Analytics, Economics, Estonia, Financial Services, GDP, Markets and Companies

In the first quarter of 2016, Estonia's economic growth remained modest as a result of a continuously adverse external environment. While growth in private consumption sped up, the decline in investments continued and the input from government sector consumption was modest. Global economy is plagued by a deficit of aggregate demand, which undermines the Estonian exporting industry and investment activity. In year to year comparison, gross domestic product grew 1.7 percent, which is significantly less than Estonia's growth potential, Madis Aben, analyst at the fiscal policy department of the Ministry of Finance, said is his commentary on GDP data for the first quarter.

Export keeps declining as a result of the weak external environment, yet the speed of decline slowed down due to a certain improvement in the export of goods. The export of services meanwhile kept declining as a result of a reduction in the exports of transport services and travel services. Exports can be expected to start growing again in the second quarter, backed up by quietly recovering external demand and an increase as a result of a low reference base in the export of communication equipment, which represents a big portion of exports.

Domestic demand started to grow in the first quarter on the back of faster growth in private consumption. This helped to increase both profits and wage income in the trade sector in an otherwise difficult economic situation. While consumption of durable and semi-durable goods grew faster than the average, consumption of food did not change year over year. As a result of the cold winter mandatory expenditures related to housing, which had been on a downtrend at the end of the year, grew rapidly.

The decline in investments deepened, yet the reduction in inventories that had continued for four quarters came to a halt. The biggest negative impact originated in investment in buildings and facilities, in which both the corporate and the government sector invested significantly less than a year ago. This explains also the problematic situation in the construction sector, where both profits and wage income decreased. An increase in investments in intellectual property and computer technology continues, just like moderate growth in investment in dwellings.

Growth in value added subsided to marginal levels and was driven predominantly by fields related to consumption. Trade had the biggest upward effect, while information technology, administration and auxiliary services and accommodation and catering services were doing well too. Agriculture and forestry, where a weaker reference base had an effect on real growth in value added alongside lower prices, also had a positive effect on economic growth. Growth in value added was undermined the most by the energy sector, where a decline in output and profitability continued. Other negative contributors included manufacturing, where value added decreased in half the branches and the electronics sector accounted for a large portion of the decline. A decline in value added continued in the construction sector.

The Estonian economy has been characterized in the last couple of years by a continuation of relatively rapid wage growth in combination with a decline in corporate profits. In the first quarter the sectors accounting for most of the reduction in profits were manufacturing, transport and storage, and energy. All these sectors are linked more or less with depressive external demand or low energy prices and it cannot be said that profits have decreased only as a result of high wage demands of employees, the ministry said.