Banks: Lower construction volume to affect GDP growth in 2019

Construction underway in Narva.
Construction underway in Narva. Source: Aili Vahtla/ERR

Both Swedbank and SEB's economists commented on Friday that shrinking construction volumes will have a negative effect on growth. On the upside, a deceleration in that specific market probably means that the danger of overheating is less immediate now.

Swedbank's Tõnu Mertsina said that the impact of the construction sector on Estonia's economic growth will be more modest this year, and also believes that the threat of overheating in the construction market has subsided.

Civil engineering investment volumes shrinking as well

According to Mertsina, the 2-percent decline in the growth of construction volumes in the first quarter of 2019 was not surprising, as the increase in construction volumes decelerated sharply already in the final quarter of last year.

But back then, growth was still sustained by a strong increase in the construction volume of civil engineering works. "At the beginning of this year, however, the increase in construction volumes of civil engineering works slowed down sharply, and the construction of buildings, especially non-residential buildings, fell. As the share of building construction amounted to about 80 percent of total construction in the first quarter, its impact was very strong. Building volume growth has slowed down also in our neighboring countries of Latvia and Finland," Mertsina said in a press release.

No strong increase in residential construction anytime soon

Although the number of dwellings allowed into use increased in the first quarter, the number of permits has been on the decline for five consecutive quarters already. According to Mertsina, this shows that no strong increase in construction volumes of residential premises is to be expected in the near future. He believes that the volume of non-residential construction will decrease as well.

While confidence in the sector remains relatively strong, people are less inclined to buy houses and apartments: "Regardless of fast salary growth and the strong general confidence of consumers, people's confidence in acquiring a dwelling has fallen sharply. The drop in confidence started already at the end of last year, and deepened even further at the beginning of this year," Mertsina said.

The number of ownership changes of apartments remained at roughly the same level in the first quarter as a year ago.

Labor shortage continuously high

Labor shortage in construction continues to be high, but hasn't worsened lately. "This is due in part to a decline in construction volumes, but relief has also been provided by foreigners with short-term and fixed-term employment permits, many of whom have found work in our construction sector," Mertsina said.

"Construction has seen very strong growth over the past three years, and has made a significant contribution to economic growth. The decline in construction volumes in the first quarter shows that construction's contribution to economic growth has lessened. The risk of overheating of the construction sector has shrunk," he added.

SEB: Decreasing construction volumes sign of a slump in real estate market

While the high employment rate as well as the continuing salary growth will hold on for still a while to come, the deciding factor for the residential real estate market, favorable demographics, is currently losing strength, SEB chief economist, Mihkel Nestor, said.

According to Nestor, in addition to harsh numbers, a strong slowdown in the real estate market is a contributing factor. Surveys show that the share of people thinking about changing homes in the next 12 months has dropped substantially. Commercial construction isn't showing any signs of optimism either, Nestor remarked.

Meanwhile, a decelerating construction market has a great impact on Estonia's economic growth, he added. "The construction sector has been its main engine for the past two years. Last year, a third of the growth in added value came from construction companies. When adding the related areas of activity, such as engineering and architectural firms, the production of construction materials, their transportation and so on, active construction could even have made up half of Estonia's economic growth. Without this, a GDP growth of almost 4 percent would have been rather unlikely last year," Nestor said.

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Editor: Dario Cavegn

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