Analytics, Baltic States – CIS, Economics, Estonia, EU – Baltic States, GDP

Statistics released this week show that Estonia's GDP for the second quarter of 2014 was 2.4% larger than a year earlier and 1.1% larger than in the previous quarter.

GDP growth for the first quarter and for last year were also corrected upwards. The sector that saw the biggest impact from the correction of GDP was transportation and storage, where the negative contribution was reduced. The position of net production taxes was also improved. These are the two areas where weaknesses have raised the most questions for analysts in recent years.

The fresh statistics for the national accounts show that the Estonian economy has grown faster in recent years than had been calculated so far, and there was no new dip in the economy at the start of this year. Although GDP was revised partly because of a change in methodology across Europe, the main source of the improvement in the growth figures was the new sources of data used in compiling statistics.

The corrected figure for economic growth is more in line with other economic statistics such as those for wages and retail sales, which have shown that the purchasing power of the public improved significantly at the start of the year, Eesti Pank said. Growth was primarily supported by household consumption in the first half of this year, and it increased by 3.6% in the second quarter. Although the extraordinarily large investment projects of recent years have now ended, investment growth was also positive at 0.7%. The fairly significant contribution to economic growth from the statistical discrepancy indicates that the assessment of the sources of growth in the second quarter might yet change considerably in future revisions, the central bank said.

The relatively large revision of GDP confirms that the analysis needed for economic policy should be based on a broad range of indicators in current circumstances. The very low figure for GDP growth that was published earlier gave an inaccurate picture of the state of the economic cycle. When GDP alone was used, the economy declined, but the appreciable pressure on wages indicated the economy was in better shape. Estonia has a small and open economy where individual transactions can have a large impact, so major statistical revisions are inevitable. The correction of statistics once more precise data have become available is a normal event in Estonia and abroad. Statistics Estonia has also made significant corrections to figures for economic growth in the past, raising the calculation of growth by an average of 0.4 percentage points.

Eesti Pank said that it is quite probable that many institutions will revise their forecasts for the Estonian economy upwards to reflect the new GDP figures. Despite this, the state of the economy has not improved from where it was half a year ago. The continuing conflict between Russia and Ukraine has had a dampening effect on expectations for growth in the external environment. The European Union has already agreed additional sanctions and any subsequent Russian counter-measures will undoubtedly have an impact on the Estonian economy, the central bank warned.