GDP records smallest contraction in six quarters during Q1

GDP shrank at a milder pace of 2.4% year on year in the first quarter, compared to the 2.6% fall recorded in the fourth quarter of last year. Q1's reading marked the seventh consecutive decline but was the best result since Q3 2022. On a seasonally adjusted quarter-on-quarter basis, GDP declined 0.5% in Q1, compared to the previous quarter's 0.6% decrease. Q1's reading marked the smallest contraction since Q2 2023.

Looking at the details of Q4’s release, government spending rebounded, growing 0.5% in Q1 (Q4 2023: -4.4% yoy). Moreover, fixed investment growth surged to 11.1% in Q1, well above the 0.9% increase in the previous quarter. That said, household consumption fell 1.4% in the first quarter, which contrasted the fourth quarter's 0.6% expansion and came off the back of deeply pessimistic consumer sentiment, still-elevated inflation and a higher unemployment rate. On the external front, exports of goods and services declined at a quicker pace of 7.8% in Q1 (Q4 2023: -7.3% yoy), as exports of services swung into contraction. In addition, imports of goods and services contracted at a quicker rate of 6.7% in Q1 (Q4 2023: -3.6% yoy).

The economy is forecast to rebound overall in 2024: Domestic demand will underpin the recovery, with private spending, public consumption and fixed investment all bouncing back this year. That said, a sluggish recovery in the Nordic economies will continue to weigh on the external sector. As a result, GDP growth will remain below its prior 10-year average of 2.4%. Faster-than-expected monetary policy loosening is an upside risk, while the delayed absorption of EU funds is a downside risk.

Analysts at the EIU commented: “Private consumption growth will rebound in 2024 as inflation moves closer to the ECB's 2% target, allowing real wages to accelerate and easing the pressure on real household disposable incomes. Government consumption will make a modest positive contribution to growth; however this impact will be limited by the government's ongoing fiscal consolidation plans. […] The main factor that will weigh on the recovery will be tight monetary policy in the euro area until the middle of 2024. This will hinder the economic performance of most of Estonia's main trading partners, keeping manufacturing and export orders subdued.”

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