Recovery More U-shaped than V-shaped
In our last quarterly report, we spoke of a V-shaped recovery in Estonia. Three months on, we are less optimistic: it is beginning to look more U-shaped. If 2013 was the bottom of the cycle, with GDP growth of only 0.8%, we are less convinced there will be a sharp acceleration this year. We are now forecasting 2014 growth of 2.0% (down from a predicted 3.2% last quarter). Various factors explain this downward revision. The Estonian economy is very open, and the export led recovery is proving to be more sluggish than hoped. While strong external demand has yet to make itself felt, domestic consumption is filling the gap, supporting a rather more modest growth curve. The speed of the recovery has also been held back by a couple of one-off factors. One is the conclusion of a public investment programme supported by European union structural funds. Another is the diversion of Russian transit oil flows away from Estonian ports, a process which began in 2011 and which we believe is now bottoming out. Investment will make a positive contribution to 2014 growth, although it will remain relatively small. We are more optimistic for 2015, when we see GDP growth beginning to pick up pace with expansion of 3.3%.
In the ports and shipping sector, as mentioned, competition from the new Russian Baltic port of Ust-Luga has been a negative for Estonia's port of Tallinn. But oil shipments have stopped contracting and Russian transit trade needs have recently been growing faster than its Baltic port capacity, meaning there will still be business for Tallinn. Throughput at the Estonian port fell by an estimated 4.2% in 2013 and, we now expect it to register small but positive growth in 2014. The port authorities have claimed that a policy of diversification will eventually begin to pay off: we expect moderate growth in container activity levels in 2014.
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