Finance ministry: Economic recovery uneven across fields of activity

The 'super-ministry' building in Tallinn, home of the finance ministry and several others.
The 'super-ministry' building in Tallinn, home of the finance ministry and several others. Source: Siim Lõvi /ERR

There are extensive disparities between various fields of activity behind the first quarter of 2021's fast economic growth, Madis Aben, analyst at the fiscal policy department of the Estonian Ministry of Finance, said on Monday.

Data from Statistics Estonia shows the gross domestic product (GDP) grew by 5.4 percent year on year in the first quarter of 2021, the GDP at current prices was €6.9 billion.

"Behind Estonia's fast economic growth in the first quarter are the relatively relaxed business activity and movement restrictions as opposed to other European Union countries, the good adaptability of the economy and the stabilizing activity of the government sector, especially through the healthcare sector," Aben said in a statement.

However, he said that development has been uneven across the fields of activity of the private sector. "Economic situation indicators show fast improvement of confidence in industry and construction, while, according to surveys, consumers are still careful," the analyst said.

Aben added that, in connection with the suspension of foreign tourism a year ago, all sectors serving tourists are still in a depressive state. As the share of these activities in the economy is small -- accommodation and catering made up less than 2 percent of GDP in 2019 - Aben said this will not affect aggregate figures much.

"While in the economy as a whole, the salary fund in the first quarter was at the level it was at the beginning of last year, then in accommodation and catering, it was nearly 30 percent smaller. Together with art and entertainment, accommodation and catering are one of the few fields where the decline in income from employment at the beginning of the year worsened compared with the average of last year," he said.

Aben said that in addition to public sector activities, economy was supported in the first quarter also by information and communications, real estate and the finance sector, as is tradition. "The fast growth of the real estate and finance sector is ensured also in the following quarters by an active real estate market, which is fed by both the savings many have accumulated during the crisis as well as the release of pension assets. Declining demand for commercial real estate will likely enable the construction sector to satisfy the increased demand for residential real estate and prices will stabilize after some time," he added.

The analyst noted that compared to the economic growth indicator, a different picture is provided by the registered unemployment statistics, according to which altogether 53,000 people have registered as unemployed as of the end of May, which is 23,000 more than two years ago and nearly 3,000 more than a year ago.

"For seasonal reasons, unemployment decreases in spring and this is the case right now as well. The arrival of foreign tourists, which will likely not happen until next year, is of critical importance from the perspective of people with few professional skills," Aben said. He added that Estonia lost out on €1.3 billion from foreign tourists in 2020.

"Economic growth in the second quarter is likely to be significantly higher than in the first quarter, but it is feared that growth will remain uneven," the analyst said.

LHV analyst: All prerequisites for economic boom have been created

LHV economic analyst Kristo Aab said the Estonian economic environment is significantly more active compared to the same period last year and all the prerequisites for an economic boom have been created.

"When compiling economic forecasts at the end of last year, the most common view was that in the first quarter of this year, the total volume of the economy should remain at a similar level or decrease slightly on an year-on-year basis. This was supported by the fact that the spread of the virus was on the rise again and there were a number of restrictions on economic activity in the country, which there was no reason to think about a year earlier," Aab told BNS.

The monthly economic indicators published in April and May were rather positive, but Aab said that such rapid economic growth was nowhere to be seen.

Aab said that approximately half of the economic growth came from significantly higher product tax receipts. "This could partly be predicted because in the first quarter of last year, the receipt of fuel excise duty was reduced by the replenishment of inventories made a quarter earlier in order to avoid the additional cost of the mandatory biocomponent added from the beginning of 2020," he said.

However, most of the improved tax revenue is due to the significantly more active economic environment than last year. Revenue from VAT increased by about a fifth, while revenue from excise duties increased by as much as 28 percent.

Of the activities, information and communications, financial and insurance activities and trade contributed to economic growth. "The stronger impact of retail trade on GDP growth will emerge in the second quarter of this year, but recovered sales of motor vehicles already appeared in the statistics of the first quarter. For other activities, as expected, growth was close to zero or the value added created continued to decline," the analyst said.

According to Aab, the decline in construction volumes that has lasted for a year has now reached the value added of the construction sector, which decreased by 7 percent, and the manufacturing industry also showed a small minus. "Public sector activities also made a positive contribution," he added.

Aab pointed out that such strong economic growth makes one reassess the need for the state budget stimulus in the planned extent. "Growing demand and insufficient supply have already significantly raised the prices of certain construction materials -- wood, metal structures --, a massive additional stimulus to the sector could upset the balance even more and create imbalances in the labor market as well," he said.

In addition, according to Aab, the economy will be stimulated at the end of the year by approximately one billion euros of the money invested in the pension system to be flung into consumption, the full extent of which we will not see until 2022. "Thus, all the preconditions for an economic boom have been created, but the goal of the state should be to prevent booms in addition to crashes," the analyst said.

SEB analyst: Pace of economic growth came as a surprise

According to SEB economic analyst Mihkel Nestor, economic growth in the first quarter was not surprising, but the speed of economic growth was.

"The fact that the Estonian economy grew in the first quarter of this year was not a big surprise. Gross domestic product was very close to its pre-crisis level already at the end of 2020. The low reference base and strong economic indicators in the first months of this year predicted that positive GDP growth is likely," Nestor told BNS.

He added that the contribution of tax revenues turned out to be significantly higher than expected. "Among the economic sectors, there was a surprisingly large increase in wholesale and retail trade and their impact on economic growth in the first quarter, which may be related to the results of some specific companies. The contribution of the financial sector was much higher than usual as well," he said.

In his opinion, the rapid growth of the information and communication sector was more expected. At the same time, Nestor said that the economic statistics there have been strongly influenced by the software company Car.Software Estonia, which belongs to the Volkswagen group, and whose turnover exceeded one billion euros in the first quarter.

However, the analyst said that GDP growth of more than 5 percent does not coincide with the individual situation of all participants of the economy. "In the first quarter, value added decreased in two very large economic sectors - manufacturing and construction. The situation is still very difficult in accommodation, catering and entertainment, where the business climate will not improve significantly until the third quarter. All in all, however, the Estonian economy has proved surprisingly resilient in the coronavirus crisis," Nestor said.


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Editor: Helen Wright

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