The Estonian economy is finally turning around after the massive decline it experienced during the crisis. Source: Statistics Estonia

TALLINN — Estonia’s economy is now the best-performing of the hard-hit but recovering Baltic states.

The Estonian economy is recovering the fastest of the three with its gross domestic product increasing year-on-year for the first time since the last quarter of 2007.

Statistics Estonia announced Tuesday that the smallest Baltic state’s gross domestic product increased by 3.5 percent in the second quarter of 2010 compared to the same period last year.

Peeter Luikmel, an economist at Estonia’s central bank said in a statement to the press that he expects the economy to continue to recover, especially in the export sector. Goods exports at current prices increased 25 percent year-on-year, reflecting the small country’s dependence on surrounding economies.

“The ability to cope with rapid changes and the competitive level of labor costs make it possible for Estonia’s enterprises to participate in the same supply chain as the companies of other Nordic countries.” he said “Capacity utilization in manufacturing is consistently creeping up, already amounting to about 70 percent.”

Luikmel said that if the production output continues to expand at the current pace, exporting enterprises will soon face the need to make additional investments in order to meet increasing demand, which could affect the country’s woeful employment numbers. However, he expects domestic demand to continue to be weak as the sale of industrial production in the domestic market is still decreasing. Although unemployment contracted in the second quarter, the income of consumers is smaller compared to a year ago.

“Another factor inhibiting consumption is that the price level has lowered less than the wage level. Investment activity is also sluggish. Most of companies have still plenty of underutilized production capacity, which means there is no need to make rapid investment,” Luikmel said.

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