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Recession arrives in Estonia

  • 2008-08-13
  • By Mike Collier

UNWELCOME VISITOR: Now in Estonia, recession will soon cross the border into Latvia (Photo: Mike Collier)

TALLINN - It's been a long time coming, but it's here at last.

Official data confirm that Estonia is the first of the Baltic states to officially go into recession in the wake of the 'credit crunch'.

Statistics Estonia on Aug 13th confirmed that the economy contracted by a seasonally adjusted 0.9% in the second quarter (Q2) of this year, following a 0.5% contraction in Q1, thus fulfilling the widely-accepted definition of recession as negative growth in two consecutive quarters.

In the wake of the news, analysts lined up to offer a gloomy prognosis.London-based Capital Economics said "GDP is now falling at an annual rate of 1.4%. But perhapsmore significantly, two successive quarters of negative growth mean that Estonia has now entered a technical recession."

And according to Capital, Latvia will soon join Estonia as a fully-paid up member of the recession club: "The Latvian economy grew by just 0.2% y/y in Q2. This appears consistent with a contraction in seasonally adjusted GDP of 1.5% q/q, the first quarterly fall since 1998. But it's only a matter of time before Latvia joins Estonia in recession."Capital lays the blame for the Baltic downturn on two main factors - the bursting of theproperty market bubble and a sharp decrease in consumer spending.

"What's more, there are three good reasons to think that things will get worse before they get better," said Capital's Neil Shearing in a bulletin released soon after the Estonian data were made available.

"Firstly, labour markets have yet to react to the slowdown in the first half of 2008. The unemployment rate has actually fallen in Latvia and Lithuania and has remained flat in Estonia. But surveys point to a rise in unemployment over the coming months," Shearing said.

"Secondly, the growth outlook for the euro-zone has deteriorated in recent months. Since exports to the euro-zone account for roughly 15% of GDP in the Baltics, this could hit manufacturers in the region hard... it is becoming even more difficult for the region to rebalance towards net exports," Shearing continued.

"Finally, external financing conditions are likely to become more difficult over the coming year, as global liquidity dries up. This will make it much harder for the region to fund its huge current account deficits. As a result, these deficits will have to shrink, and this requires a further contraction in domestic demand," he concludes."The upshot is that we expect the region to enter a deep and protracted recession."

Danske Bank's Baltic specialist Violeta Klyviene concurred with Shearing's assesment, describing the Estonian GDP data as "even lower than our already bearish expectation."

"Obviously, the numbers are bad, as they confirm that the slowdown in the Estonian economy is continuing. Furthermore, the speed of adjustment is significantly higher than was expected just half a year ago. The Estonian economy is clearly sliding into recession, and the economy will slow further rather than rebound."

"In sum, we expect negative growth for 2008 as a whole of around -1%. Meanwhile, all indicators suggest that a pronounced slowdown is also under way in the other two Baltic economies."

It will come as small consolation to Estonia that being the first Baltic country to go into recession makes it more likely that it will also be the first to emerge into sustainable growth. But with Latvia teetering on the edge of the precipice and Lithuania only starting to experience the first signs of a slowdown, if Estonia can weather the storm it could emerge with a significant economic headstart over its neighbors and competitors.