The current account surplus narrowed marginally by 1.5% y/y to EUR65.2m in October, according to figures of the Bank of Estonia, published on Friday. The merchandise trade deficit expanded tangibly by 51.4% y/y to EUR94.9m, driven by strong domestic demand, which has been partially fueled by favorable labor market conditions. Meanwhile, the services trade surplus widened by 16.0% y/y to EUR166.5m, supported by solid demand for Estonian services abroad. The secondary income surplus expanded by 33.3% y/y to EUR30.8m, likely due to higher remittance flows from abroad. On the financing side, the financial account reported a net outflow of EUR70.6m, mainly due to portfolio investment, which posted an outflow of EUR112.8m, as Estonians search for diversification and higher yield abroad. On the other hand, foreign direct investment remained strong with an inflow of EUR135.2m.
In 12-month rolling terms, the current account surplus narrowed by 34.0% y/y to EUR385.4m, accounting for 1.5% of projected GDP for the year. The merchandise trade deficit widened by 37.9% y/y to EUR1.2bn, while the services trade surplus expanded marginally by 2.7% y/y to EUR1.9bn. The financial account reported an outflow of EUR584.7m, driven by portfolio and other investments, while foreign direct investment added up to EUR1.2bn in the 12-month period ending in October 2018, which was 63.5% y/y higher compared to the same period last year.
Looking ahead, the current account surplus is likely to narrow down somewhat further, given that foreign demand is expected to ease down somewhat, while domestic demand should remain robust. To note, the government expects the CA surplus at 2.1% of GDP in 2018, according to its updated forecast, published in September. Meanwhile, the European Commission expects the surplus at 3.5% and the IMF at 2.2% of GDP, according to its most recent forecast.