GDP growth has exceeded expectations
Economist at Eesti Pank
The rapid growth in the economy in the first quarter of this year came mainly from an improvement in economic circumstances at the start of the year, not from the low reference base of last year. Yearly growth in Estonian GDP was 5.4% and growth over the quarter adjusted seasonally and for the number of working days was 4.8%. GDP was larger than it was in the fourth quarter of 2019 before the crisis and was also larger than was forecast before the crisis.
Sectors that contributed strongly to the growth in the first quarter were the IT sector, parts of the public sector and supporting activities like the financial sector and real estate. Value added in the industrial sector was down over the year. Growth was also strong though in the retail sector, where the restrictions on activity were tighter than they were a year earlier. The rapid growth in the retail sector is confirmed by the monthly economic figures. It is possible that the restrictions on the use of services and the reduced ability to travel have led people to spend more in retail networks.
Such a sharp acceleration in economic growth is counter-intuitive. Tighter restrictions started to apply in the first quarter and meant that fewer people were going to their places of work and that it was harder for them to consume goods and services. This is confirmed by mobile positioning data from Google. Although more people were going to workplaces at the start of the first quarter, a large share of them remained at home from the middle of the quarter when the restrictions started to apply (see Figure). A reduction in the share of people going to workplaces has previously been correlated to GDP. As the restrictions have been eased in recent weeks, there has been a sharp rise in people going to workplaces again.
An improvement in the economy is also in line with the April data from corporate surveys published by the European Commission. They show that significant labour shortages started to appear in the corporate sector at the start of spring and industrial capacity utilisation rose to its highest level of the past decade. This is more indicative of a boom than of an economy struggling because of the coronavirus restrictions. Corporate surveys last spring gave a much more pessimistic picture than what later economic results actually showed. While the survey results in spring 2020 were too pessimistic, it is possible that there has now been an overreaction in the opposite direction.
If the economy recovers more quickly than expected from the crisis, additional fiscal stimulus for it should be avoided, in order to prevent some sectors overheating. As the restrictions introduced because of the pandemic are eased, the economy will strengthen further in the second half of the year. Demand will also be increased further by the savings built up during the crisis and the money taken out from the second pension pillar. Although now is a good time for the government to borrow, the first goal of fiscal policy should still be to keep the local economy stable. Imbalance in the economy would cause Estonia to lose more in the long term than could be gained from cheap loans.
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