Faster growth in the Estonian economy is an exception in the wider perspective
Statistics Estonia estimates that the economy grew by 4.2% in the third quarter over the year. This was a little faster than in the second quarter when the growth was 3.8%. The faster growth in the third quarter was an exception in the wider perspective as various indicators for growth in economic activity weakened in the third quarter in Estonia and elsewhere.
The economic sentiment index, which reflects the expectations of companies for the months ahead, has fallen in Estonia and in other countries in Europe. Growth in industrial output has slowed in the European Union as a whole and in Estonia, and growth slowed in the European Union economy in the third quarter.
Economic activity in other countries affects Estonia through exports and the growth in exports from Estonia was quite slow in the third quarter. It may be though that this is a first sign of the consequences of the fall in Estonia’s price competitiveness, which has been caused by wages growing faster than productivity. Exports grew by only 0.8% over the year.
The faster growth in the Estonian economy has been driven by domestic factors, as consumption and investment have grown but exports have barely done so. This indicates that the economy is strong enough to survive short-term wobbles in the external environment. It is still worrying though that growth was fairly unevenly spread across sectors, as almost half of the growth came from construction and real estate. As the Estonian economy is small and tightly linked to those of other countries, continued moderate growth in the economy requires stronger exports.
The recovery of growth in investment in the third quarter is a positive sign as it was mainly businesses that were behind the growth it this time. Investment by households was smaller than a year earlier and general government investment was only a little larger in real terms than a year before. The growth in investment helps strengthen the competitiveness of companies and the growth in productivity. As there is already full employment in the economy, further growth can only be achieved by increasing productivity.
Eesti Pank will publish a new economic forecast on 19 December.