The economy remained strong in the first quarter
Economist at Eesti Pank
The Estonian economy grew by 4.3% over the year to the first quarter, and by 0.1% over the fourth quarter of 2021. Russia’s war has not yet shown up in the figures for economic growth, but it is clearly apparent in the structure of demand. The major growth in inventories indicates that people and companies are preparing for supply difficulties.
Data from the first quarter show that the uncertainty caused by the war has led companies to build up bigger inventories than before. Changes in inventories added 4.6 percentage points to the growth in GDP. On top of energy products, Estonia used to import goods like metals, wood and fertilisers from Russia, and these must be replaced with similar goods from elsewhere. The build-up in inventories gives hope that supply disruptions will hinder the activities of businesses less than was feared while supply chains are redirected.
The large change in inventories is equally reflected in imports, which grew relatively quickly in the first quarter despite the fall in investment. Investment usually contains a large amount of imported goods, and so a large drop in investment usually brings about drop in imports. Investments fell because of extraordinary transactions in recent years and supply difficulties during the pandemic.
Private consumption also grew very fast at the start of the year, which probably partly reflects a similar stocking up of goods in case supplies deteriorated. The turnover of retail companies grew particularly fast in March. Private consumption is however supported by other factors, such as the release of the savings that were built up during the pandemic and the use of money from funded pensions that was withdrawn early in the autumn. The rapid growth in consumption shows the strength of the economy, as higher energy prices meant that households had to manage with very large unavoidable expenses in the first quarter. Consumption increased despite the higher energy prices.
Growth in the economy remained less than expected though. Sectors that saw an unexpectedly sharp decline in value added were energy and mining. Higher energy prices made the Estonian oil shale sector more competitive, and so industrial production volumes in those sectors increased in the first quarter. There was an increase of 14% in construction volumes over the year, but the value added of construction fell according to the national accounts data. The fall of around 5% in the value added of retail within national accounts estimates also seems unbelievable given the very fast growth in private consumption. This means there are contradictions in the statistics for the first quarter that are an indication of the large changes that are happening during difficult times.
Further growth in the economy this year will largely be defined by supply difficulties, which will reduce supply in the economy. Supply chains will be affected not only by the deterioration in relations with Russia, but also by the strict coronavirus policy in China for example, which could restrain the global recovery from the previous crisis. This may lead to slower growth in the economy at the same time as higher inflation, while budget stimulation will not be able to improve the state of the economy.
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