Estonia Fully Enters Recession In Q2 2008

Estonia's economy contracted the most in almost 14 years in the second quarter of 2008, becoming the second European Union economy to enter formally enter a recession since the start of the global credit crunch. Estonia's economy contracted by 0.9 percent from the previous quarter, following a 0.5 percent decline in the January to March period, according to preliminary data from the Tallinn-based statistics office last Thursday.



Gross domestic product shrank an annual 1.4 percent, the biggest decline since the third quarter of 1994. This is Estonia's third recession since regaining independence in 1991. The last one was in 1999 after exports to Russia collapsed the debt default there.



A sudden drop in consumption and falling real estate investment have been pressuring all three Baltic economies (Estonia, Latvia and Lithuania) since the middle of 2007. In addition severe labour shortages fuelled by a certain degree of out-migration coupled with long term low fertility has turned a dificult situation into an extremely complicated one.

Estonia's unemployment rate fell to a 16-year low in the second quarter, keeping pressure on employers to raise wages even after the Baltic economy entered a recession. The rate declined to 4 percent, the lowest since the second quarter of 1992, from 4.2 percent in the first quarter, according to the latest data. Estonia's jobless rate has dropped steadily since European Union entry in 2004. The decline in unemployment, which usually lags changes in economic growth, will almost certainly reverse somewhat in the coming quarters, but Estonia's underlying demography means the unemployment rate may not rise as much as many suspect, and one indication of why this may be is to be found in the latest data, since the statistics office point out that the main reason for this most recent decline has been the fact that more jobless people have been retiring. In fact the number of employed persons was the samein the second quarter as in the first quarter (657,000).

Estonia's labor force declined by almost 10,000 in Q2 from a year earlier to 683,900, with the number of jobless falling by 7,700 to 27,300, the office said. The number of live births fell dramatically in Estonia from the late 1980s, effectively halving by 1998 from a decade earlier. Labor supply has declined further after the opening of the labor markets of wealtier western European countries to Estonians after 2006. The falling unemployment has created a shortage of workers in skilled fields and boosted wages, up 19.5 percent in the first quarter, threatening to undermine export competitiveness.

The quarterly unemployment rate, based on labor surveys, is above the monthly registered jobless rate, which rose to a 2 1/2 year high of 2.8 percent in July, as not all unemployed register themselves with the Estonian Labor Board which publishes the monthly figures.