Estonia Government Consumption (ann. var. %)

GDP records sharpest contraction since Q2 2020 in Q4

GDP declined at a more pronounced rate of 4.1% year on year in the fourth quarter, below the 2.9% contraction logged in the third quarter. Q4’s reading marked the worst result since Q2 2020.

On the domestic front, the deterioration came on the back of weakening consumption. Private spending contracted 1.9% in Q4 (Q3: -0.8% yoy); household purchasing power declined in the quarter as inflation increased at more than twice the pace of wages. Additionally, public consumption fell 1.3% (Q3: +0.6% yoy). More positively, fixed investment growth picked up to 13.1% in Q4 from the 1.7% increase recorded in the previous quarter, likely supported by EU funding and Estonia’s key information and communications sector.

Meanwhile, the external sector suffered from slowing external demand that plagued most of Europe: Exports of goods and services fell 6.5% on an annual basis in the fourth quarter, which contrasted the third quarter’s 4.4% expansion. In addition, imports of goods and services growth moderated to 3.3% in Q4 (Q3: +6.0% yoy), pointing to sluggish domestic demand.

In turn, on a seasonally adjusted quarter-on-quarter basis, economic activity dropped 1.6% in Q4 from the previous quarter’s 1.3% contraction. Q4’s reading marked the fourth consecutive quarter of negative growth and a deepening recession.

Looking ahead, our panel continues to see the economy contracting through Q2 2023. Persistent headwinds from elevated price pressures, tighter monetary conditions and a gloomy external landscape amid Europe’s slowdown will stifle economic activity. As such, the economy in 2023 should post one of the weakest GDP figures in the Euro area as a whole. However, a strong rebound is penciled in for 2024. European energy prices, the global economic outlook and additional spillovers from the war in Ukraine are key factors to watch.

Analysts at Swedbank commented on the outlook:

“[We] expect that the opportunities for economic growth will improve in the second half of the year, and that annual GDP in 2023 will remain at the previous year’s level, in real terms. Slowing inflation will result in a recovering purchasing power, while the expected improvement of foreign demand will favor local enterprises that participate in the export-sector value chain. Although we expect that Ukrainian refugees will contribute less to the Estonian economy than local residents, their large number will add to the creation of value added and to final consumption.”