Estonia Revises Down Economic Growth to 9.8 Percent

From Bloomberg recently:

Estonia Revises Down Economic Growth to 9.8 Percent

Estonia, the European Union's second fastest growing economy, revised down its economic growth rate in the first quarter to an annual 9.8 percent as the property market cooled and export growth slowed.

The pace of growth was revised from the preliminary estimate of 9.9 percent released May 15, the Tallinn-based statistics office, Statistikaamet, said on its Web site today. The annual rate was the slowest in two years. The Baltic country's economy grew a revised 10.9 percent for the previous three months.

``Domestic demand weakened mainly due to slowing investment growth, even as the warm winter benefited construction,'' Maris Lauri, the chief economist with Hansabank Markets, said in e- mailed comment. ``The worst hit came from modest export growth and continued strong import rise.''

The $15.1 billion economy is poised for a ``soft landing,'' according to the central bank, after rising house prices and higher interest rates slowed growth in the property market in the first quarter and banks including the Baltic region's biggest lender AS Hansapank set stricter mortgage lending criteria.

Unemployment at a 15-year low and a 20 percent increase in wages during the first quarter are still boosting spending power and pushing up inflation, which stood at 5.7 percent in May and forced the government last month to postpone its target for meeting euro-adoption criteria to 2011.

May Overheat

Estonia's inflation and widening current account deficit, at 14.8 percent of GDP in 2006, increased worries among foreign investors and credit agencies earlier this year that the Baltic economy may overheat, similarly to that of neighboring Latvia, and trigger a sharp decline in the growth rate.

``Strong consumer demand coupled with a slowdown in export growth means the external balance is likely to have worsened this quarter,'' Neil Shearing, an economist at Capital Economics in London, said in e-mailed comment. ``We want to see signs that consumption is starting to ease before signaling the all clear on overheating.''

The Finance Ministry said it expected the economy to slow further in the second quarter because order books in construction are declining, retail and service industries are forecasting lower revenue growth and consumer optimism has ``slightly'' declined. A ``consumption boom'' will still persist ``in the near term,'' the ministry said in an e-mailed comment.

Increases

Private consumption jumped 18 percent, the biggest increase in 14 years, according to the ministry. Gross fixed capital formation, which includes investment and stock-building, also increased 18 percent, slowing from previous two quarters. Exports of goods and services grew 5 percent from a year earlier, while imports rose 11 percent.

Exports slowed most in fuel shipments and electronics, the Finance Ministry said. Analysts, including Lauri from Hansabank Markets, have said the decline in electronics trade is due to rising wages which are forcing companies such as Elcoteq SE, a Finnish contract manufacturer with a factory in Tallinn and Estonia's biggest exporter, to move its high-volume production to lower-cost countries.

Latvia's economy grew a revised 11.2 percent in the first quarter, the fastest pace in the European Union. Lithuania's economy grew 8.3 percent.