At the Äriplaan 2014 conference on Wednesday, Governor of Eesti Pank Ardo Hansson explained that Estonia is at a very different stage of development to where it was in the last decade and achievable annual growth will be 3-4%.

“The surprisingly slow pace of economic growth in the first half of the year in Estonia was not broadly based but was the result of increased competition in transport and warehousing. Our manageable growth level of 3-4% could be achieved next year. Although growth will be slower than it has been for the past decade, it will still be noticeably faster than in the rest of the euro area,” Hansson said.

Slower growth than before and lower inflation will mean that nominal income growth for companies will be slower in future. “This means that companies should be more vigilant about cost growth, as there is a risk of wage pressures coming from a tightened labour market,” Hansson noted.

“Estonia's development will start to be affected more and more by the fact that the working age population in Estonia is shrinking. It is because of this that the central question in increasing production capacity in the next few years will be the amount and the deployment of labour resources. There are around 60,000 under-utilised people and people wanting to work in Estonia who haven't yet looked for jobs, but for them to be brought into employment will probably demand more flexible working conditions from employers.”

Hansson believes that attention should be paid to the causes of difficulties in Finland, one of Estonia's most important trading partners. “Firstly the paper and electronics industries, which have been important for Finland, have disappeared, electronics in particular losing out as a result of increased competition. Secondly labour costs have grown rapidly in Finland in the last decade, and this has reduced competitiveness.”

He added that one of Estonia's advantages is that its sovereign debt is the lowest in Europe. “We are exiting the crisis without an increased burden of debt and this means that job-creating enterprises can trust in the stability of the tax system.”

The budget deficits of countries in the euro area have fallen and competitiveness has improved even in countries with difficulties. “If the forecast is correct and inflation remains modest, then key interest rates in the euro area will stay low. This will support the economy,” said Mr Hansson, who is a member of the Governing Council of the European Central Bank.

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