Leading The Baltic Slowdown
Our call for the Baltics to underperform Central Europe (CE) appears to be gaining traction, with real GDP growth decelerating in all three Baltic economies in Q114, compared to expansions across CE. Estonia is leading the Baltic slowdown, with flash estimates from the statistics office indicating a surprise 1.9% year-on-year (y-o-y) contraction of real GDP in Q114, the first decline since Q110. We have revised down our forecasts for real GDP growth in 2014 and 2015, from 2.0% and 3.3% to 1.2% and 2.8% respectively, well below European Commission and IMF estimates.
Although a detailed expenditure breakdown is not yet available, high frequency indicators imply that weak external demand remains the main drag on growth. Nominal export growth to Finland and Sweden, which together accounted for 32.9% of Estonia's export market in 2013, contracted by 15.1% y-o-y in Q114. We also believe that fixed investment remains subdued in light of weak industrial production and export readings.
While exports to Russia (11.4% of total in 2013) grew by 4.0% y-o-y in Q114, we do not expect Russia to be a source of export growth in the coming years. Stagnation in the Russian economy will negatively affect Estonia via other channels, including as a drop-off in transit trade and cross-border investment activity.
|Sharp Decline In Q1|
|Estonia - Real GDP Growth, % chg y-o-y|