Estonia Economic Forecast

GDP contracted at a slower annual pace in Q2 and less than initially reported, as stronger public spending supported activity. In contrast, the decline in private consumption tripled from Q1 and was the steepest in three years amid higher interest rates. Fixed investment also deteriorated at a quicker pace, further dragging on growth. Meanwhile, exports declined steadily in Q2, but a larger contraction in imports led to a less downbeat external-sector performance. Turning to Q3, GDP will likely shrink year on year for the fifth consecutive quarter, but by less than in Q2. The industrial sector’s downturn softened in July, and inflation fell to an over-two-year low in August, abating some pressure on household budgets. Nevertheless, headwinds to activity remained strong: In July, merchandise exports fell at the sharpest pace since 2009, and retail sales grew by less than in Q2.

Harmonized inflation plunged to 4.3% in August from 6.2% in July on a steeper fall in housing and utilities prices. Average inflation will broadly halve this year from 2022 on softer domestic demand and higher interest rates. Looser-than-expected fiscal policy and volatile energy prices pose upside risks.