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Swedbank economist: Economic impact of pandemic weaker than expected in Estonia

BC, Tallinn, 01.09.2020.Print version
While the impact of the coronavirus pandemic on the Estonian economy has been strong, it has been smaller in figures than previously forecast, according to Swedbank chief economist Tonu Mertsina.

Estonia's gross domestic product (GDP) fell by 6.9% in the second quarter of 2020, compared to the second quarter of 2019, while GDP at current prices was 6.4 bn euros, according to Statistics Estonia.

"The volume of Estonia's economy contracted 3.9 % during the first half of this year. This is not a final figure, however, it is a preliminary one which will be adjusted several times," Mertsina said.


The economist added that the largest negative contribution to the economic decline in the second quarter -- 2.6 percentage points, or 39% -- came from manufacturing, followed by retail and wholesale, real estate and the hospitality sector. 


"Seven of the 20 areas of activity included in the calculation of GDP saw their value added grow, and the combined impact of construction and the ICT sector was considerable. The decline in manufacturing, our main exporting sector, was caused by a general decrease in demand," he said.


Mertsina pointed out that the decline in production volumes in manufacturing has decelerated rapidly, having bottomed out in Estonia in May and only decreasing 1% on year in July whereas export revenue even grew slightly.


"The crisis dealt a great blow to our tourism sector, particularly to accommodation and travel services, which will be much slower to bounce back than the rest of the economy. The number of people accommodated in Estonia was 78% smaller in the second quarter compared with a year ago and the value added in accommodation declined 72%," he said.


The economist added that as the proportion of this area in the economy is small, its negative impact on the economy as a whole at 0.5 percentage points, or 7%, was modest. 


"Export decreased 19%, but the decline in the export of services was much stronger than in that of goods, at 35% and 10%, respectively. The drop in the export of services was mainly due to reductions in transport and travel services," he noted.


Mertsina highlighted as a positive aspect the decline in export being smaller than that in import, which fell 22 %. This, in turn, has increased net export and reduced economic downturn.


"Export and import alike bottomed out in May, and the decline in both figures eased in June. Compared with our major trade partners, their import decline, too, has slowed down," he said, adding that while global trade volumes are in strong decline, they already exhibited signs of improvement in June. 


Private consumption in the second quarter dropped 8.7 %; however, breakdown by month reveals some differences, according to Mertsina.


"Card payment revenues, which indirectly indicate private consumption, fell sharply in April, but in May the fall decelerated and turned to growth in June, accelerating further in July," the economist said.


"National support measures, the Unemployment Insurance Fund's wage compensation in particular, have reduced unemployment growth, which in turn has supported improvement in private consumption," he said, adding that people's confidence is still very weak, despite having improved somewhat after bottoming out in June.


"As expected, investments declined -- 15% -- mainly due to the enterprises' sector, where gross fixed capital formation declined by a quarter as a result of the crisis and greater uncertainty as well as base effect," he added.


Investments by the government sector and households increased, however, according to Mertsina. He added that the government sector's investments only grew 3% in the second quarter but growth over the first half of the year amounted to 12%. The economist underscored that public procurement currently has an important role in stimulating economic growth.


"The current economic downturn bottomed out in the second quarter and the economy has bounced back rapidly over the past months," Mertsina said, adding that the exit from the current crisis should be significantly swifter compared with the late 2000s recession. 


"Estonia along with the Nordics and other Baltic states, which are the recipients of half our export, have been less affected by the current crisis than Western and Southern Europe," he said.


The economist added that according to Swedbank's forecast published last week, Estonia's economy was predicted to contract 5% this year. Better GDP performance in the second quarter allows to reduce the projected decline.


"The risk of the spread of the coronavirus decelerating Estonia's exit from the crisis has grown, however," Mertsina said.


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