More expensive energy will probably cause a recession in the second half of the year

Autori Kaspar Oja pilt

Kaspar Oja

Economist at Eesti Pank



Data from Statistics Estonia show that gross domestic product in Estonia was up 0.6% over the year in the second quarter but was down 1.3% on the first quarter when seasonally adjusted. The sharp rise in energy prices over the summer makes it probable that the economy will enter recession in the second half of the year.

Monthly figures for economic activity such as retail sales and industrial output show that economic growth over the year was still quite strong at the start of the second quarter, but this had changed by the end of the quarter. The slowdown is generally in line with what various forecasts for the Estonian economy predicted in the spring, as growth is hindered by the supply difficulties caused by the war and by higher energy prices. Energy prices continued to rise on foreign markets throughout the summer at a rate that was closer to that which was expected in the risk scenarios in the spring. This suggests that future development may be weaker than was forecast in the spring.

Assessment by businesses indicate that the economy was generally performing very well in the second quarter, but a decline is expected in the near future. The survey of manufacturing companies in July indicated that the capacity utilisation was relatively high, meaning that output volumes are high given the equipment available to producers. Expectations for growth in the coming months have receded though, which was particularly evident in the August survey. The assessment by manufacturing companies about the current situation in Europe as a whole has deteriorated, but output is expected to continue growing in the coming months.

Across sectors, the long-lasting trend continued in the second quarter with IT and business services contributing more to growth in the economy. The hotel and restaurant sector also grew fast as it recovered from Covid. Energy, mining and manufacturing made an unexpectedly negative contribution to economic growth though. This contradicts other data sources, as the monthly output indexes for those sectors suggest that growth should have been expected there. Electricity production was up by some 50% over the year in the second quarter for example, and so it is hard to understand the decline in the energy sector within GDP.

It is probable that there will be a recession in the second half of the year. This was expected in the forecasts made in spring, but given that energy prices have risen faster, the recession in the second half of the year may be deeper than was predicted in spring. The measures promised by the government should ease the impact of higher energy prices on households at the end of the year, but many businesses will find that high energy prices make their circumstances very difficult. It is important that supplies of energy be secured for the winter.

Additional information:
Hanna Jürgenson
Eesti Pank
Tel: 668 0965

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