Inflation continued to accelerate in August as the prices of natural gas and electricity hit new records. Now competitiveness is at stake. Data published by the Bank of Estonia show the consumer basket was 24.8% higher in price in August than a year earlier. Half of the inflation was caused by energy prices, as electricity prices were 206% higher than a year earlier, while natural gas prices were up 244%. And higher prices for food commodities and higher processing costs are feeding increasingly into the retail prices of food, while inflation for food prices increased to 21% in August. Prices for services have mainly risen because demand has been very strong. The tourism sector has recovered after the Covid restrictions were released as households can use the savings they built up earlier for traveling. Costs have risen for tourism companies also thanks to the higher fuel prices being passed through into transport prices. The rental market has also exited its pandemic slump. Rents were up 29% over the year in July in Estonia, which was the largest increase in the Euro Area.
As the rate of growth in the Estonian economy has slowed, companies are finding it harder to raise prices. Rapid wage growth and high energy prices are causing strong cost pressures for businesses. Again, the Bank of Estonia shows that gross domestic product in Estonia was up 0.6% over the year in the second quarter but was down 1.3% in the first quarter when seasonally adjusted. The sharp rise in energy prices over the summer makes it probable that the economy will enter a recession in the second half of the year.
The Euro Area economy remained in good shape in the second quarter, but the future outlook for foreign demand has become more pessimistic than it was in the first half of the year. Although Estonia’s foreign trade measured in euros increased in the second quarter, the growth was affected by the persistently high inflation caused by rising prices for energy, fuels, and commodities. Exports of goods and services increased by 29% and imports by 20%. For manufacturing companies, the capacity utilization was relatively high, meaning that output volumes are high given the equipment available to producers. The assessment by manufacturing companies about the current situation in Europe as a whole has deteriorated. Across sectors, the long-lasting trend continued in the second quarter with IT and business services contributing more to growth in the economy. The hotel and restaurant sector also grew fast as it recovered from Covid. Energy, mining, and manufacturing made an unexpectedly negative contribution to economic growth though.
High inflation, the war in Ukraine, and the gradual application of sanctions on Russia have boosted uncertainty in goods markets. Goods exports increased by 27% in the second quarter despite all this, though this figure was partly affected by high inflation. In the second quarter, the groups of goods with the largest exports were mineral products, and wood and wood products, while exports of machinery and equipment, and metals and metal products declined a little. Imports of goods were around one-third more in the second quarter than a year earlier. Trade with Russia also continued. Imports of mineral fuels were around 60% of the goods imported from Russia, and imports of wood products were one-fifth. The impact of sanctions on trade with Russia will start to become apparent in the second half of the year.
The sanctions affect international trade in services as well, especially through the restrictions on land, sea, and air transport, but this did not yet impact the overall picture of trade in services in the second quarter. Balance of payments data shows that exports of services at current prices were up 32% in the second quarter. The biggest contribution to the growth came from travel services, which recovered strongly from the pandemic. Telecommunications and computer services and other business services also continued to make a major contribution to the growth in exports of services. Exports of transport services were down a little in the second quarter. Imports of services continued to be affected by the high reference base caused by a one-off transaction, and so imports of services were 15% less than a year earlier.
The current account was in deficit to a small extent in the second quarter, by 0.3% of GDP. The surplus in the services account gave support to the current account, but the deficit in the goods account was larger than in previous quarters. Weaker demand in foreign markets, the continuing pressure from inflation, and the ongoing uncertainty make businesses more pessimistic about the future. The majority of companies estimate that orders for the coming months have declined and that it is ever harder to pass the higher costs for production inputs to the final product prices. This will make it harder for companies to earn profits and will threaten their competitiveness in foreign markets.