Second quarter displayed clear signs of improving economic situation

Peeter Luikmel, Eesti Pank, economist

According to Statistics Estonia's flash estimate, our GDP increased by 3.5% year-on-year in the second quarter of 2010. Seasonally and working-day adjusted GDP grew 2% on the first quarter of the year.

Economic activity continues to recover, especially in the exporting sector. Goods exports in current prices was some 25% higher than in the same period a year ago. The ability to cope with rapid changes and the competitive level of labour costs make it possible for Estonia's enterprises to participate in the same supply chain as the companies of other Nordic countries. Capacity utilisation in manufacturing is consistently creeping up, already amounting to about 70%. If the production output continues to expand at the current pace, exporting enterprises will soon face the need to make additional investment in order to meet increasing demand.

Domestic demand continues to be weak. The sale of industrial production in the domestic market is still on the fall. Although it is likely that unemployment contracted in the second quarter, the income of consumers is also smaller compared to a year ago. Another factor inhibiting consumption is that the price level has lowered less than the wage level. Investment activity is also sluggish. Most of companies have still plenty of underutilised production capacity, which means there is no need to make rapid investment.

The rebound in economic activity in the first half of the year was partly due to the impact of one-off measures. Fiscal stimuli implemented in several countries have only a temporary effect and it is not clear how the pace of recovery in domestic demand is going to proceed. Another one-off factor boosting economic activity in the first half of the year was restocking.

The exporting sector has so far been the main pillar of economic recovery. From the point of view of further growth, the extent to which recovering domestic demand will offset slowing external demand growth is becoming more and more important for Estonia.

Further information:
Ingrid Mitt
Public Relations Office
Telephone: +372 6680 965, +372 5126 843
E-mail: ingrid.mitt [at] eestipank.ee