Estonia's Q2 GDP Falls 16.6 Percent, but Fall is Slowing

UNCLAS TALLINN 000245 SIPDIS FOR EUR/NB E.O. 12958: N/A TAGS: ECON EFIN ETRD PGOV EN SUBJECT: Estonia's Q2 GDP Falls 16.6 Percent, but Fall is Slowing ¶1. According to Statistics Estonia, Estonia's GDP fell 16.6 percent year-on-year in the second quarter in 2009. Most of the decrease can be explained by reduced manufacturing, construction, wholesale trade, and financial intermediation. The good news is, the drop in GDP seems to be slowing. GDP fell by 3.7 percent quarter-on-quarter, compared to 6.1 percent in the first quarter of the year. Analysts at two of Estonia's largest banks, SEB and Swedbank, expect the GDP decline to level off in the third quarter. SEB predicts that while cuts in government spending will put downward pressure on GDP this quarter, this pressure could be alleviated by a slight increase in consumption. ¶2. Statistics Estonia also released Q2 job figures, which show that unemployment worsened, but at a decreasing rate. Unemployment for the quarter was 13.5 percent, compared to 11.4 percent in Q1. However, Q1 saw 26,000 people lose their jobs, compared to 13,000 newly unemployed in Q2. Officially, Estonia now has 593,000 employed persons, and 92,000 unemployed. Employment levels fell the most in the construction field, where one in three workers lost their jobs, while employment grew slightly in the manufacturing sector. Underemployment also increased, from 3,000 people at the beginning of the year to 15,000 at the end of Q2. ¶3. Comment: The Prime Minister continues to stress that the GOE's main goal for the near future is to meet the Maastricht Criteria to join the Euro zone. Estonia hopes to be allowed to adopt the Euro on January 1, 2011. Estonia is doing well on most of the criteria, but the declining GDP is making it hard for the government to keep its annual deficit below 3 percent. Having run budget surpluses for most of the decade, Estonia has already had to cut government spending twice this year and raise VAT to try and limit the annual deficit. Swedbank believes that a third round of budget cutting, reducing at least another EEK two billion [USD 182.5 million], will be needed. So far, polling indicates the majority of Estonians support the PM's plans to join the Euro, though this support will be tested in the run-up to local elections on October 18. DECKER