Estonia's 2012 economic growth surpasses analysts' expectations

Photo: Urmas Luik / Pärnu Postimees

Analysts speaking to BNS after the release of Estonia's preliminary economic growth figures for the final quarter and full year of 2012 said that the annual growth rate of 3.2 percent was above the forecasts of their institutions.

Growth in the final quarter of the year was characterized by domestic demand and in the near term growth is seen to continue at a moderate rate or slow down somewhat, the analysts said.

Economic growth in the fourth quarter was faster than expected both in quarterly as well as year on year comparison, Swedbank Estonia chief economist Tõnu Mertsina said. He said that growth happened largely as a result of domestic demand, which is indicated by the bigger contribution of retail trade and information and communications. As far as retail trade goes, for instance, Mertsina said he sees no notable deceleration of growth ahead.

While industrial output increased to a certain degree, its contribution to GDP growth remained minimal. Besides the increase was not broad based but happened on the back of a few areas of activity. "Since of manufacturing output more than 70 percent goes to foreign markets, the acceleration of real growth in goods' exports to 10 percent in the GDP count is a very good result," said Mertsina.

Insufficient demand and reduction in new orders continue to be the problems restricting output of the manufacturing sector. Orders from the domestic market have been on a downtrend for a longer time already, yet now also the increase in orders for the foreign market has slowed down, the chief economist of Swedbank Estonia said.

As problems for the near term, Mertsina highlighted persisting negative trade balance, reduction in investments by eurozone companies and deepening of eurozone problems in Finland and Sweden. Also the wage income of households is smaller than a year ago. "Since export will not be broad based in the coming few months because of weak external demand, GDP growth could decelerate in the early part of this year," he said.

Ruta Arumäe, analyst at SEB Pank, said that while in principle developments in the economy in 2012 were as anticipated, the time when growth sped up arrived a couple of months earlier than was forecast at the beginning of the year. Annual GDP growth surpassed the forecast, she added.

The outcome as regards exports in the final quarter was strongly influenced by a decline in exports in December. On the other hand, domestic demand increased at a solid rate at the end of the year. As the main indicators continue to suggest acceleration of growth also in the present quarter, moderately favorable developments are seen due for the economy in 2013, she added.

Danske Pank senior analyst Violeta Klyviene said the Estonian economy showed good results despite the overall deceleration of economic growth in the eurozone. As the reasons for the better performance of Estonia the analyst named bigger flows of goods to Russia the economy of which is on a growth trend thanks to higher oil prices, as well as the still better performance of the Nordic economies, the main trading partners for Estonia, compared with the eurozone average despite the deceleration that took place in the Nordic economies too.

Klyviene described Estonia's exports as broad based, saying this was demonstrated by the fact that exports grew despite a reduction in external orders.

The year-on-year growth rate of 3.2 percent surpassed also the estimate of the Bank of Estonia. Growth in the next quarters depends on how the economies of the euro area and the Nordic countries will recover from their current lows, said Kaspar Oja, economist at the central bank.

Domestic demand offset the weakening in exports in 2012, but balanced economic growth needs strong exports because the ability of households to keep increasing their consumption is limited, Oja said. In the third quarter of 2012, household consumption increased notably faster than incomes, and savings fell to a low level. Data for the fourth quarter suggest that the rise in domestic demand indicators like retail sales has slowed, and the annual growth in indicators relating to exports, like industrial production, has accelerated.

Industrial production fluctuated a lot from month to month in the fourth quarter and saw sharp rises and falls, suggesting that the recovery in external demand is still fragile. The industrial production and exports of Estonia's main trading partners do not indicate that the situation will improve rapidly, though the economic confidence indexes and output expectations of the manufacturing sector have picked up in recent months in the Nordic countries, which indicates that pessimism has fallen among businesses in that region.

The central bank's forecast from December predicts that the Estonian economy will grow by 3 percent in 2013.

The gross domestic product (GDP) of Estonia increased by 3.2 percent in 2012 compared to 2011, a flash estimate published by Statistics Estonia on Monday indicates. GDP in the final quarter of the year was 3.7 percent bigger than in the corresponding period a year ago.