Analytics, Banks, Economics, Estonia, Financial Services

Estonia's GDP declined 3.2% on year over the first three quarters of 2020. Estonia's economic downturn has been among the smallest in Europe both in the third quarter as well as throughout 2020 thus far, Mertsina said. 

"The strongest positive contribution came from the financial sector and energy production. Larger inflow of value-added tax, too, supported economic growth. On the other hand, earlier growth in value added in the ICT sector and in public administration decelerated, and declines in value added aggravated in construction and transport," Mertsina said.

The chief economist pointed out that growth in value added in ICT, which previously strongly contributed to Estonia's economic growth, has been rapidly decelerating for several consecutive quarters.

The decline in value added in construction in the third quarter was to be expected as the impact of the crisis arrived with a delay in the sector, he noted.

Even though manufacturing had a strong negative effect on GDP, the decline in value added has abated quickly in the sector. 

"The decrease in value added in manufacturing -- our largest exporting sector -- has been decelerated by improvements in external demand. The export of goods increased close to 4% in the third quarter," Mertsina said.

The economist said that the decline in the export of services meanwhile has yet to recover significantly from its lowest point in the second quarter. The export of services remains in a strong 30-percent decline due to decreases in freight transport and travel services.

The purchase managers' index for the euro area has deteriorated over the past few months due to a decline in the service sector index, whereas the index for manufacturing continued to recover in November. In the United States, purchase managers' indexes have improved strongly in the industrial and service sectors. The Chinese economy grew both in the second and third quarter. 

"The improvement in external demand is also demonstrated by rapid deceleration in the decline of global trade volumes, which in September bounced back to a similar level as in February," Mertsina noted.

The economist pointed out that during the crisis, Estonian retailers only saw a drop in sales volumes in April, and since May, the figures have greatly grown in yearly comparison. The decline in private consumption, too, has quickly decelerated to 0.7%, mainly due to increases in the consumption of food products, alcoholic beverages and homeware, and increased expenditures on housing.

"Expenditures on transport and accommodation continue to be in strong decline. Non-residents' purchases in Estonia have significantly dropped this year, and the decline also continued in the third quarter. The fall in GDP has been decelerated by the government sector's increased expenditures on health case and education," Mertsina said.

Investments saw an unexpected leap in growth in the third sector, mainly caused by a large-scale software investment by one company. The investments did not significantly impact GDP, however, as imports likewise grew.

The growth in investments was also positively impacted by an increase in government sector investments.

"Investments by the government sector have already increased 14 percent during the first three quarters of this year, which is a very welcome development during the economic downturn," the economist said.

Mertsina noted that the economic downturn was softened by the rapid containment of the first wave of the coronavirus, timely support by the state, good state of public finances before the escalation of the crisis and relatively well balanced macroeconomic situation; economic downturn at Estonia's major trade partners has also proved smaller than the European average.

While confidence in trade, industry and services has quickly bounced back from the low point in April and May, confidence in the construction sector is still recovering slowly and consumer confidence has declined instead.

"While the index showing expected growth in industrial production has bounced back to a level slightly exceeding that before the crisis, the outlook for growth in the demand for services has not forecast any improvements over the past few months, remaining significantly below the pre-crisis level," he said.

The lowest point of the crisis is over; however, uncertainty remains high due to the second virus wave and new economic restrictions.

"The second wave of the coronavirus has worsened the prospect of economic growth resuming for both the last quarter of this year and first quarter of this year, and possibly even for the first half of next year. Broken down by sector, it will be uneven," Mertsina said.

According to a forecast published by Swedbank at the start of November, Estonia's GDP is set to decrease 3.2% this year. Moderate economic growth should resume in 2021, however.