Finnish Senior Economist: Estonia’s economy started the year with stronger-than-expected growth
OP Bank’s latest economic analysis shows that Estonia’s economy grew faster than expected in the first quarter. Although Latvia and Lithuania outpaced Estonia in terms of growth within the Baltics, Estonia stands out from its northern neighbour Finland, where the economic recovery is progressing significantly more slowly this year.
Estonia’s economy grew by 2.4% year-on-year in the first quarter and by 1.1% compared with the previous quarter. Growth was mainly supported by household consumption and public sector spending. At the same time, investment remained low and exports weighed on overall growth.
“Despite uncertainty arising from the situation in the Middle East, Estonia’s economy is set to grow at a fairly solid pace this year. Growth is being supported, among other factors, by increased public sector spending and higher defence expenditure. Although higher energy prices continue to put pressure on the economy, growth is expected to become more broad-based over the course of the year. The strong first quarter also provides grounds to expect solid growth for the year as a whole,” said Joona Widgren, Senior Economist at OP Bank.
Across the Baltics and Finland, the recovery is overshadowed by persistent price pressures, which are also affecting private consumption. While household consumption has remained modest across the region in recent years, consumer confidence in Estonia is particularly weak. This is partly due to the prolonged difficulties of the Estonian economy and the slow recovery of purchasing power. At the same time, inflation is rising again: according to OP Bank’s forecast, inflation will reach 4.0% in Estonia and Latvia this year, and 4.5% in Lithuania. In Finland, inflation remains significantly lower at around 2%.
The economic outlook is further clouded by the conflict in the Middle East, the impact of which extends beyond the region itself. Its potential effects on energy prices, supply chains and business confidence are also expected to be felt in the Baltic countries and Finland with a delay. As small open economies, Estonia and the other Baltic states are highly dependent on the external environment, meaning that rising global uncertainty may slow the recovery and make it more uneven.
“The next phase of Estonia’s economic growth will largely depend on the recovery of domestic demand. So far, households have remained cautious, but rising incomes and a stable labour market create the conditions for a gradual improvement in consumption. Domestic demand needs to become the main driver of Estonia’s economic growth,” Widgren added.