Economy could grow by up to 10 percent in Q2

Construction cranes.
Construction cranes. Source: Siim Lõvi/ERR

Estonia's economic growth exceeded 5 percent in the first quarter, while analysts told ERR that we could see double digits in the second.

Because we saw strong growth and GDP climb to a high level in the first quarter, this will affect the remaining three quarters, with annual growth forecast as noteworthy, Tõnu Mertsina, chief economist for Swedbank, said.

"It is difficult to provide an exact figure, while we might see growth of around 9-10 percent. We might even see quarterly deficit. But that would not suggest there is anything wrong with the economy. On the contrary, the economy is growing rapidly," Mertsina said.

The economist said that the third and fourth quarters will also show rapid growth, with close to a billion euros people have withdrawn from the second pension pillar playing a considerable part in that. His forecast suggests annual growth will fall short of 10 percent.

"Our forecast is not finished yet. We will publish it toward the end of August, while I would still forecast annual growth in the single digits. That said, growth is strong and might come to 8 percent," Mertsina said.

Rasmus Kattai, head of the economic policy and forecasts subdepartment of the Bank of Estonia, also said that growth could come to or even exceed 10 percent in the second quarter year-over-year. The economy will largely depend on the ability to cope with the coronavirus crisis in the second half-year, he said.

"It will leave a mark on the economy one way or another. Should we do well and manage to avoid tough measures, signs show that the economy has the potential and strength to keep growing in the third and fourth quarters. This crisis is different, with both individuals and companies having money left and funds withdrawn from the second pension pillar adding to purchasing power. As far as consumption is concerned, there is plenty of room for the economy to grow," Kattai said.

Prices and wages growing, labor shortage looming

The Ministry of Finance said on Wednesday that the Tax and Customs Board collected €3.95 billion in taxes in the first six months of the year for an increase of 13.8 percent on year. VAT and motor fuel excise duty receipt grew notably.

Mertsina said that while tax receipt was strong, it likely fell short of the first quarter. "The first quarter saw taxes on products contribute to growth. Growth of value added would have come to 3 percent without taxes, which is still a strong result," he said.

Above average price and salary advance can also have unpredictable effects on growth.

"Inflation will slow down real growth of net salary. It could impede growth of energy consumption. If real growth of net salary was 9 percent in 2018, around 4 percent in 2019 and 3 percent last year, the figures will be more modest for 2021 and 2022. That said, salary advance still outpaces inflation, purchasing power is growing. The important thing is that people's expectations have been growing alongside inflation picking up speed in recent months. This sees people ask for a bigger salary but could also liven up consumption," Mertsina said.

Kattai remarked that rapid price advance is working against growth in some ways, while general price advance is mainly due to energy and motor fuel price hikes that may be reversed at some point. He believes looming labor shortage will deliver a much more serious setback next year.

"We have come very close to the situation we had before the crisis where companies wanted to expand but couldn't because of lack of workforce. While it will still be possible to find new people and contribute to the economy this year, labor shortage will very likely come to impede growth much more strongly in 2022," Kattai said.

Labor shortage is one component in price advance, with the second being salary advance already at 7-8 percent and the third supply difficulties and raw material shortages in the coronavirus situation, the economist added.

Lepik: GDP growing in distorted environment

Even though spiking GDP graphs are nice to look at, this year's figures should not be taken too seriously as the reference base is very low and countries' stimulus packages and central banks' quantitative easing make for a distorted business environment, economic expert Kristjan Lepik told ERR.

"Signs suggest economies have recovered. However, this has happened in the conditions of extraordinary stimulus. There have been various support measures, quantitative easing. We are in a somewhat distorted environment right now. Next year will reflect true Covid recovery," he said.

Lepik said that Covid has brought changes some of which are temporary, while some are permanent. "We do not know where the new economic normality will lie. We need to keep in mind that recovery has been uneven. GDP looks at the big picture, while some sectors, like technology, are doing well in a situation where others, such as tourism, are struggling."

Central banks' stimulus measures are also behind price advance.

"They are aimed at inflation by nature – quantitative easing or zero interest rates. Considering that the interest is zero while inflation is up to 5 percent, central bankers say rapid inflation is temporary, while no one really knows that. It seems somewhat less temporary in several aspects. This would force central bankers to hike interest rates that would in turn slow down the economy. Covid has left us with a distorted reality where it is hard to tell what is real and what is temporary," Lepik explained.

How economies will strike a balance after government stimulus runs out is more important than quarterly GDP reports, the economist suggested.

"Provided inflation pressure will hold, we are looking at tough choices where interest rates are concerned. Inflation is also psychological in that it is very hard to get back under control once people start to believe it. What central bankers are doing today is a little worrying," Lepik said.

Statistics Estonia will publish second quarter financials in late August, complete with adjusted data for GDP in past years that could alter growth figures to some extent. Statistics Estonia data suggests the Estonian GDP grew by 5.4 percent year-over-year in the first quarter.

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Editor: Marcus Turovski

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