Uncertainty in Estonia’s economic recovery due to eurozone slowdown

TALLINN - Investors “overreacted” to signs the eurozone’s economic recovery is losing momentum, as data have yet to confirm the situation is worsening, says Estonian central bank Deputy Governor Ulo Kaasik, reports Bloomberg. Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter, the least since the region emerged from recession in 2009.
It’s too early to say whether the developments of the financial markets in recent weeks will affect the economy, Kaasik said in an interview in the Estonian capital, Tallinn, on Aug. 22.

“The euro region’s recovery has been fast, and faster than what was expected a year ago,” Kaasik said. “Now, when growth has slowed in the second quarter, it has somehow surprised the markets, which have overreacted in a negative way. In fact, we don’t have clear data showing that the situation is worsening.”
The second-quarter growth figure compared with an 0.8 percent expansion in the first quarter and a 0.3 percent median estimate of 34 economists in a Bloomberg survey.

Economic growth is slowing around the globe. The U.S. Federal Reserve this month pledged to keep interest rates near zero for another two years to bolster a recovery that’s moving “considerably slower” than expected. European policy makers are struggling to contain a debt crisis, while Japan has cut its annual growth forecast on weaker export prospects.
Given recent developments, a worse-than-expected development of the euro area’s economy can’t be ruled out as “risks are significant and there is a lot of uncertainty,” said Kaasik.

Kaasik and Madis Muller, a former fund manager with the World Bank, were appointed in May as deputy central bank governors for five-year terms, replacing Marten Ross and Rein Minka. Estonia adopted the euro in January, with Governor Andres Lipstok becoming a voting member of the European Central Bank council.
The four-week rout in equities has wiped out more than 8 trillion dollars in global stock values before central bankers from around the world prepare to meet this week in Jackson Hole, Wyoming.

Estonia’s euro adoption has had a “certain” role in boosting growth to 8.4 percent in the first half from a year earlier, the European Union’s fastest, and increasing investor confidence, Kaasik said.
The 19 billion dollar economy started expanding in the second quarter of 2010 following its deepest recession in two decades, on demand for its products from Sweden and Finland. Exports grew 43 percent from a year earlier in June, the slowest pace in four months, the statistics office said earlier this month.

Five-year Estonian credit-default swaps traded at 125 points (1.25 percent) on Aug. 19, while the spread to Latvia’s CDS has increased to 133 points from 112 points before the turmoil on global markets, according to data from CMA. The spread to Lithuania’s CDS has increased to 132 points from 110.
“Markets view Estonia more positively as the CDS spreads with our neighbors Latvia and Lithuania are increasing,” Kaasik said. “Our CDS prices have increased by a similar magnitude as those of Sweden and Finland, while Latvia’s and Lithuania’s have clearly risen more.”