The outlook for foreign demand growth has become more pessimistic
Economist at Eesti Pank
The euro area economy remained in reasonably good shape in the second quarter, but the future outlook for foreign demand has become more pessimistic than it was in the first half of the year. Although Estonia’s foreign trade measured in euros increased in the second quarter, the growth was affected by the persistently high inflation caused by rising prices for energy, fuels and commodities. Exports of goods and services increased by 29% and imports by 20%.
High inflation, the war in Ukraine and the gradual application of sanctions on Russia have caused some uncertainty in goods markets. Goods exports increased by 27% in the second quarter despite all this, though this figure was partly affected by high inflation. The groups of goods with the largest exports in the second quarter were mineral products, and wood and wood products, while exports of machinery and equipment, and metals and metal products declined a little.
Imports of goods were around one third more in the second quarter than a year earlier. Trade with Russia also continued. Imports of mineral fuels were around 60% of the goods imported from Russia, and imports of wood products were one fifth. The impact of sanctions on trade with Russia will start to become apparent in the second half of the year.
The sanctions affect international trade in services as well, especially through the restrictions on land, sea and air transport, but this did not yet impact the overall picture of trade in services in the second quarter. Balance of payments data show that exports of services at current prices were up 32% in the second quarter. The biggest contribution to the growth came from travel services, which recovered strongly from the pandemic. Telecommunications and computer services and other business services also continued to make a major contribution to the growth in exports of services. Exports of transport services were down a little in the second quarter. Imports of services continued to be affected by the high reference base caused by a one-off transaction, and so imports of services were 15% less than a year earlier.
The current account was in deficit to a small extent in the second quarter, by 0.3% of GDP. The surplus in the services account gave support to the current account, but the deficit on the goods account was larger than in previous quarters.
Weaker demand in foreign markets, the continuing pressure from inflation, and the ongoing uncertainty made businesses more pessimistic about the future. Surveys about expectations show that companies which estimate that orders for the coming months have declined and that it is ever harder to pass higher prices for production inputs into product prices are in the majority. This will make it harder for companies to earn profits and will threaten their competitiveness in foreign markets.
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