TALLINN - Newly released data show that economic activity in Estonia is slowing down at a rapid pace, and it cannot be excluded that the economy will enter a period of stagflation, or low growth in a high inflationary environment.
The statistics office announced March 3 that retail sales in January increased 1 percent year-on-year to 4.2 billion kroons (268.4 million euros). This contrasts to a 20 percent increase recorded in January 2007.
The office said that annual growth of retail sales began slowing toward the end of the year and was at 4 percent in December.
Inflation reached 11 percent in January, forcing consumers to scale back on spending and be choosier about what they purchase.
Food sales increased by 1 percent in January, mainly due to the rapid growth in food prices, the statistics office said.
Compared to the previous month, sales in retail trade enterprises decreased 24 percent in constant prices, which is a usual fall following a spike in Christmas and end-of-year sales.
Analysts said the slowdown would continue into the future.
"Looking ahead, GDP growth is likely to slow further to less than 4 percent year-on-year in the first quarter of 2008," Danske Bank said in a statement.
The economy grew 4.5 percent in the fourth quarter, the statistics office announced last month.
"We are now also seeing a drop in property prices and tightness in credit conditions that is likely to put further downward pressure on private consumption growth," the bank said.
Indeed, bank lending is continuing to fall. Compared with January 2007, the growth in the volume of new loans issued slowed by about one half, while the annual pace of consumption exceeded 40 percent, the Bank of Estonia announced on March 3.
Borrowing activity of private individuals and enterprises was in January more modest than in previous years, the bank's chief financial sector analyst Jana Kask said.
The aggregate volume of private and corporate loans grew in January 1.3 percent month-on-month. In annual comparison, the growth rate declined to 29 percent.
Kask said that the loan repayment capability of private individuals and enterprises remains good even though the volume of payment defaults have increased due to the more challenging economic environment.
But with inflation set to continue climbing over the upcoming months, and GDP falling, Estonia could find itself in a dreadful environment of stagflation. Some analysts consider that Hungary, where inflation is close to 8 percent and GDP growth less than 1 percent, has entered a period of stagflation. The word is even being used to describe the United States' rising economic woes.
The key to preventing such a scenario depends on whether the government can stimulate export-related industries, keep budget spending and wage growth under control and boost competitiveness in key sectors.
Danske Bank has predicted that Estonia's GDP would grow by 3 percent this year. In 2006, the economy expanded by 11.2 percent.
