At the Äriplaan 2016 conference on Wednesday, Governor of Eesti Pank Ardo Hansson spoke of how Estonian companies have succeeded in increasing their non-price competitiveness. The need to improve competitiveness has become ever more important in coming years as higher labour costs have made production more expensive.

Despite the strong growth in wage costs, companies find that their competitiveness in the European Union market has improved. “The opinion of companies suggests that non-price competitiveness has improved and Estonia’s advantage as a producer lies in more than cheap labour resources,” explained Governor Hansson.

Non-price competitiveness shows whether companies are able to increase exports despite higher prices and labour costs by concentrating on something other than prices. Non-price factors can include innovation, product variety, recognition and quality, position in global production chains, and integration in international production networks.

However, Mr Hansson underlined that in the near future Estonian companies will have to work on developing non-price competitiveness even more than they have so far as the working age population in Estonia starts to shrink. “The number of workers has not fallen yet, but Estonia is entering a demographic autumn and the labour market will lose 30,000 people over the next five years. The decline in the working age population means that it will soon become harder for companies to find employees and wage pressures will increase. Estonian companies have done well at improving their competitiveness and this gives us the chance to become gradually more successful”, he explained.

He noted that inflation is likely to move from its level of around zero this year to 2.5-3% in the coming years. “The biggest beneficiaries so far have been companies focused on the domestic market, as cheaper energy has boosted the real purchasing power of households. If prices start to rise in the years ahead, people will find their purchasing power no longer rises so fast”.

Mr Hansson said that the Estonian economy is capable of faster growth than the current 2%, but to grow faster than 4% would need assistance from structural reforms.

He considered that another risk to economic growth alongside excessive rises in labour costs is that corporate profits may continue to decline. This would limit the ability of companies to make the investments that will provide growth in the future. He also noted the risk from the Nordic real estate markets, because if prices start to fall sharply there, the Nordic bank groups operating in Estonia could face difficulties that could mean they may not be able to continue providing loans to Estonian companies on favourable terms.