Signs of improvement in international trade were evident in the third quarter
The increasing second wave of the virus is slowing growth in global trade, which was strong at the start of summer. Economic activity still increased quite noticeably overall in the third quarter, though the picture varied from country to country. The economies of Estonia’s main trading partners have done better than the average for the countries in the European Union, and this allowed Estonia’s foreign trade to recover in the third quarter after its steep drop in the second.
Exports of goods grew by as much as 1.3% in the third quarter. There has been no improvement in the services market after the first wave of the crisis though, and exports of services remain deep in the doldrums having fallen by 29%, or almost one third. The consequence of this was that total foreign trade fell in the third quarter as exports of goods and services were down 10.1%, and imports were down 4.5%.
Goods exports are supported by manufacturing, which has managed to survive the crisis relatively well and exported 0.7% more in the third quarter than in the same quarter of last year. The biggest contributors were the sectors that are important for Estonia such as wood processing, where exports grew by 5%; food processing, where they grew by 3%; production of metal products, where exports were up 13%; and production of electronic and optical equipment. Sectors that remained in decline were transportation and storage, and accommodation and food service.
The expectations of Estonian industrial companies for orders, and confidence in the economic position of trading partners improved gradually over the summer and autumn, but in November there were signs of some retreat. This suggests that the general demand environment for international exports of goods has been generally supportive in the last months of the year. It should be noted though that the second wave of the virus has affected countries differently and the stricter restrictions that have been reintroduced have hindered the movement of goods and dampened the confidence of businesses and consumers.
The current account, which had long been in surplus, turned negative in the third quarter and was in deficit by 2% of GDP. There was a small deficit in the balance of exports and imports of goods, while the balance for services remained positive but narrowed substantially in the third quarter. The surplus in services diminished because imports of computer services increased more than fourfold, which was a consequence of acquisitions of intangible fixed assets in the information and communications sector. Exports of services were held up by ICT services and financial and insurance services, as demand for such services has continued to grow throughout the crisis.
Although there were clear signs of improvement in the Estonian economy and the economies of trading partners in the third quarter, the total outcome for 2020 is still a relatively strong economic contraction. A substantial recovery in the economies of Estonia’s trading partners, and so in Estonia’s foreign demand, is forecast from next year.
Eesti Pank publishes an economic policy comment on external sector statistics, together with a statistical infographic on the balance of payments that covers changes in the current and capital accounts, the financial account, the international investment position, and the external debt.