The economy should return to growth in the second half of the year

Autori Kaspar Oja pilt

Kaspar Oja

Economist at Eesti Pank



Data from Statistics Estonia show that GDP in Estonia was 2.4% less in the first quarter than a year earlier, and 0.5% less than in the fourth quarter of last year after correction.

Although the recession remained broadly based, it was still certain individual branches of the economy that largely caused the downturn. The largest negative impact came from the energy sector, where value added was down by 36%, reducing GDP by 1.7%. Electricity production was only 3.9% down on a year earlier in the first quarter though, while heat production was up by as much as 10.8%. The contribution of the energy sector to growth in the economy has been similarly contradictory for some time now.

Manufacturing was also a major contributor to the recession. Manufacturing output has been close to a stable level throughout the past six months, and the last major and lasting contractions in output were in the first half of last year. This means that the slump in the manufacturing sector should soon pass out of the yearly comparison.

Expectations of businesses do not indicate any clear imminent improvement in circumstances, but continuing growth in investment shows that the general outlook for long-term growth in the economy is still positive. Corporate investment was a quarter more in the first quarter than a year earlier. Current forecasts point to the economy returning to growth over the year in the second half of this year.

Comparison over a longer period back to 2019 shows that one cause of a reduction in real GDP in Estonia has been relative changes between prices. The GDP data show the prices of goods exported from Estonia were 34% higher than in 2019, but imported goods were only 26% more expensive. There may be various reasons for export prices to rise faster. One is that it may indicate that Estonian exporters have succeeded in raising prices because they are highly competitive, another may be that domestic price pressures have made Estonian production relatively more expensive than that of trading partners. The differences in the dynamics of export and import prices need to be analysed thoroughly because this contradiction is not apparent in other data sources such as price indexes for exports and imports.

The energy crisis of recent years and Russia’s war in Ukraine caused problems for the competitiveness of various sectors, but these worries have started to ease. Energy prices have fallen, labour costs are rising more slowly, and demand in target markets is forecast to start to recover. This all gives hope that the economy will gradually start to improve.

Additional information:
Hanna Jürgenson
Eesti Pank
Communications Specialist
Tel: 56920 930
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