Future growth in the economy will depend on supply chains operating reliably
Economist at Eesti Pank
The rapid yearly growth of 12.9% in the Estonian economy is due to the low reference base, as the economy was subject to the Covid-19 restrictions in spring last year. Growth was also very fast in quarterly terms though at 4.3%, which is extraordinary as the anti-virus restrictions also limited economic activity in the second quarter of this year. Such fast growth in the economy shows that many companies have adapted to the restrictions and growth in a large part of the economy was no longer hindered by them.
The general recovery in the economy overshadows the detail that some branches have maintained their consistently fast growth of recent years despite the pandemic, while the branches most affected by the pandemic are still far off where they were before it started. Value added in information and communications was up by around one third in the second quarter for example, and was some 40% more than in the second quarter of 2019. Employment in that sector also increased over the year. The value added of accommodation and food service meanwhile, the sector that suffered most during the pandemic, was up by more than 40% over the year in the second quarter, but was down by almost the same amount on its level of two years ago.
What will be decisive for further growth in the economy though is how supply problems, or supply-side restrictions, in the economy are resolved, as they are increasingly hindering further growth at businesses. The level of capacity utilisation in manufacturing is close to its historical peak, but expansion of production is limited as supply difficulties have worsened the problem of accessing equipment. Labour shortages increased in most sectors in the spring, but this is no longer such a major problem in construction for example as access to construction materials is blocking production even more. The difficulties with the supply of construction materials have arisen partly because output was reduced during the pandemic, while the labour shortages have been largely responsible for the slow recovery in output.
Governments are in consequence facing a problem that they have not been used to, given developments in the economy over the past decade. Stimulating demand has been a priority, but may no longer be of any help, and attention needs to be focused more on flexibility in the economy to solve the problems of supply difficulties and the reallocation of labour. Although companies have indicated signs of labour shortages, the number of people unemployed is still higher than it was before the pandemic.
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