TALLINN - Estonia's economy grew 9.8 percent in the first quarter of 2007, continuing its second-best performance in the EU after neighboring Latvia, the Statistics Office announced June 11. Growth was fueled by robust domestic demand, particularly in the manufacturing, trade, transportation and banking industries. Once again quarterly imports outpaced exports, pointing to persistent discrepancies in the current account deficit. At constant prices GDP totaled 54.3 billion kroons (3.5 billion euros), the Statistics Office said.
On June 7 the office announced that consumer prices rose 5.7 percent year-on-year as of the end of May, while monthly inflation reached 0.7 percent, the highest in the Baltics.
Inflation is expected to continue rising after the government recently approved a number of mandatory excise taxes needed for conversion with the EU. Analysts have revised forecasts for 2007 to over 6 percent.
Housing expenses expanded 13.8 percent over the year, while food and beverages grew 7.8 percent, according to the office.
Danske Banke said in a research note that the rise in inflation "moves the country further away from its goal of adopting the euro." The bank's analysts strongly recommend hedging exposure to the Baltic markets.
Estonia's economy grew 11.4 percent in 2006, giving rise to fears of overheating, which could entail an eventual collapse of the economy. In the meantime, the high inflation plus wage growth is eroding away at exporters' competitiveness.
The Finance Ministry stated that the economy would continue to slow in the second quarter due to lower sales forecasts in the trade and retail sectors and smaller orders for construction companies.
Maris Lauri, an analyst with Hansabank Markets, said GDP growth would likely fall below 9 percent for the year.
"The growth of domestic demand proved as strong as expected, but more moderate than at the end of last year," said Lauri.
"The reason for this is a slowdown in investment growth. The strongest negative impact on economic growth, however, came from the modest increase in exports and continued rapid growth of imports," he added.
Last year Estonia had the second highest current account deficit in the EU, behind Latvia.
Changes in productivity and profits were also apparent from first quarter data, analysts said.
"What was definitely positive was that productivity growth has picked up again even if it still does not match wage growth," said Lauri. "The growth in profits of enterprises appears to have been checked very sharply'swage gains mean growth of expenses, and directly transferring them to sales prices is not always possible," he explained.
Meanwhile, the Labor Market Board announced on June 8 that unemployment fell 16 - 19 percent year-on-year and that total unemployment in the Baltic state was now 2 percent of the working age population.
As usual, joblessness was highest in the Valga and East Viru counties (4.7, 4.6 percent respectively) and lowest in the Tallinn and Tartu areas.
