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1. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Elina Allikalt No. 4 • 30 September 2010
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Maris Lauri, +372 6 131 202. Elina Allikalt, +372 6 131 989. Annika Paabut, +372 6 135 440.
Economic growth resumed, but recovery varies
between sectors
 With the third consecutive quarter of positive GDP growth reported in the second
quarter, annual positive economic growth also resumed after more than two years of
contraction. The growth was founded on strong external demand, while domestic
demand continued to be weak.
 Economic sectors gaining the most from the increased external demand were
manufacturing and energy supply. Several services sectors also resumed growth,
while most sectors dependent on domestic demand continued to decline (e.g.,
construction and domestic trade).
 Productivity has been growing for several quarters, reflecting large-scale cost cutting
and restructuring.
Earlier this month, Statistics Estonia reported a third
consecutive quarter of positive economic growth in
the second quarter (1.9% seas.adj.), and as a result
annual positive growth was also resumed (3.1%),
after more than two years of contraction. This
recovery was primarily based on strong export
growth due to increased demand on the main
Estonian export markets. In contrast, consumption
and investment continued to decline as domestic
demand remained weak; total domestic demand,
nevertheless, reported positive growth but only
because of a sharp growth in inventories (9% of
GDP), as companies were increasingly restocking
after two years of decline.
Despite the export-led economic growth, the
contribution of net exports turned negative after
more than two years of positive impact. Import
growth (23%) outpaced that of exports (18%) for
two reasons. First, since most of the input for
Estonia’s exports is imported (including energy and
raw materials), it is only natural that both trade
volumes increase hand in hand. But since weak
domestic demand presents no additional pressures
for import growth, the growth of goods exports
continued to be stronger than that of imports (29%
vs. 25%). Second, imports of services were up by
17%, while exports of services remained flat. This
increase in imports, however, can also be linked to
recovered goods’ exports because it occurred
mostly in freight transport and related services
(especially strong growth was reported in the sea
and road transport sectors).
Components of economic growth, 1Q 2005 - 2Q 2010
(Contributions to annual growth, percentage points)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2005 2006 2007 2008 2009 2010
Consumption Inv estment
Inv entories Net exports
GDPSource: SE
Recovery founded on manufacturing
exports
As the economic growth in the second quarter was
strongly export oriented, the recovery varied
strongly across economic sectors as well,
depending on the sector’s dependency on the
domestic market and the companies’ ability to

2. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 4 • 30 September 2010
2 (4)
adjust and restructure according to the changing
economic situation.
Structure of value added growth in selected economic
activities, 1Q 2006 - 2Q 2010
(Contributions to annual growth, percentage points)
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2006 2007 2008 2009 2010
Other
Real estate,
renting etc.
Transport,
storage,
communic.
Domestic
trade
Cons-
truction
Manu-
f acturing
annual
growth
Source: SE, Swedbank calculations
Manufacturing sales, Jan 2007 - Jul 2010
(Annual growth, three-month averages)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2007 2008 2009 2010
Domestic Export TotalSource: SE
As mentioned above, goods’ exports were up by a
strong 29% in the second quarter. Thus, the biggest
value-added growth, of 20% was registered in the
manufacturing sector, which contributed 3% to total
economic growth. Although manufacturing was one
of the rare sectors to show growth already in the
first quarter, its impact increased significantly in the
second (see chart). The strongest recoveries in
manufacturing were seen in electric and optical
appliances, wood and wood products, and metal
and metal products. The monthly foreign trade
figures show that the nominal export growth of
these product groups was 29%, 45%, and 69%,
respectively, in the second quarter. The main export
partners were Finland, Sweden, and Russia, with
export flows to those countries increasing by up to
40% in an annual comparison.
The only manufacturing sector that continued to
contract was food products, beverages, and
tobacco, due to its stronger dependency on
domestic demand developments. The
manufacturing of textile products and building
materials, which was also hit hard by slumping
domestic demand, managed to resume positive
growth in the second quarter, but only by 5%.
Manufacturing sectors, 1Q 2007 - 2Q 2010
(Contributions to annual value added growth, percentage points)
-35%
-25%
-15%
-5%
5%
15%
25%
2007 2008 2009 2010
other
transport
equipment
electrical
appliances
metals
building
materials
rubber, plas-
tic, chemicals
wood, paper
f ood,
bev erage
total
Source: SE, Swedbank calculations
Strong export growth also boosted the output of the
energy supply sector (10% annual increase) and
the mining sector (17%), which is related to the
energy sector by electricity production. However,
despite strong growth, the contribution to overall
growth of those sectors was rather small (0.4%),
due to their small share in value-added output.
Nevertheless, Estonia is the only electricity net
exporter in the Baltic region (domestic consumption
makes up about two-thirds of total production),
covering a large part of the electricity deficit in
Latvia and Lithuania, and it also exports to Finland.
As the economic activity in the other Baltic
countries continues to recover, Estonia’s electricity
exports are expected to remain strong in order to
cover their growing deficits.
The best performing services sector was financial
intermediation, growing by 11% annually and
contributing 0.4% to overall growth. The growth of
this value added was most influenced by the
increase in incomes by the banks through service
fees, but the rising net premiums of insurance
companies also played a part. Also, the real estate,
renting, and other business activities sector, which
covers the biggest share of total value added in the
economy (one-fifth in the second quarter) reported
positive, albeit marginal, growth after two years of

3. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 4 • 30 September 2010
3 (4)
decline, of 1%, thereby contributing 0.2% to the
economic recovery.
Continuously declining activities affected
by weak domestic market
Construction was among the sectors hardest hit
during the recession after the bursting of the real
estate bubble; as the second- quarter data show,
recovery to positive growth has yet to be seen –
value added in construction fell by 8%, weakening
value-added growth by 0.5%. The slump in the
domestic market has been so severe that, although
many Estonian companies are targeting more
works abroad (the share of works done abroad
increased to 9% in 2010, up from just 2-3% during
2006-2007), overall construction works carried out
are continuing to fall. While the construction of
buildings is at its lowest level since the boom years,
civil engineering construction has been much more
resilient, mostly supported by public sector projects
and EU funds. Moreover, the draft budget for 2011
includes a record share for investments (16% of
total budget, or ca EUR 1bn) with roughly one-
fourth of this targeted to road construction. As
private sector projects are to remain scarce, the
public sector will be the main driver of recovery in
the construction sector.
Construction sector, 1Q 2005 - 2Q 2010
-80
-60
-40
-20
0
20
40
60
2005 2006 2007 2008 2009 2010
Conf idence, points
Volumes, annual growth, %
Value added, annual growth, %Source: SE, DG ECFIN
The transport, storage, and communications sector,
which is rather dependent on domestic economic
activity, continued to contract in the second quarter
as well, by 3%, slowing value-added growth by
0.3%. Revenues of transport service companies
grew by 14% annually in nominal terms, with the
biggest gainers being freight transport and road
transport, growing by 18% and 21%, respectively;
all other sectors, except railroad transport, reported
growing revenues as well. Most of this growth was
supported by increased revenues from services
provided abroad, as growth on the domestic market
was much slower. Revenues in storage- and
transport-related services have been growing for a
year now, accelerating to 24% in the second
quarter.
The wholesale and retail trade sector reported
marginal 0.3% growth, supported by an increase in
wholesale trade. As roughly three-fourths of
domestic trade is done through wholesale, its
growth had a big impact on the outcome. Wholesale
trade increased in all major categories, including
food products and machinery and equipment. Retail
trade growth, as the closest indicator to private
consumption, is, not surprisingly, still negative.
Domestic trade, 1Q 2005 - 2Q 2010
(Annual growth of nominal sales)
-30%
-20%
-10%
0%
10%
20%
30%
40%
2005 2006 2007 2008 2009 2010
Retail trade WholesaleSource: SE
Sales of tourism and catering services, 1Q 2006 - 2Q 2010
(Annual growth)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2006 2007 2008 2009 2010
No of f oreign tourists Accommodation
Catering Touring serv icesSource: SE
Although value added by the hotels and restaurants
sector declined by 3%, this had only a marginal
effect on the overall economic outcome. Here as
well, the downturn was prolonged by weak
domestic demand, especially with regard to catering

4. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 4 • 30 September 2010
4 (4)
services. In contrast, the number of tourists visiting
Estonia has been record-high this year, supporting
the recovery in the accommodations sector. Other
tourism-related services, however, are lagging, as
foreigners are increasingly visiting Estonia for
reasons other than just “sightseeing” and are
tending to travel on their own, for shorter periods,
and to spend less.
Overall, the sectors that are more affected by weak
domestic demand and continuously falling private
consumption will catch up as domestic demand
starts to recover more; we see this happening by
the end of this year, but more noticeably next year.
However, export growth is expected to outpace that
of private consumption for at least a couple of
years; this, in turn, will further encourage
companies to restructure and look for new markets.
Productivity growing
The most positive data from the second quarter are
that, together with a resumption in economic
growth, productivity is continuing to increase
further, as costs are still declining. Depending on
which measure is used, productivity has been
gaining ground for many quarters. The
manufacturing sector, which was the engine for
economic growth, is leading the productivity growth
figures; even more, the nominal levels are
exceeding those seen during the highest production
years (2006-2007). This has been achieved in a
situation when, the number of hours worked has
fallen by about 30% from the peak, the production
volumes are about 20% lower. Despite harsh cost
cutting, manufacturing was the rare sector to report
an increase in investment in the second quarter (of
43% vs. a. 12% decline on average in the
economy), with the strongest increases seen in the
purchases of vehicles, computers, and other
equipment and machinery.
The number of employed, as well as hours worked,
is still decreasing in an annual comparison
(however, small seasonal quarterly growth was
reported). As positive economic growth resumed,
companies started adding working hours to those
already employed, resulting in a smaller decline in
hours worked vs. people employed (-6% and -8%,
respectively). With economic growth picking up the
pace in the coming quarters, companies will
inevitably have to start increasing employment to
meet the growing demand. This, in turn, will slow
productivity gains, even more because the biggest
cuts in costs are already behind and most of the
inevitable restructuring has already been done.
Enterprises productivity, 1Q 2006 - 2Q 2010
(Annual growth)
-30%
-20%
-10%
0%
10%
20%
30%
2006 2007 2008 2009 2010
Value added growth
Hour productiv ity
No of hours workedSource: SE
Swedbank
Economic Research Department
SE-105 34 Stockholm
Phone +46-8-5859 1028
ek.sekr@swedbank.com
www.swedbank.com
Legally responsible publisher
Cecilia Hermansson, +46-88-5859 7720
Maris Lauri +372 6 131 202
Elina Allikalt +372 6 131 989
Annika Paabut +372 6 135 440
Swedbank’s monthly newsletter The Estonian Economy is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
completeness of the report and cannot be held responsible for any error or omission in the
underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
monthly newsletter The Estonian Economy.