Estonia’s economy recorded a modest upswing in the third quarter, with GDP growing 0.9% on the year and 0.4% on the previous quarter. The figures point to a slow but steady recovery, even as industry and retail cooled slightly from their earlier pace, said Kaspar Oja, economist at Eesti Pank, the country’s central bank, on the bank’s website eestipank.ee.

The economist says that business sentiment, however, has clearly shifted – companies still cite weak demand as their main headache, but far fewer describe the situation in the bleak terms heard earlier this year.

As reported by bne IntelliNews, Estonia has been struggling to restart its growth engine.

Public spending was the key engine of growth, the analyst says. Government consumption rose sharply, buttressed by increased public investment. Private consumption, meanwhile, slipped below last year’s level. Much of that decline appears to stem from July’s VAT hike, which prompted households to accelerate purchases into the spring and early summer. As demand normalises, household spending is expected to regain momentum.

The strain on consumption was mirrored in retail and wholesale, which delivered the steepest drag on value added. Yet detailed business statistics show a more nuanced picture: vehicle sales slumped, but other retail categories posted gains that softened the sector’s overall contraction, Kaspar Oja said.

Corporate investment weakened again, falling below the already subdued second-quarter level, with transport-related spending seeing the sharpest cutbacks. Economically, this is consistent with the phase of the cycle – firms operating below capacity rarely rush to invest. Renewed demand should eventually trigger a rebound once existing capacity becomes tight.

External trade offered a rare bright spot though. Exports outpaced imports, supported by government-driven domestic activity. Export volumes rose about 6%, far outstripping the 1.6% increase seen in manufacturing turnover. GDP data also revealed much stronger manufacturing and energy-sector performance than monthly output indexes suggested, underlining how volatile short-term indicators can be, Kaspar Oja said.

Looking ahead, domestic demand is expected to strengthen as fiscal easing boosts household incomes. This may carry inflation risks and divert resources from exporters, but high unemployment and a subdued business cycle should temper price pressures. Under such conditions, a more expansionary fiscal stance can help guide the economy back toward its long-term growth path, Kaspar Oja inferred.