Bank of Estonia: Businesses should be investing more ({{commentsTotal}})

€100 bill.
€100 bill. Source: Siim Lõvi/ERR

Estonian companies should be more active investing, while the state should make a greater effort to control costs, Bank of Estonia economist Kaspar Oja said at a financial managers' conference hosted by SEB on Thursday.

"One might think that when the economy is having good times and higher profitability, more money is invested, but this is not the case," Oja said.

He described construction investments, which often accompany other investments, as an important component to consider. However, investments by companies in real estate are rather stagnating, while the state is having new buildings erected and households' investments in real estate are increasing.

"Currently, investments by Estonian businesses measured as a ratio to value added are smaller than in the EU on average," Oja observed. "The situation used to be different."

According to the economist, while the international trade war poses the biggest risk to the Estonian economy, there are no serious signs of overheating.

In general, construction and domestic demand are considered to be the engines of Estonia's economic growth, yet the export of services with a high value added has also grown, he noted.

"Some Estonian companies are doing well also because there are signs of overheating in Europe," Oja said.

Even though businesses have been sensing some overheating for some time already, the state's fiscal policy has not been consistent with this perception and costs have been increased instead, he added.

Rapid growth and consumption are driving inflation, in which the energy component, especially higher oil prices, but also the negative effect that the warm summer had on Nordic hydro stocks, is also playing a role. This factor is pushing the price of electricity higher now already, as in Estonia, businesses' electricity buying contracts are often pegged to the free market price.

When it comes to employment, the rate of full-time employment in Estonia is the highest in the EU, and hiring in the service sector is more difficult than during the boom a decade ago.

"At the same time, based on surveys, the productivity of employees has improved somewhat, which is the only way to raise competitiveness, as the price of labour in Estonia has moved rather to the level of Southern European countries and in several Eastern European countries, labour is cheaper than here," the economist added.

In conclusion, Oja said that he doesn't see the Estonian economy as being very vulnerable right now, as there are no internal discrepancies within the economy.

"Signs of heating can be seen in the real estate sector, but bank statistics do not confirm it," he explained. "The biggest risk is international trade restrictions: were countries, for instance, to impose trade restrictions at 1% of imports, that would reduce the GDP of Estonia by one percent."

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Editor: Aili Vahtla



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