Economists are divided as to whether this third quarter estimate indicates a bottoming out of the economy or not. Source: Estonia Statistics

TALLINN — Estonia’s Department of Statistics released its initial estimate Thursday that the smallest Baltic state’s gross domestic product fell to -15.3 percent.

The economic crisis appears to have bottomed out given that the decline is slightly less than the second quarter’s -16.1. Statistics Estonia asserts that the slackening decline is being caused by the slight strengthening in the country’s export markets instead of a return in domestic demand, which remains down. Of Estonia’s main export partners, Germany returned to modest growth in the second quarter, while Finland, Sweden, Latvia and Lithuania’s GDP declines abated.

Estonia’s finance ministry says the worst is over and that the economy may recover faster than expected in early 2010.

“All economic conjuncture indicators show an increase in confidence in Estonia and in Europe, for months,” 
Madis Aben, an analyst in Ministry of Finance told Baltic Reports. “The unexpected faster recovery in external environment should lead to the rise in the economy early next year.”

Swedbank analyst Maris Lauri says a definitive turnaround is being held back primarily by domestic demand.

“These facts confirmed our opinion, that the economy already hit the bottom in second and third quarter, and that the weakness of domestic demand , especially private consumption, holds back the growth of economy,” Lauri told Baltic Reports. “In other areas we can see clear signs of improvement. Investments with the support of EU funds are growing, corporate stock has stabilized and exports have increased since the spring, although slowly.”

Pessimism abounds

However, other economists at Estonia’s largest banks warned against expecting a full recovery anytime soon, given that export markets are only marginally rejuvenating and domestic demand is moribund. Sampo Bank argues that a sluggish economy is here to stay for at least a couple years, given that lack of cash inflow to the domestic economy. The country’s Scandinavian-dominated banks have restricted credit and the government is implementing austerity measures to avoid deficit and qualify for eurozone entry, foregoing a large Keynesian fiscal stimulus that several Western countries have opted for.

“We see few signs of relief in the economy,“ Violeta Klyvienė, Sampo’s senior Baltic economist told Baltic Reports.

While the finance ministry argued that the bottom has already been reached, some analysts have not ruled out a “w” double dip recovery.

“The weak domestic demand and external demand undermine Estonia’s economy,” Sander Klaos, the head of Nordea’s credit analysis department, told Baltic Reports. “The recession rate is still high, and we are expecting further fall quarter by quarter.”

SEB analyst Ruta Arumäe cautioned optimists that the fourth quarter’s GDP could drop further.

“The growth in exports was not strong enough and the domestic demand continues to decline,” Arumäe told Baltic Reports. “The bottom of the economy is estimated in the third or fourth quarter.”

— Baltic Reports editor Nathan Greenhalgh contributed to this article.