The shortage of investment is a problem in an otherwise strongly growing economy



  • Growth in the economy was broadly based in the second half of 2016, with only a few sectors declining
  • The consequence of growth in labour costs is a shortage of profit and investment
  • Surveys show that companies have an improved opinion of their competitiveness

Data from Statistics Estonia show that the Estonian economy grew by 2.7% year-on-year in the fourth quarter of 2016, and 1.9% quarter-on-quarter. Quarterly GDP growth was last faster than this in 2011, when the economy was recovering rapidly after the crisis. Growth was notably faster than was expected in the most recent Eesti Pank forecast. The indicators for growth in the fourth quarter are in line with other recent economic statistics, which also point to stronger growth at the end of last year. For 2016 as a whole the economy grew by 1.6%.

Growth in the second half of the year was quite broadly based. Only agriculture among the largest sectors saw a decline, which was a consequence of the poor harvest in the autumn. Growth in industrial output in Estonia in the fourth quarter was among the fastest in Europe. An important role in this was played by the oil shale sector, which was still a significant drag on growth in the first half of the year. Growth in industry in the fourth quarter can be considered broadly based as various sectors contributed to it. Growth also strengthened in the construction sector in the fourth quarter. This is in some contradiction to the continuing reduction in investment in buildings and structures, but various data sources have been indicating a strengthening in the construction sector for some time now. Growth in retail, which is dependent on private consumption, remained strong.

The economy should grow faster this year than in 2016. Surveys of business sentiment have again indicated strong development in the economy in the first months of this year. The sentiment indexes in both industry and construction were at their highest levels of the past five years in February, and the indexes for all sectors were above their averages of the past decade.

The Eesti Pank forecast expects the contribution of the general government to total demand to increase in 2017 because of the presidency of the European Union and public sector investment. Growing export markets and retreating uncertainty in the external environment in general will lead corporate investment to recover gradually. Growth may be slowed however by the risks from political uncertainty in the external environment and problems of competitiveness stemming from the rapid growth in labour costs in recent years. Higher inflation will restrain growth in real household incomes to some extent, and this in turn will restrain growth in private consumption.

The faster growth in wages than in productivity of recent years may again pose a threat to the economy. Although labour costs grew a little more slowly than the economy in the fourth quarter, labour costs have returned to where they were during the crisis as a share of GDP, and the profitability of companies is low. For this reason investment is also weak, and this is limiting new opportunities for growth.

Surveys show that wage growth has so far harmed competitiveness in sectors with low productivity such as the clothing and fur industries. A survey by the European Commission and the Estonian Institute of Economic Research found a general improvement in the assessment by industrial companies of their competitiveness. Sectors with low productivity that were acutely aware of labour shortages a year ago had a more negative opinion of their competitiveness though.

For further information:
Ingrid Mitt
Public Relations Office
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