Future development in the economy will depend mainly on foreign markets
Economist at Eesti Pank
Data from Statistics Estonia show that Estonian GDP was 0.7% smaller in the first quarter than in the same quarter of last year, and seasonally adjusted was 3.7% less than in the fourth quarter of last year. The economic position in the first quarter only partly reflects the impact of the coronavirus and is more a consequence of earlier events.
The main impact from the emergency situation and the restrictions imposed because of the virus came at the end of the quarter. Growth in the economy was driven most by the IT sector and was slowed by product taxes being shifted between quarters. Without those factors the yearly GDP growth would have been close to zero in the first quarter of this year and in the fourth quarter of last year.
There were in broad terms three factors that shaped GDP growth in the first quarter. The first was that the economic cycle was reaching a peak and it was hard for companies to grow by hiring new employees. This factor will be less important in the immediate future as unemployment has risen. Secondly, trade tensions have increased in recent years, and that has particularly affected more open countries like Estonia. This particularly explains the contraction in the industrial sector. The third reason was that climate policy affected some branches of the economy. The branch affected most in Europe was car production, while in Estonia it was oil shale energy that lost competitiveness.
The industrial production statistics for April show that although Estonia introduced fewer restrictions in response to the pandemic than some other countries in Europe did, the contraction in the economy in the second quarter will probably still be relatively large. The performance of the Estonian economy is connected with economic developments in other countries through exports of manufactured products, and if other parts of the world are doing badly the Estonian economy also suffers. Pan-European surveys of industrial companies show that industrial output in April was restricted more than before by reduced demand. They also noted shortages of equipment, funding problems and other issues. shortages of equipment are probably a consequence of problems in supply chains, and other issues are the problems caused by the restrictions.
Although the crisis initially hit hardest in the service sector, where some businesses had to cease activities temporarily or for a longer period, the key question in the further development of the economy is how international trade and the exporting sector will recover. The income earned by the exporting sector affects demand for branches of the economy focused on the domestic market, so if exports do not grow then the service and retail sectors cannot recover to their previous levels.
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