Estonia Heads For A 2008 GDP Contraction On The Back Of A Decline In Domestic Demand

Estonian retail sales declined in May for the second time in three months, suggesting the Baltic nation's economy is on the verge of contraction. Retail sales, excluding car and fuel sales, fell an annual 3 percent, after remaining unchanged in April and declining 4 percent in March, according to the latest data from the Tallinn-based statistics office. Sales were up however when compared with April, by 4%, but we need to remember there are a great many seasonal factors at work here, and we also need to remember that in May 2007 we were at the height of the consumer boom.

Year on year retail sales reached a record 23 percent in March 2007 and then started to decline as the economy began to slow as banks tightened lending to avoid overheating as inflation accelerated. As a result the economy only grew at an annual 0.1 percent in the first quarter.


Following a gross domestic product expansion of 10.1 percent in the first quarter of 2007 we may now well see a full-year contraction this year, the first since a 0.1 percent decline in 1999, when exports dropped dramatically following the 1998 Russian default. Certainly an annual contraction in Q2 would seem to be very much on the cards at this point.



Adjusted seasonally and for working days, the economy actually shrank 0.5 percent from the fourth quarter of 2007.






Household spending which accounts for 55 percent of gross domestic product fell by an annual 0.4 percent in the first quarter, and this decline now seems set to continue, although exports, are on the upside at the present time.

In fact in April 2008 Estonian goods exports were up sharply, to 12.2 billion kroons during the month. Compared with April 2007 the increase in exports was 1.8 billion kroons or 18% in nominal (non inflation adjusted) prices. The main increases were in metals and products thereof and of machinery and equipment. This performance is promising, but it will probably be insufficient to offset the sharp decline which is now taking place in domestic demand (in particular since the Estonian government cannot run a deficit to give a stimulus), and exports may well become increasingly difficult if the economies of those who receive the exports themselves in turn start to slow.

Estonian Consumer Confidence, which was boosted by entry into the European Union in 2004, has all but collapsed after reaching record highs in January 2007. According to the Tallinn-based Konjunktuuriinstituut confidence bounced back slightly in june to -16 from the four-year low of -19 registered in May.


The EU Economic Sentiment Index for June has also now been published, and here is the principal chart for the Baltic countries. As can be see the composite index for Estonia remains steady at a very low level, while Latvia just shot below them.

Industrial Output Drops

More evidence of the sharpness of the slowdown is to be found in the fact that Estonia's industrial production fell the most in nine years in May, providing us with the latest evidence (following yesterday's retail sales data) that the Baltic economy has slipped into what now seems likely to become a pretty deep recession. Output, adjusted for working days, decreased an annual 6.7 percent, the biggest decline since May 1999, compared with a revised 0.1 percent fall in April, according to data from the Estonian statistics office released today. Production fell a monthly 4.8 percent on a seasonally adjusted basis.



Industrial output, led by food production and wood procession, has now fallen for three straight months.