Swedbank flash comment Estonia : Weak foreign demand inhibits the economic growth in Estonia

Swedbank• GDP real growth 2% in the second quarter
• Main contribution from private consumption, but investments decreased
• Economic activities dependent on foreign demand (transportation and manufacturing) had the largest negative contribution to the GDP growth
• Exports decreased less than imports, resulted in increased contribution to the GDP growth

According to the second estimate of Statistics Estonia, GDP grew 2% yoy in real terms in the second quarter (flash estimate was 1,9%). Compared to the previous quarter, GDP grew 0.7% (seasonally and working day adjusted).

Statistics Estonia published its regular revision of last four years, as well, whereas the last year’s GDP was revised up from 2.1% to 2.9% (major correction in the first quarter). This lifted Estonia together with Lithuania among the fastest growing countries in the region.

Wholesale and retail trade contributed the most to the economic growth in the second quarter. However, more than half of the GDP growth came from net taxes on products with the support of robust growth of VAT revenues. Whereas, primarily those economic activities which sell their goods and services on the domestic market contributed to the growth, activities dependent on foreign markets and foreign demand (transportation and manufacturing) inhibited the growth the most.

Transport sector suffers primarily from the weakened demand from Russia and increased competition from Russian cargo ports. Substantial role in the decrease of manufacturing value added is played by the halted production and export of electronic products. Weak Russian market has substantial negative effect as well.


Export of goods and services decreased by 1% annually in the second quarter. Whereas, last year the robust growth of exports of electronic products compensated for the fall in exports to Russia, this is not the case anymore. At the same time, its positive, that enterprises have gradually redirected their exports to new markets. We expect that export volume remains approximately on the same level this year as in 2014.

According to the revised figures, private consumption has been even stronger this year, growing 5.4% yoy in the second quarter, as well as in the first half of the year. The main contribution has come from the increased consumption of food and goods and services of recreation and culture. Considering the accelerated real growth of net wages, the robust growth of private consumption has been expected. However, the expected deceleration in the growth of real net wages, together with the decrease in population and employment, can inhibit the growth of private consumption next year.

Investments have decreased already four quarters in a row. In the second quarter, the decrease was 8%, primarily due to the negative contribution of corporations. Its positive, that government investments increased after falling five quarters in a row. Considering weak foreign demand in this year together with the decrease in business sector turnover, increased labor costs and decrease in profitability, as well as worsened sentiment, we do not expect broad based growth of investments shortly.

Major share of intermediate and capital goods have to be imported to Estonia. Together with the decreased demand for the intermediate goods and investments, imports have decreased, as well. Whereas, the imports have decreased more than exports resulting in the increased contribution of net exports to the GDP growth.


We expect that foreign demand will gradually improve next year, and will give stronger support to the GDP growth. According to our recent estimates, GDP growth reaches to 1.9% in this year and it will accelerate in the next year. However, downward risks have increased in the global economy, which can worsen the outlook of the GDP growth in Estonia, as well.

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