Bank of Estonia: Q1 2021 GDP growth could transform into boom

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The Bank of Estonia building in Tallinn Source: Siim Lõvi /ERR

Rapid economic growth in the first quarter of 2021 (Q1 2021) bears the hallmarks of a potential economic boom which might come in the latter half of this year, and is not simply the result of a comparison with a low base reference in 2020 and the downturn sparked by the arrival of the pandemic, the Bank of Estonia (Eesti Pank) says.

The growth will continue to be strong in the second half of this year as coronavirus restrictions are lifted and people rapidly return to the workplace and away from remote working, as well as visiting stores and other businesses, the central bank says.

The central bank adds that caution is needed to ensure certain economic sectors do not overheat.

Data from state agency Statistics Estonia shows gross domestic product (GDP) grew by 5.4 percent year-on-year in the first quarter of 2021.

GDP stood at 4.8 percent when working-days only are taken into account – a figure higher than both the final quarter before the coronavirus pandemic arrived – i.e. Q4 2019 – and greater even than that forecast before the pandemic struck.

Central Bank: IT, financial services main drivers so far

The IT sector, financial services and real estate were the main drivers of this growth, the bank says, as well as some public sector activities.

Value added in the industrial sector was down on the year, however.

Despite coronavirus restrictions, retail also saw strong growth, the central bank says – one possible explanation is that people are actually spending more, spread over a smaller number of retail visits, stocking up when they are in-store.

European Commission-produced findings also show an improvement in the economy, the bank says, with significant labor shortages which started to appear in the corporate sector at the start of spring and industrial capacity utilization rising to their highest level of the past decade.

All of this is more indicative of a boom than of an economy struggling as the result of coronavirus restrictions, the bank says, while corporate surveys last spring gave a much more pessimistic picture than that which later economic results actually demonstrated.

Public starting to be more mobile again

A sharp acceleration in economic growth may appear counter-intuitive, however, the central bank says, with tighter restrictions in the first quarter of this year meaning fewer people going out – a phenomenon backed by mobile data from google.

As reported by ERR News, the growth has been uneven across activities within the private sector, the finance ministry adds.

At the same time, the Bank of Estonia says that additional fiscal stimulus should be avoided, to prevent overheating in some sectors, especially as coronavirus restrictions start to be lifted and the numbers of people going to work starts to rise sharply.

The economy as a result will continue to grow in the second half of the year, and demand will also be fueled by savings accumulated during lock-down and also money released from the so-called second pillar of the Estonian pensions system, following reforms which entered into force at the start of this year.

Now would be a good time for the government to borrow, the central bank says, but the primary goal of fiscal policy is to keep the local economy stable, the bank says – failure to do so would lead to results outweighing the positives to be gained from cheap loans, the bank says.

Latvia economy contracts 1.3 percent in Q1 2021

Over the same period, i.e. Q1 2021, Latvia's economy contracted by 1.3 percent on year, the English-language portal of public broadcaster LSM reports.

High-street banks LHV and SEB have both commented that the Estonian economy has grown significantly and at a surprising rate, with all the hallmarks of an economic boom in place.

More information is available on the Bank of Estonia website here.

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Editor: Andrew Whyte

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