24.09.2024
The economy is in unusually good shape
Postitatud:
28.02.2018
- The good state of the economy can be used to provide security for the future
- The greatest concern in the economy is low productivity
- The manufacturing sector has lagged behind the rest of the economy in productivity
The Estonian economy grew by 4.9% in 2017. The economy was 5% larger than a year earlier in the fourth quarter, and 2.2% larger than in the previous quarter. The growth in the economy was unusually strong and exceeded expectations, and the good state of the economy makes it an appropriate time to think about the future. Rapid growth in incomes provides an opportunity for both the government and people to save, but the biggest problem in the economy is low productivity. Further growth in the economy will depend on how well companies are able to boost productivity.
Growth was broad-based in the fourth quarter of 2017. Both the export-focused industrial sector and branches of the economy serving domestic demand contributed to the growth. The environment has been exceptionally favourable to growth in the economy. Interest rates are low and Estonian fiscal policy has of late been looser than previously. The external environment is stronger and this passes on into the domestic economy through the large exporting sector. On top of this, unemployment has fallen during the relatively long period of growth, and confidence has strengthened among companies and people. This encourages investment.
A feature of the recent growth in the economy has been the major impact that business services have had on it. This indicates that the economy is specialising and reorienting towards higher value added services. At the same time, the largest problem in the Estonian economy remains low productivity, especially in manufacturing. Increasing demand has been served by employing new staff, while the role of productivity in economic growth has been small. Production in Estonia is still cheap, as our wage and production price levels are like those in Finland 30 years ago. The rapid growth in the service sector means though that the industrial sector may lose its relative advantage. Productivity is already lower in manufacturing than in the rest of the economy.
As it is already below the average elsewhere in the country, industry may become less competitive in the labour market and may be left short of workers. It is important for a small economy though that we have a relatively large exporting sector. Reduced competitiveness in industry is not good for the high productivity business services sector either, as it is linked to the industrial sector through the same value chains. One part of the highly productive business services is supplementary goods to low-productivity industry, and without industry such services would not exist either.
The good times in the economy cannot last forever. Although savings have increased in recent years, it has mainly been wealthier households that have managed to save. If problems were to appear unexpectedly, most people would only have enough money for up to two months. The faster growth in lower wages that was caused by the change in the tax system will allow people to save more.
As the economy has been doing unusually well for some time now, signs of overheating in the economy are appearing, such as increased worry among companies about the labour supply. Economic theory and the agreed fiscal rules say that in such a case fiscal policy should be tightened as this should start to cool the growth in the economy. It is possible though that elections in a year’s time mean that such a cooling will be postponed.
Additional information:
Viljar Rääsk
Tel: 668 0965, mobile 5330 0619
Email: [email protected]
Press enquiries: [email protected]