TALLINN - Analysts and Ministry of Finance officials put on brave faces after the release of new figures showing that Estonia's gross domestic product shrank in the second quarter of 2008 meaning the country is now in recession.
Statistics Estonia on Aug 13th confirmed that the economy contracted by a seasonally adjusted 0.9 percent in the second quarter of 2008, following a 0.5 percent contraction in the first quarter. This fulfills the widely-accepted definition of a recession of negative growth in two consecutive quarters. The Estonian economy has contracted by 1.4 percent from 2007.
Stefan Anderssen, an executive and analyst at the investment bank Evli, said that although the figures looked grim, they don't actually accurately reflect the full picture. "In order for unemployment to rise, it is quite clear that wage raises will be held dramatically," Anderssen told The Baltic Times.
Anderssen believes that the majority of Estonians will continue to enjoy a high standard of living despite the problems that companies are facing.
"The Estonian problem is over investmentâ€¦ For the population in general I think the high flexibility in the Estonian economy will down unemployment down," he said.
Risk capitalist Steve Jurvetson believes the entrepreneurial spirit of Estonians would help the country weather this storm.
Speaking to Eesti Ekspress, he said that the conditions in Estonia remain exactly the same as six months ago 's with the country a member of the EU and the World Trade Organisation 's and that the current economic position will not matter in ten years.
Meanwhile, the Ministry of Finance insisted that the country was not yet in recession.
"The negative economic growth of the second quarter was to be expected, and the economy is expected to improve in the beginning of the coming year," a ministry spokesman wrote, according to the Web site arileht.ee.
Statistics Estonia has switched to the chain-linking method of calculating economic growth. The new method enables the company to measure economic activity more accurately and ensures better international comparability of data.
Compared to the first quarter, the GDP, chain-linked by the reference year 2000 and seasonally and working-day corrected, decreased by 0.9 percent.
According to their analysis, the fall in GDP was caused by the decrease in value-added manufacturing, the wholesale and retail trade, the transport and storage sectors, and energy and real estate activities.
Reduced domestic demand led to a decrease in orders of manufactured goods.
There was also a drop in production of food wood and building materials
Domestic demand was a reason for the decrease in the value-added of wholesale and retail trade activity as well. There has also been a collapse in the sale of automobiles.
The only good news is that the fall in the energy sector has been tempered by imported electricity.
The financial services industry has also been badly hit. It is now in free fall.
The rise in the cost of borrowing and the collapse of the housing market both contributed to the situation.
Fast deceleration in the growth of the value-added of financial intermediation, which had started in the first quarter, continued. Real growth of the value-added decelerated due to the slowdown in financial and interest income and fees and commissions income. The increase in interest rates on loans also contributed to the decline.
The revised GDP for the second quarter of 2008, calculated by the uniform method, will be published by Statistics Estonia on September 8, 2008.
The Financial Times in the U.K. reports that the downturn in Estonia has hampered the country's reputation in Europe.
A recession is defined as two consecutive quarters of negative growth.
Policymakers in both Latvia and Estonia are now scrambling to revise their economic forecasts downwards and balance budgets that are set to go into the red because of falling tax revenue.