Increased investment indicates that economic growth may accelerate
- Eesti Pank published its review of the Estonian economy in the second quarter on Thursday
- Certain individual sectors were the cause of slower growth in the economy in the second quarter
- Increased investment activity of companies in the first half of the year indicates that economic growth may pick up
- The share of labour-intensive sectors in the economy is increasing, and upwards pressure on labour costs remains strong
- Consumer prices were at the same level in August as at the start of 2013, but inflation will rise in the months ahead
Yearly growth in the Estonian economy remained slow in the second quarter. Growth was weakened by a fall in value added in the energy and mining sectors and in real estate activities, but it was broad-based across the other sectors. Growth was led by more labour-intensive sectors and that explains at least partially why the number of people in employment and the average wage have increased even as overall figures for economic growth have been low. The increase in unfilled positions also shows that the upwards pressure on domestic wages caused by labour shortages has probably not yet faded.
Exporting companies considered their own competitiveness in both the European Union market and elsewhere to be better than in the beginning of the year. This is in line with a revitalisation of Estonian trade in the second quarter. Investments in fixed assets also increased in the second quarter. Investments by households in housing increased, and so did corporate investment, making it more likely that the persistent gap of recent years between economic growth and wage growth will be closed through increased labour productivity rather than through a sharp braking of wage growth.
Having fallen for more than two years, prices rose in August and took consumer price inflation back into positive territory. However, the price level has been rising steadily on a monthly basis since the start of the year, and in a little over half a year consumer prices have climbed by around 2%. Price pressures have remained weak despite rapidly rising wage costs and increasing demand. This is partly because profit margins have been slimmed, and partly because the oil price has been low and prices have risen only slowly for imported commodities. The impact on inflation of cheaper energy is fading out, and that will boost inflation in the near future.
The consequence of the fall in prices in the meantime was that consumer prices were at a similar level in August this year to where they were at the start of 2013. During this time the average gross wage increased by 20% however, meaning that the average purchasing power of residents increased by about one fifth in three years, which has resulted in fast growth in retail sales and in private consumption.
Strong growth in wage income and consumption has boosted tax revenues. Tax revenues have also been raised by higher excise rates for alcohol, tobacco and fuels. In the first half of the year, general government income exceeded expenditure and for the year as a whole the budget should remain in surplus. Growth in general government spending has been seriously limited by a reduction in investment, but the cut in the numbers employed by government institutions in an effort to keep the size of the public sector the same relative to a shrinking population has also had an impact.
Eesti Pank will publish a new forecast in Estonian on 13 December.
Eesti Pank publishes a review of the Estonian economy four times a year. The economic review is accompanied in June and December by a forecast for the next two years, and in March and September it is published without the forecast.