The one percent decline in gross domestic product was entirely expected, and it appears that the eight-quarter economic downturn has ended, Swedbank Chief Economist Tõnu Mertsina commented on the GDP changes. :format(webp)/nginx/o/2024/08/29/16321298t1h6ae8.jpg)
According to Tõnu Mertsin, the deepest economic downturn was in the first quarter of last year. Photo: Madis Veltman
The one percent decline in gross domestic product was entirely expected, and it appears that the eight-quarter economic downturn has ended , Swedbank Chief Economist Tõnu Mertsina commented on the GDP changes.
Translation: Sergey Svetlov
The revised estimates of gross domestic product (GDP) for the second quarter were fairly predictable. Estonia's economy contracted by 1% year-on-year and remained flat in a seasonally and calendar-adjusted quarterly comparison. Since a more detailed look at the quarterly comparison showed slight growth, it can be said that the economic downturn that lasted for eight consecutive quarters has ended.
The deepest downturn in the economy occurred in the first quarter of last year, but the recovery is very slow. In the first half of the year, GDP contracted by 1.6%, but the second half of the year should be slightly better. Despite this, our forecast is that the Estonian economy will contract by 0.6% this year. On the positive side, GDP growth in current prices, i.e. in monetary terms, accelerated slightly in the second quarter, increasing by 2.8% year-on-year. However, this growth is significantly lower than the average over the past 10 years (7.1%).
Of the 21 sectors of the economy, eight showed growth in constant prices in the second quarter, with the largest positive contribution coming from a 12% increase in the real estate sector. Despite the stagnation in the real estate market, value added in this sector has grown significantly in recent quarters. The largest decline in GDP was due to a decrease in value added in wholesale and retail trade and construction. However, the strong decline in trade is largely due to the exceptionally strong growth in the previous year, which raised the comparison base.
However, retail sales fell in the second quarter. As expected, overall consumption continued to decline. Since consumption accounts for more than half of total GDP, its decline has a significant impact on the economy as a whole. Although real wages have been rising since the middle of last year and the purchasing power of the average worker has improved, consumption is held back by weak household confidence.
The decline in exports of goods and services slowed down in the second quarter, with exports of services even increasing slightly, but the trade deficit increased slightly, which had a negative impact on GDP. External demand remains weak, but is gradually improving and should begin to support exports more and more. However, the weakened competitiveness of enterprises may hold back export growth. Thus, according to a Swedbank survey this year, the main focus of enterprises is on improving efficiency and competitiveness.
Next year, Estonia's economic growth will be driven mainly by factors coming from the external environment – increased external demand and lower interest rates. Lower interest rates will increasingly support the growth of domestic demand.
Although it is necessary to reduce the excessive state budget deficit, the already known planned tax packages and spending cuts will accelerate inflation and slow economic growth next year and beyond. However, the improvement of the Estonian economy should continue next year and the economy will grow. To increase economic activity, it is necessary to improve confidence in the economy.
