Inflation and supply difficulties are impeding the capacity for further economic growth
Economist at Eesti Pank
Growth remained very fast in the economy in the third quarter at 8.6% over the year, and it was broadly based across sectors. Quarterly growth from the second quarter slowed a little to 0.7%, seasonally adjusted and adjusted for the number of working days.
Like elsewhere, growth in Estonia is driven by demand, which is reflected in the rapid growth in private consumption. There are two factors behind this in a large part of the world. The first is that the easing of the pandemic has expanded opportunities for consumption, by making travel easier for example. Secondly, people built up savings during the lockdowns that they can now direct into consumption. Those factors have been enhanced further in Estonia by early withdrawals of money from the second pension pillar.
Growth in the economy is being hindered by supply-side limits. Growth in the industrial sector was below the average in the whole economy, and this appears to be due to problems in supply chains. Pan-European surveys of industrial companies show that industrial output in Estonia is being restrained most by labour shortages, while the greatest concern in Europe as a whole is access to materials. Production capacity utilisation in manufacturing was extraordinarily high in October, meaning there is now little free production capacity that could support faster growth. Supply difficulties mean it may be hard to increase production capacity.
Higher energy prices are slowing the increase in consumption as inflation reduces the growth in real incomes. If wage rises push prices up, it could cause general rises in the price level and keep inflation higher for longer. Inflation is currently high largely because of higher energy prices, and this is essentially a temporary factor. The government could reduce the risk of inflation remaining high for longer by bringing the state budget towards balance faster, as this would create a good environment for the economy.
The economy is generally developing as forecast, though growth in the third quarter was a little lower than expected. Eesti Pank will publish an updated economic forecast on 21 December.
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