(Adds Estonian finance ministry commentst)
By David Mardiste
TALLINN, Aug 13 Estonia said on Wednesday it expected further economic contraction in the coming months after data showed it became the second European Union country to fall into recession.
"In the coming quarters, negative economic growth is expected to continue. Low consumer and investor confidence indicators have continued to fall also in July," the Finance Ministry said in a statement.
SEB economist Ruta Eire agreed. "The numbers were expected to be negative, but were more negative than we thought ... It will be negative for the third and fourth quarters as well. Yes, we are in recession," she said.
News that the former high flying Baltic state has followed Denmark into recession added to pressure on the shares of Swedish banks, which expanded rapidly in the Baltic region in recent years, but where investors now fear rising loan losses during the downturn in Estonia and southern neighbour Latvia.
A flash estimate from the Estonian statistics office showed gross domestic product fell 1.4 percent year-on-year in the second quarter and, seasonally and working day adjusted, fell 0.9 percent versus the first quarter. This was after a quarterly GDP fall of 0.5 percent in the first three months of the year.
The common definition of a technical recession is two consecutive quarters of negative growth.
DEEP AND PROTRACTED SLOWDOWN?
On July 1, Denmark revealed its economy shrank 0.6 percent in the first quarter versus the fourth quarter of 2007. The Danish statistics office also revised fourth quarter GDP to a fall of 0.2 percent from a quarter-on-quarter 0.3 percent rise.
Amid weakness in the European banking sector overall, the Estonian numbers added to falls in Swedish bank shares.
SEB (SEBa.ST) and Swedbank (SWEDa.ST), the most active in the Baltic, fell most, respectively down 4.81 percent at 123.75 Swedish crowns and 4.54 percent to 126.25 crowns by 1239 GMT.
"SEB and Swedbank have figures from Estonia which are weighting negatively, but the whole sector is also lower. The market is down and the banks are down further. The Baltic is weighing heavily today," said one analyst.
The median forecast for the second quarter in a Reuters survey of 4 analysts was for a GDP fall of 0.3 percent.
Nordea analyst Anssi Rantala said GDP for the whole year in Estonia would clearly be negative while Capital Economics said Latvia would soon follow Estonia. "We think the (Baltic) region is heading for a deep and protracted downturn," it added.
The Estonian central bank expects GDP growth this year of 2 percent after 7.1 percent in 2007 and 11.2 percent in 2006.
Latvian second quarter growth was just 0.2 percent in the year. Lithuania had second quarter growth of 5.5 percent. (Reporting by David Mardiste and Patrick Lannin; Additional reporting by Victoria Klesty in Stockholm; Editing by Mike Peacock and Victoria Main)