Estonian Economy Contracted in First Quarter on Weak Investment, Spending
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 and companies refrained from spending and investment.
Gross domestic product shrank a seasonally adjusted 2.3 percent after a revised 2.3 percent rise in the previous period, the Tallinn-based statistics office said on its website today. Output fell 2.3 percent on the year, in line with median estimate in a Bloomberg survey of three analysts.
The $23 billion economy, 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 by Prime Minister Andrus Ansip and restrained lending by banks are curbing domestic demand, the Finance Ministry and central bank say.
“We expect both investments and consumption to have remained weak in the first quarter,” said Annika Lindblad, a Helsinki-based analyst with Nordea AB, before the report. She forecast a quarterly contraction of 2.4 percent. “Both indicators are expected to turn to quarter-on-quarter growth in the near future. More certainty regarding euro adoption in 2011 would especially support investment later this year.”
Austerity measures of more than 9 percent of GDP helped Estonia narrow the deficit last year to 1.7 percent of GDP and keep government debt at 7.2 percent of GDP, the lowest in the 27-member European Union. 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 Apr. 26, with new borrowing falling most in property-related sectors.
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.
“Whereas the domestic demand was small, the 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 on 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.