GDP contracts at a slower rate in Q3

Economy continues to decline but at a softer pace: GDP fell at a slower pace of 0.6% year on year in the third quarter on a seasonally and calendar-adjusted basis, easing from the 1.1% contraction recorded in the second quarter and marking the best performance in two years. The outturn was the tenth consecutive decline and was largely due to a prolonged malaise in domestic demand. On a seasonally adjusted quarter-on-quarter basis, the economy stagnated, deteriorating from the previous period's 0.1% rise.

Domestic demand deteriorates: Domestically, private consumption and fixed investment were the chief drags on the Q3 reading. Household spending contracted 2.1% in Q3 (Q2: -1.1% yoy), marking the steepest decline since Q2 2023, as the unemployment and inflation rates accelerated from Q2. Additionally, fixed investment contracted 15.2% in Q3 (Q2: +8.3% yoy), marking the worst reading since Q2 2022. Falling public and private outlays on buildings and structures made the largest contribution to Q3’s plunge. More positively, public consumption accelerated to a 1.4% increase in Q3 (Q2: +1.2% yoy). On the external front, net trade contributed to overall GDP for the fourth consecutive quarter. Exports of goods and services grew 0.1% year on year in the third quarter (Q2: -1.0% yoy), marking the first expansion in two years. Conversely, imports of goods and services declined 1.3% in Q3, deteriorating from Q2’s flat reading.

GDP to rebound in Q4 2024: Our panelists have penciled in a slight rebound in annual GDP growth in Q4 and an acceleration through the end of next year. Over 2025 as a whole, the economy should return to growth on the back of recoveries in private spending, fixed investment and exports. Monetary policy easing by the ECB and recovering EU demand will provide key tailwinds to the economy. Downside risks include weaker-than-expected EU growth in light of protectionist U.S. policies.

Panelist insight: EIU analysts said: “Despite continued economic weakness highlighted in the third-quarter data, we expect the Estonian economy to turn a corner in 2025. The vast bulk of mortgage holders in Estonia have floating-rate contracts and will benefit from lower interest payment burdens as the European Central Bank eases monetary policy further in 2025. Lower inflation will bolster real household incomes, while exports will benefit from rising euro zone demand. A ceasefire in Ukraine, something that has become more likely since the election of Donald Trump in the US, would also have the potential to bolster Estonia’s appeal to investors and tourists once again.”

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