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Expert: Given Estonia's high inflation rate, economic recession is modest

Kaspar Oja.
Kaspar Oja. Source: Bank of Estonia

Estonia's GDP fell by 2.4 percent in the third quarter compared to the same period last year. Kaspar Oja, senior economist at the Bank of Estonia (Eesti Pank), said that the drop was rather modest given the rate of inflation. He anticipates that the economy will resume growth by the middle of next year.

Oja told ERR that based on quarter-to-quarter growth, we have been in a fairly steep decline for two quarters in a row, starting in the second quarter.

"This is the result of both high inflation and supply chain problems. The branches of the industrial sector that used to import raw materials from the east especially stand out in this respect," Oja said.

"However, the slowdown is a result of the economic cycle, as evidenced by the fact that corporate assessments of economic indicators were relatively optimistic until recently, indicating that the economy was heating up. These indicators had reached the typical level for the current economic cycle by the beginning of the fourth quarter," he explained.

Oja said that the current decline of 2.4 percent should not be over-interpreted as the underlying dynamics in the various economic sectors are sometimes rather unexpected.

However, he said that value added in agriculture, forestry, mining, and energy fell significantly in the third quarter, despite the fact that these are the sectors that, given the circumstances, should have grown rather well as prices rose and competition from the east waned.

"Manufacturing and construction GDP increased during the same time period, despite the fact that these are the sectors about which we hear bad news on a daily basis. Because of rapid market fluctuations, it is difficult to summarize GDP, and I would not place too much emphasis on a single number," expert emphasized.

What is more important, he said, is to examine what has happened across various sectors. There have been reports of layoffs in the manufacturing sector, real export volumes have fallen in recent months and overall economic indicators point to a difficult situation.

"It is also worth noting that, based on this quarter's data, the recession has been relatively mild when compared to the rate of inflation. This was aided by the fact that households have buffers, i.e. substantial savings that have now been depleted," Oja explained.

He added that because these "buffers" are already limited, they will be unable to protect against future difficulties. As a result, the Estonian economy is now more vulnerable than it was at the beginning of the year.

Oja said that we will likely exit the recession soon and resume economic growth around the middle of next year. However, risks are higher today than they were in previous similar situations.

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Editor: Kristina Kersa

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