Estonia’s economy is in recession

Estonia’s GDP was 1.8% smaller than a year ago in the second quarter and 2.4% smaller in the third quarter – the economy was shrinking for the second consecutive quarter, which spells recession.

The country’s central bank, the Bank of Estonia, said the Estonian economy was “shrinking quite fast” for the second consecutive quarter.

Kaspar Oja, an economist at the bank, said the impact of the crisis has been softened by people using their savings and by support from the state, but this means the buffers available to protect against further shocks in the future will be smaller.

“Even in the face of very high inflation, households have been able to use their savings to continue consuming, and private consumption in real terms fell by only 0.4% in the third quarter,” he said in a statement. “Using savings now means though that it will not be possible to use them in the future to cushion any more shocks that might happen. As household buffers have shrunk, so has their ability to soften any negative impact on the economy, and if new risks are realised, they will affect economic developments much more.”

Forest industry in Estonia. Photo by Ken Oja.

Oja noted the contraction in the economy in recent quarters is partly due to high inflation, which has mainly been caused by higher prices for commodities in international markets.

“Businesses have also been affected by changes caused in supply chains by the war in Ukraine. Corporate surveys over the past year have revealed some signs of overheating, but those have now receded, and so the decline is partly also due to domestic factors and a tightening of the capacity for growth.”

The Energy, mining, forestry and the agriculture sectors have all been hit. At the same time, value added in manufacturing and construction has increased, although the news in those sectors has mostly been bad of late, according to Oja.

Estonia’s economy contracted by 2.4% in the third quarter of 2022. By far the biggest negative contributor was agriculture.

The Bank of Estonia forecasts that Estonia will experience a small recession this year, but the economy should start to recover in the second half of next year.

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