Finance ministry: Companies' profits under pressure despite economic growth

Madis Aben, analyst at the Ministry of Finance's Fiscal Policy Department.
Madis Aben, analyst at the Ministry of Finance's Fiscal Policy Department. Source: Ken Mürk/ERR

Companies' profits are under pressure despite surprisingly rapid economic growth, said Madis Aben, analyst at the Ministry of Finance's Fiscal Policy Department.

According to Aben, business-owners' confidence in the continuation of the favorable business cycle in Estonia and Europe has been decreasing for two years. Confidence has seen a sharp decline in Finland, Sweden as well as Estonia, but thus far, the mood has not significantly deteriorated in Latvia and Lithuania, he noted.

Consumer confidence remains high, however, as jobs are created and wage growth is rapid as well, reaching 8 percent. Companies' profits are increasingly under pressure due to wage growth and cautious consumer behavior in the aftermath of the crisis, Aben said. He pointed out that, according to business statistics, wage income growth has exceeded profit growth for the sixth year in a row.

Despite the cooling business climate, Estonia's economic growth remained rapid in the third quarter, reaching more than 4 percent, with almost all sectors showing growth.

"Construction's negative contribution was compensated for by the increased profitability of agriculture, but the energy sector is retreating," Aben noted. Deceleration could also be seen in the mining and quarrying sector.

According to the analyst, the rapid increase in agricultural products is due to poor harvests a year ago and may not continue next year, however the downturn in energy is likely to be more permanent. The decline in construction, meanwhile, may be short-lived if the expected economic slowdown remains moderate.

The information and communications field is also continuing to do well, as are trade and professional activities, including engineers, architects and lawyers. The reduction in the alcohol excise duty also had a positive impact on growth, resulting in one-off changes in store purchases and border trade.

Companies' investments have been modest first and foremost due to the sufficiency of production capacities.

"Business investments this year have shown surprisingly rapid growth against a backdrop of poor prospects, while housing investments also remain rapid," the analyst highlighted.

Surprisingly, third quarter economic growth accelerated not just in Estonia, but also in key countries such as Finland and Sweden. In light of this growth, Aben said it cannot be ruled out that business sentiments across Europe are unreasonably pessimistic in the shadow of the previous crisis, and that the economic slowdown may be more subdued than expected.

According to information released by Statistics Estonia on Friday, Estonia's gross domestic product (GDP) grew 4.2 percent on year in the third quarter of 2019. The Estonian GDP was €7 billion at current prices. The seasonally- and working day-adjusted GDP grew 1 percent compared to the previous quarter. On year, the seasonally- and working day-adjusted GDP grew 4.1 percent.


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Editor: Aili Vahtla

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