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May 11 (Bloomberg) -- Estonia’s economy, which exited the European Union’s third-deepest recession in the fourth quarter, contracted in the first three months of this year as consumers refrained from spending and companies ran down inventories.

Gross domestic product fell a seasonally adjusted 2.3 percent after a revised 2.3 percent rise in the previous period, the Tallinn-based statistics office said today. The contraction was in line with the Finance Ministry’s full-year forecast of 1 percent expansion, the ministry said in an e-mailed statement. The economy will probably grow this quarter from a year earlier and compared with the first three months, it added.

The $23 billion economy of Estonia, which aims to adopt the euro in January, faces a slow recovery after shrinking 3.6 percent in 2008 and 14.1 percent last year. Budget cuts, high unemployment and restrained lending by banks are curbing domestic demand, the Finance Ministry and central bank say.

“Output continued to stall in the domestic demand-oriented activities,” said Violeta Klyviene, senior Baltic analyst with Danske Bank A/S in an e-mailed note. “Recovery is visible mostly in exporting activities.” Klyviene kept her forecast for an annual contraction of 0.7 percent this year, adding she may improve the forecast.

Austerity Plan

Output fell 2.3 percent on the year, in line with the median estimate in a Bloomberg survey of three analysts. The contraction was due to one-time factors such as smaller stock-building of goods after a surge in inventories of fuel and alcohol at the end of the year before tax increases in January, the ministry said.

Austerity measures of more than 9 percent of GDP helped Estonia narrow its deficit last year to 1.7 percent of GDP and keep government debt at 7.2 percent of GDP, the lowest in the EU. The European Commission and the European Central Bank are due to report tomorrow on whether Estonia meets the currency bloc’s fiscal and inflation targets.

The volume of corporate loans was 1.4 billion krooni in March, “the smallest credit turnover of recent years,” the central bank said on April 26, with new borrowing falling the most in property-related industries.

AS Baltika, the third-largest Baltic clothing retailer, said on May 5 its first-quarter sales fell 22 percent from a year earlier, forcing the Tallinn-based company to cut staff and retail space lease costs.

Domestic Demand

“Whereas domestic demand was small, sales of manufacturing on the domestic market were still in a downtrend,” the statistics office said. “The decrease in the value added of construction even accelerated as its output is mainly targeted at the domestic market.”

Estonia doesn’t have any government bonds, though a market for credit default swaps on its debt exists as an instrument for speculating on the country’s credit quality.

The cost of insuring against a default declined 22 basis points yesterday to 110, according to Bloomberg data. The credit-default swaps have been the fifth-best performer globally this year.

The Baltic states of Estonia, Latvia and Lithuania were the fastest growing economies in the European Union in 2006 as banks poured money into the region sparking a real estate and consumption boom. By 2009, the region was the worst hit in the 27-nation bloc and Latvia required an international loan to avert bankruptcy after the countries’ real estate markets slumped, credit markets froze and consumer spending collapsed.

Latvia’s economy expanded 0.3 percent in the first quarter from the previous three months, exiting the EU’s deepest recession, the Riga-based statistics office said yesterday. Lithuanian GDP contracted on a quarterly basis by 4.1 percent after the closure of its only nuclear plant, the nation’s statistics office said on Apr. 28.

To contact the reporter on this story: Ott Ummelas in Tallinn at

To contact the editor responsible for this story: Willy Morris at

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