Estonian GDP in the third quarter was 3.9% smaller than a year earlier and 1.3% smaller than in the second quarter. This meant that GDP has been shrinking for seven consecutive quarters. It last peaked in the fourth quarter of 2021 and has since declined by 5.7%.

The downturn in the economy was seen most in the exporting sector in the third quarter. The reduction in export volumes that followed the loss of the Russian market and of raw materials happened mainly in 2022, and the current decline in exports is more a reflection of the weakness in foreign markets and the problems with competitiveness. Although private consumption was down too, exports at constant prices were 12.1% less than a year previously. Imports were down by a lot less. The growth in investment in the third quarter was relatively strong though, which is backed up by other data sources.

Given the extent of the decline in manufacturing as the exporting sector, the recession has been relatively mild in the context of the earlier volatility in the Estonian economy. Estonian industrial output dropped by a third during the global financial crisis, while GDP lost 20%. Estonia was at that time one of those countries where GDP fell very deeply, while it fell by much less in most European countries even as the decline in industrial output in those countries was similar in magnitude to that in countries with large falls in GDP (see Figure 1). The picture in Estonia was similar to that in the other Baltic states or in Greece for example.

Estonian industrial output has now fallen by 20% from its peak in the current recession, while the economy has contracted by around 6%. The Estonian economy has so far performed like the economies in Western European countries, which survived the global financial crisis rather better (see Figure 2).

A steep fall in industrial output was a feature of both crises, but the reactions of other key indicators for the Estonian economy in the two episodes have been very different. The Estonian economy had significant macro-imbalances before the global financial crisis, as the current account deficit was wide, household consumption exceeded incomes, and the banks were mainly using foreign capital for lending. None of these problems have been seen in the current recession, or only to a much lesser extent than in 2007. Households had accumulated savings before the current crisis broke, and so there was not the same shock to consumption as in 2009. The banks mainly fund their operations from local deposits and so the supply of new loans has not dried up as it did in the global financial crisis.

It is very difficult to improve matters during a recession, and what is done between such episodes matters much more, and whether buffers are built up that can be used to survive future difficulties. The contraction in the Estonian economy in the current recession has been of 6% rather than over 10%, and this is thanks to the buffers that were accumulated before it started. Domestic demand has held up quite well despite the deep drop in industrial output.

Estonia needs to make decisions that would bring growth back to exports and to the economy. Earlier advantages like cheap raw materials and cheap labour, and a location between Russia and Western Europe can no longer support exports. Estonia needs to have a discussion about what its competitive advantages will be in the future and about what policies will help industry benefit from those advantages. Businesses need to know what the rules of the game will be and which types of business should be developed further in Estonia in the future. The recession will end sooner or later, but the recovery may be weaker than it would be otherwise if competitiveness is not strengthened.

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