The economy continues to grow fast
Economist at Eesti Pank
- Slowing growth does not mean that the risk of the economy overheating has disappeared
- The slowdown in the oil shale sector played an important role in output developments
- Low productivity remains a problem
- Faster growth in imports than in exports can be seen as a generally favourable development in the short term given the level of growth in investment
- Improvement in the economy and the wider use of the EU structural funds should allow the government to build up bigger reserves
Yearly GDP growth in Estonia slowed to 4.2% in the third quarter and quarterly growth adjusted seasonally and for the number of working days was 0.3%. Growth was slower than in the second quarter mainly because of the energy sector and consumption taxes. It might have been thought from monthly statistics like the industrial production volume index that the slowdown in growth would be even sharper. Given though that the potential growth in the Estonian economy is around 3%, growth of 4.2% is still fast.
Slowing GDP growth does not mean that the risk of the economy overheating has disappeared. At the start of the fourth quarter, companies considered labour shortages to have worsened and wage pressures have increased in consequence. The service sector considers labour shortages to be similar to what they were at the peak reached during the last economic boom (see Figure).
One cause of labour shortages is the weak growth in productivity in companies. After the economic crisis of 2009, growth has been built more than previously on increased employment, but productivity growth has remained low. Growth of this sort however is sooner or later restricted by a shortage of workers. Foreign labour can ease this temporarily, but if productivity does not increase it becomes hard to raise wages.
In this case the government needs to be careful that its fiscal policy does not increase the risk of overheating. Given the improvement of the economy and the wider use of EU structural funds, the state budget should have a nominal surplus.
The largest factor behind the slowdown in growth in the economy in the third quarter was the oil shale sector. Production of electricity and oil has recovered as the oil price has risen from its low levels of the past couple of years, and this accounted for a large part of the growth in the economy in the first and second quarters, but in the third quarter the effect of this was fading away. Growth was also slower because rises in excise meant that production taxes contributed less to it. Stocking up of goods subject to excise in anticipation of the tax rise boosted the contribution of production taxes to the economy in the second quarter.
Faster growth in imports than in exports can be seen as a generally favourable development. This is partly because of a decline in exports from branches of industry with low value added content, which account for a large part of the turnover of the industrial sector but have little impact on profits and wages. It is also because a recovery in investment has accelerated growth in imports. As investment is fairly import intensive, imports grow fast when investment is increasing. Investment needs to grow however for productivity to be raised and for the economy to keep growing.
The data already available for the fourth quarter indicate some slowing in growth in construction, which has so far led the growth in the economy. Manufacturing companies continue to have high expectations for growth in output and the industrial output data for October indicate growth speeding up in manufacturing. Industrial companies also have increased expectations that prices may rise. Eesti Pank will publish a new economic forecast on 19 December.
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