Data from Statistics Estonia put Estonian GDP down 1% over the year in the second quarter, and at the same level as in the first quarter. This development is generally in line with what was expected in the Eesti Pank forecast published in June. Forecasts over the past year have been expecting the economy to return to growth in the second half of this year.

Industrial output in Estonia has however remained at around the same level for some time now. The most recent statistics are from June, when industrial output was a little below its average level of recent months. Such variation has also happened earlier though, and it is not reasonable to draw conclusions from the data of just one month. Statistics for the past half year indicate that output has clearly started to grow in several branches of industry. This is because of recent investment in expanding capacity, in food production for example, and also because energy prices have fallen and so competitiveness has improved.

The expectations of industrial companies for future growth in output have also become positive in some branches, meaning that producers expect output to grow in future. Not all branches of industry are so optimistic, and it would be more accurate to say for the industrial sector as a whole that expectations of decline have lessened. The expectations of companies within branches of industry evidently vary, but the general trend in expectations for output in recent months appears to have become brighter than at the start of the year or at the same time a year previously.

Investment has remained quite large despite the enduring recession. Some production capacity stands idle during a recession and a fall in profits makes it harder to fund new investment, and so investment is usually weak when the economy turns down. Investment has remained quite strong in Estonia though, which indicates that companies have confidence in the economy recovering and in future growth.

One reason for the weakness in the economy has been the paucity of consumption, but consumption by households as a ratio of wage income is similar to what it was in 2019 before the Covid-19 pandemic. The interest payments of households have increased in the meantime though, and this has restrained their ability to consume. Statistics on financial transactions show that people saved only quite small amounts during the recession, but saving has now recovered to close to where it was before the pandemic.

It may be expected for economic growth moving forwards that if the government starts to limit its fiscal stimulus to the economy, then growth will be slower in the coming year than was forecast. This needs to happen though in order to reduce the debt burden of the public sector and stem the future growth in interest payments, as this will help maintain competitiveness in the longer term.

It is important that the budget deficit be reduced, and also that the business environment continue to favour economic development and so support improvements in living standards and growth in the state budget in future. Estonia has been approaching the average standard of living in Europe over the past couple of decades despite the recent recession, and so the economic policy challenges facing the country are increasingly similar to those faced by wealthier European countries, where productivity growth is even slower than it is in Estonia. Achieving growth in the economy will become harder than it has been, and it will become increasingly important to maintain the business environment.

For further information:
Viljar Rääsk
Communication manager
Eesti Pank
6680 745, 5275 055
[email protected]
Press enquiries: [email protected]