OREANDA-NEWS. August 21, 2012. Estonia's economy grew by 2% in annual terms in the second quarter and by 0.4% from the first quarter. A slowdown in growth in Europe is largely due to problems with public finances in several countries. However, the sovereign debt crisis has not affected Estonia much. The uncertainty in the external environment has dampened external demand, thus slowing also export growth, but this might not be perceptible to many people. Wage growth continues and unemployment keeps shrinking. Estonia's economic confidence indicator is still above the historical average, even though confidence in the euro area is generally low.

Private consumption in Estonia has not been hit by the weak external environment and continues to support growth. However, in the past few years people have been more cautious in their consumption decision than they used to be before the crisis. Apart from increasing consumption, households have expanded their financial buffers. Domestic demand is supported also by favourable interest rates.

Yet economic growth cannot rely merely on domestic demand for long. To speed up growth, external demand and export growth should recover first, but the economic activity in Europe has remained subdued in the past months.

Estonia's economic development in the first half of 2012 was generally in line with the Eesti Pank's forecast. The forecast relies on the assumption that euro area governments take steps to ease the crisis and the external environment will thus start to recover gradually in the second half of the year. The spring forecast of Eesti Pank expects a 2.6% growth for this year.