BMI View: Estonia n Economy Is Changing Gears
Since our last quarterly shipping report, we have marginally reduced estimated GDP growth for 2013 to 1.9% (down from 2.1% previously) but we continue to forecast a brisk recovery in 2014, with growth of 3.2%. In our view the Estonian economy is experiencing something of a gear change. Formerly propelled by growth in exports and fixed investment, the shape of growth is now shifting towards private consumption, which will prop up economic activity until external demand gradually recovers. Export growth slowed significantly in 2013, hardly surprising since we have been seeing a slowdown in just about all of Estonia's key trading partners, including Russia, Sweden, Finland, and Latvia. The slowdown in fixed investment reflects base effects: there had been a surge in public investment in 2012 as the government used the proceeds from carbon quota sales to fund construction projects. When this one-off stimulus ended in 2013 it contributed to a sharp decline in headline gross fixed capital formation.
The big driver for 2014 growth with be private consumption, supported by improving credit conditions, a healthy labour market (unemployment fell to 8.1% in Q213 - lowest in almost five years), and sings of growing purchasing power. There are also positive indications that residential construction activity may begin to pick up in the near future.
In the ports and shipping sector, competition from the new Russian Baltic port of Ust-Luga continues to be a negative for Estonia's port of Tallinn. That said, oil shipments have stopped contracting and Ust-Luga's chief executive had something of a point when he recently argued that Russian transit trade needs were growing faster than its Baltic port capacity, meaning there will still be business for Tallinn. Throughput at the Estonian port fell by an estimated 3.0% in 2013 and, we now expect it to register small but positive growth in 2014. The port authorities have claimed that a...