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Bank of Estonia: Economic growth acceleration exception in bigger picture

Bank of Estonia economist Kaspar Oja.
Bank of Estonia economist Kaspar Oja. Source: Bank of Estonia

According to Bank of Estonia economist Kaspar Oja, in the context of the bigger picture, the 4.2% acceleration of economic growth in the third quarter of 2018 could better be regarded as an exception.

"Growth was slightly faster in the second quarter, when the [Estonian] economy grew by 3.8%," Oja said in a press release on Friday. "The accelerated economic growth of the third quarter was nevertheless rather an exception in the bigger picture, as various indicators characterising the growth of economic activity weakened both in Estonia and elsewhere in the third quarter."

Meanwhile, the economic sentiment indicator, which reflects the expectations of enterprises over the next few months, has decreased both in Estonia as well as in other European countries. The growth of industrial production has also decelerated both in the EU as a whole and in Estonia, as has economic growth in the EU in general in the third quarter.

"Other countries' economic activity impacts us via exports, and export growth was relatively slow indeed in Estonia in the third quarter," Oja noted. "At the same time, the decrease in price competitiveness, which is caused by salary growth exceeding productivity growth, may also have begun to have an impact. Exports grew by just 0.8% on year."

According to the central bank's economist, internal demand factors were behind rapid economic growth, including consumption and investment growth. Exports, however, grew relatively little. "This indicates that the economy is strong enough to withstand short-term flutters in the external environment," he noted. 

At the same time, Oja noted that he was slightly concerned by the fact that growth was relatively inconsistent across various fields of activity. Namely, nearly half of all economic growth came from the construction and real estate sector. "As the Estonian economy is small and tightly connected with other countries, the continuation of moderate economic growth requires the strengthening of exports," he stressed.

Regarding third-quarter economic growth in general, however, Oja said that he was glad to see the restoration of investment growth, adding that it was companies that were primarily behind the increase in investments this time.

In the third quarter of 2018, investments by households decreased on year, while the investments of the government sector were only slightly greater in real value than during the same period last year.

"Investment growth will help strengthen companies' competitiveness and productivity growth," Oja noted. "As a situation of full employment has already been achieved in the economy, productivity must be increased in order for economic growth to continue."

Estonia's GDP grew by 4.2% on year in the third quarter of 2018, totalling €6.5 billion at current prices, Statistics Estonia said on Friday.

The Bank of Estonia will publish its next economic growth forecast on 19 December.


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Editor: Aili Vahtla

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