Wednesday, May 13, 2009

Estonian GDP crashes!

According to flash estimates by Estonian Statistics, the Estonian GDP in the 1st quarter of 2009 collapsed by 15.6% compared to the 1st quarter of 2008. It is the fourth quarter in a row the GDP decreases and the rates are getting worse. The figure for the last quarter of 2008 was -9.7%.

And now, what will happen?

Unfortunately, it looks like it is only the beginning of a long and painful crisis. It took time for Estonian politicians to acknowledge that the country was affected and start taking measures. Now Estonia is facing one of the worst and most dangerous enemies, deflation.

Since the beginning of the year, Estonia experienced the lowest inflation rates the country has known since its independence due to food and energy prices going down mainly. In April, inflation was 0.3% and it is forecasted that deflation should reach Estonia this month already (0.2 to 0.5% deflation).

Deflation means lower prices which is basically good for the consumer as long as he has disposable money and confidence. Here stands the problem since being pessimistic about the future will postpone the purchasing act, entailing a deeper recession until people’s confidence or prices start moving the other way. That change can however take a long time.

That is the reason why many experts recommend devaluating the currency. Devaluation would be extremely tough in the short term but would bring back competitiveness to Estonia and thus allow the country to face more serenely the recession and go back to business more quickly in the long term.

Obviously, it is now a political choice as Bo Christensen, senior analyst at Danske Bank, explains it in a video.

Will the government make the choice of the euro or will they choose Estonia?

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