Economist: Recession broad-based and transcends sectors

A crane.
A crane. Source: Siim Lõvi /ERR

The first quarter GDP drop was to be expected, recession is broad-based and affects many sectors, Liis Elmik, senior economist for Swedbank, told ERR. But bank of Estonia analyst Rasmus Kattai described the economic situation as average rather than poor.

Statistics Estonia's Wednesday flash estimate suggests the Estonian GDP continued dropping in the first quarter of 2023, by 4.1 percent compared to the same period last year.

Liis Elmik told ERR that the flash estimate was more or less in line with Swedbank's expectations.

"The decline is broad-based and affects many sectors. Demand for goods and services is weak, with falling purchasing power holding back consumption," she said.

Elmik said that the economic situation will start to improve from the second half-year as purchasing power and demand are estimated to bounce back.

"Swedbank forecasts annual recession at 0.8 percent for this year and for growth to return at 2.3 percent in 2024," the senior economist added.

Kattai: Economic situation might be better than it looks

Rasmus Kattai, Bank of Estonia economist and head of its economic forecasts team, said that more attention should be paid to the fact that the volume of the economy did not fall compared to the last quarter of 2022.

"Several sectors have been underperforming, with the processing industry of special concern as growing production costs and raw material availability have jeopardized competitive ability on foreign markets. But looking at more sectors and various indicators, the state of the economy is average rather than poor," he said.

Kattai pointed to confidence surveys among employers but mainly the strong situation of the labor market. Eurostat puts unemployment at around 5 percent in the first quarter. Registered unemployment started dropping in March, which trend persisted in April.

The central bank economist said the economic situation is expected to start improving gradually, courtesy of purchasing power that has been heading up against since late last year, past crisis effects becoming less for companies and demand recovering in the wake of slowing inflation.

"Profits grew notably in most sectors of the economy last year, meaning that companies are better able to invest in new growth. However, it is necessary for uncertainty to be dispelled for investments to return, which is something economic policy can at least partially achieve."

Both economists emphasized that the flash estimate is preliminary and the figures will likely be adjusted in the future. Liis Elmik said that the previous year's Q4 flash estimate was adjusted by more than one percentage point.

The full GDP estimate is due May 31.

In the final quarter of last year, the Estonian GDP fell 4.1 percent compared to the same period in 2021. For the whole of 2022, GDP fell 1.3 percent.


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Editor: Marcus Turovski

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