OREANDA-NEWS. May 20, 2013. The flash estimate from Statistics Estonia shows the Estonian economy growing in the first quarter by 1% year on year, and shrinking by 1% quarter on quarter.

In recent quarters the contribution of the exporting sector to economic growth has strengthened somewhat, while developments in the non-tradable sector have diverged. The construction sector declined in the first quarter, reflecting a slowdown in investment growth. In contrast the retail sector grew, showing that household consumption growth continues, which is also supported by the high levels of confidence among households. Compared to the fourth quarter 2012, the contribution of net-taxes to growth was probably more subdued in the first quarter of this year.

Growth in exports was fast in the first quarter, though the relatively weak external environment does not yet favour broad-based growth in exports. Growth in the exporting sector is also restricted by the weak economy in Europe. This is also reflected in exports by the Estonian manufacturing sector, which mainly grew in the first quarter owing to markets outside the euro area, while manufacturing exports to the euro area remained at the previous year’s level. Growth in the European economy is expected from the second half of this year.

The weak economic position of Estonia's main trading partners Finland, Sweden and Russia is a consequence of the general economic weakness in Europe. Although the expectations for growth in manufacturing in Finland and Sweden are higher than half a year ago, this has not yet had an impact on actual manufacturing output, which continued to decline in both countries in the first quarter. Russia's economic growth is additionally inhibited by the low price of exported raw materials.

Faster growth in Estonian manufacturing output than in that of the main trading partners indicates a strong competitive position for Estonian manufacturers. Accelerated growth in labour costs in manufacturing in the past year may, however, restrict the competitiveness of exports in future. As price pressure in Europe is low at present, it is difficult to pass higher costs into prices in markets with tight competition.

Eesti Pank's most recent forecast predicted that the economy will grow by 3% in 2013.