Oil shale sector held back growth in industry
Economist at Eesti Pank
- Economic situation did not differ much from the first quarter based on various indicators
- Retail sales grew faster, and imports of capital goods and tax declarations indicate an increase in investment
- Brexit will probably not have a major direct impact on Estonia, but Estonia’s close neighbours may suffer more, which may have an indirect effect on the country
GDP grew 0.6% year-on-year, and 0.3% quarter-on-quarter, according to the flash estimate of Statistics Estonia. This is less than expected. Moreover, these growth rates indicate that Statistics Estonia may have revised the GDP estimate for the first quarter downwards. More detailed data will be available in September.
Although economic growth was lower than expected, the overall trend in the economy has largely followed the latest forecast published by Eesti Pank. Economic growth was still slowed down by the oil shale sector, just like in the first quarter. At the same time, retail sales grew slightly faster, and imports of capital goods and companies’ VAT declarations indicated a pick-up in corporate investment. The economic confidence index, which shows the expectations of businesses and households for the future, remained close to its historical average in the first and second quarter. However, in the beginning of the third quarter, the economic confidence index rose despite the uncertainty caused by Brexit.
Although surveys of industrial companies have shown for some time now that businesses expect production to grow, output in the industrial sector still decreased in the second quarter compared to last year. The reason for this was the oil shale sector – the output of mining, energy, oil and chemical companies was 14% smaller than a year ago. The development was better in other industries and production increased by 4% compared to the same time last year. The overall good performance of most industries is also suggested by growth in exports of goods of Estonian origin.
The United Kingdom’s decision to leave the European Union might influence both foreign demand projections and confidence. Still, Brexit will probably have a limited direct effect on the Estonian economy only, since just a small part of Estonian products are sold there. In contrast to other Eastern European countries, a relatively smaller number of Estonians have gone to work in the United Kingdom. 3.5% of the total export of products of Estonian origin were sold to the United Kingdom in 2015. A joint project between the OECD and the WTO looking at the impact of international product chains on value-added in exports showed that in 2011, United Kingdom exports, consumption and investment utilised 284 million euros’ worth of value-added of Estonian origin (this is almost 1.7% of Estonian GDP). There are relatively few people from Estonia living in the United Kingdom; various assessments put this number between 10,000 and 15,000. Brexit may have an indirect impact on Estonia through other European Union countries that have stronger economic ties with the United Kingdom. For example, over 100,000 people have left both Latvia and Lithuania for the United Kingdom.
GDP flash estimates have systematically underestimated economic growth in the past years. Thus, Statistics Estonia will no longer publish flash estimates, but instead it will move forward the date of publishing updated estimates of GDP. The impact of this on improving the quality of economic growth estimates may be small, since the difference between GDP flash estimates and updated estimates compared to overall revisions has been small in the past few years.
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