It is difficult to measure growth in the economy at present

Autori Kaspar Oja pilt

Kaspar Oja

Economist at Eesti Pank



Statistics Estonia estimates that Estonian GDP shrank by 3% in total in 2023. GDP in the fourth quarter of 2023 was 2.7% smaller than it was a year earlier, and 0.7% smaller than it was in the third quarter of 2023.

The recession for the year as a whole was much less severe than expected in the most recent forecast from Eesti Pank, but GDP in the fourth quarter was generally in line with the forecast. This is because Statistics Estonia revised real GDP for the third quarter upwards by 1.2%. This is a very large revision given the amount that GDP growth varies in quarterly terms, but it was reasonable to revise GDP once new information became known, as doing so allows the new information to be taken into account more quickly when decisions are made.

The revision illustrates well though how much uncertainty there is around growth in the economy. What happened in the past affects expectations for the future, and so it may be that the general assessment of the state of the economy was excessively downbeat. If past events provoke too much pessimism, forward-looking investments may be smaller than they could be.

GDP in the fourth quarter was down by 2.7% over the year, but 2.3% of that came from a fall in value added in the energy sector. The GDP data show that the value added in the energy sector was down by about half. Statistics on industrial output show though that the output of the sector was down over the year by a lot less than that, and that poses the question of whether the GDP estimate for the fourth quarter will remain unchanged.

The uncertainty around the estimates of growth in the economy arises partly because there have been large changes in the economy and it is hard to estimate their impact. On top of the changes in export markets, companies have replaced the inputs and materials they need for their own production, but there are too few readily accessible data on that. The recent high inflation also makes it harder to compile statistics. Inflation was much higher than usual, and so the errors arising from it may also have been larger than usual.

It is important to look at other data alongside GDP. Statistics on industrial output show that the recession may have bottomed out at the start of the fourth quarter, as industrial output showed notable monthly growth in November and December, though output remained weaker at the end of 2023 that it was a year previously.

It may be that later revisions of the data show the economy to have been in better shape in retrospect than has so far been thought, but a large proportion of economic indicators still point to general weakness in the economy. There is a clear need for improvement in economic policy and competitiveness. Supporting growth in the economy needs Estonia to build on the competitive advantages of a very good business environment and wide experience of digital enterprise. The recession was still quite broadly based in the second half of last year, but information and communications was one of the first sectors to return back to growth.

For further information:
Viljar Rääsk
Head of Communications
Eesti Pank
5275 055
Email: [email protected]
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