Estonia's recession stopped when comparing the economy by quarter, but confidence is still deteriorating and is negatively affected by both weak foreign and credit demand, said Swedbank's chief economist Tõnu Mertsina on Monday.
Estonia's economy shrunk by 2.5 percent in the third quarter (July, August, and September) compared to the same time period in 2022. However, there was no decline compared to the second quarter of 2023, Mertsina said.
It is positive news that the manufacturing industry's production volume, export volume, and retail sales have stabilized, he said. However, there are still concerns about the energy sector which accounted for nearly half of the GDP decline in the first half of this year and continues to decrease rapidly.
"Overall economic confidence is also deteriorating. While the deterioration in confidence in the services sector, including retail trade, has stabilized at a low level, confidence in the industrial and construction sectors continues to weaken," Mertsina said.
Additionally, despite the relatively healthy labor market and wage growth, household confidence remains very weak.
"Fear of unemployment and concerns about people's financial situation remain high. People's savings are relatively large, albeit unevenly spread, but rapid inflation has slashed their real value and pushed them below their pre-pandemic trend. Also, a relatively large share of deposits, 29 percent in September, are held in fixed-term accounts, which are unlikely to be used for consumption in the near term," said Mertsina.
The slowdown in inflation and weak demand has reduced companies' turnovers, and unemployment is increasing, he added.
Low export demand is also a problem.
"The economic situation of our major trading partners is deteriorating and does not offer good export opportunities /.../ The recovery in external demand is likely to be very slow next year, but it should offer some more export opportunities for Estonian companies," stated Mertsina.
The Bank of Estonia's strict monetary policy, which has already reduced demand for credit, has not yet fully taken hold. "This restricts investment, which in turn hits economic growth," said Mertsina.
Next year, consumption should increase when salaries rise, he added.
Editor: Marko Tooming, Helen Wright