Recession-hit Estonia swings into deflation

Recession-hit Estonia swung into deflation in May, when prices fell 0.3 per cent compared with a year earlier, official data showed last week.

Compared with April 2009, prices in May were unchanged, the national statistics office said.

Deflation - a sustained drop in prices - is seen as bad for an economy since it can curb activity further by leading consumers and companies to hold back on spending as they wait for even better deals.

As domestic demand withers, the pace of inflation in Estonia has been progressively slowing over recent months, dropping to a six-year low point of 0.3 per cent in April after two per cent in March.

Estonia, which shifted rapidly from a communist command economy to the free market after independence from the Soviet bloc in 1991, enjoyed up until last year a reputation as a "tiger" in the European Union, which it joined in 2004.

Robust economic growth stoked domestic demand which, hand in hand with rising food and fuel prices, drove inflation to a 10-year peak of 11.4 per cent in April last year.

Estonia, a country of 1.3 million people, slid into recession in the second quarter of 2008 as inflation dented consumption. The global economic crisis then compounded the bleak picture by hitting exports of goods and services.

The Estonia economy had grown 10.4 per cent in 2006 and 6.3 per cent in 2007.

It shrank 3.6 per cent in 2008 and Estonian authorities estimate that it could shrink by 15.3 per cent this year.