Consumption in Estonia

Estonia - Consumption

GDP records sharpest contraction since Q2 2020 in the third quarter

GDP contracted 2.4% year on year in the third quarter, swinging from the 0.4% expansion recorded in the second quarter. Q3's reading marked the worst result since Q2 2020, when the onset of the Covid-19 pandemic ravaged the economy. A notable drop in private expenditure, eroded by rapidly rising consumer prices, drove the contraction and outweighed a remarkable recovery in fixed investment.

Household spending fell 0.9% in the third quarter, which contrasted the second quarter's 4.9% expansion. Government consumption, meanwhile, improved moderately to a 0.4% expansion in Q3 thanks to public administration, defense and education spending (Q2: +0.3% yoy). Meanwhile, fixed investment bounced back, growing 0.2% in Q3, contrasting the 23.9% decrease logged in the previous quarter. The largest positive contributions were registered in housing spending and private-sector transport equipment.

On the external front, exports of goods and services growth eased to 3.6% in Q3, marking the lowest result since Q3 2020 (Q2: +8.3% yoy). Conversely, imports of goods and services growth sped up to 6.2% in Q3 (Q2: +3.3% yoy).

Meanwhile, underlying momentum seems to be faltering further; on a seasonally adjusted quarter-on-quarter basis, economic activity declined 1.8% in Q3, compared to the previous quarter's 1.3% contraction. Q3's reading marked the worst reading since Q2 2020.

Looking ahead, the economy is likely to continue shrinking until the second half of 2023. A deteriorating external landscape—chiefly due to Europe’s impending energy crunch over the winter—and red-hot consumer prices eroding purchasing power will see economic activity weaken further in the upcoming quarters. That said, EU funding will support investment, while Estonia’s well-developed information and communication technology sector will keep the economy somewhat insulated from elevated energy costs.

FocusEconomics analysts see the economy growing 0.5% in 2023, which is down 0.1 percentage points from last month’s forecast, and 3.1% in 2024.