Economists flag falling investment as Estonia’s key economic concern

Falling business investment is weighing on Estonia’s economic growth, economist Kaspar Oja of Eesti Pank, Estonia’s central bank, said while commenting on fresh Statistics Estonia data, ERR reported. Bigbank chief economist Raul Eamets warned that future growth would have little foundation if the private sector did not invest.

Estonia’s gross domestic product grew by 1.8 percent in the second quarter from a year earlier, according to Statistics Estonia.

Oja said exports of Estonian goods and services rose by more than 9 percent in constant prices, excluding the impact of price increases, mainly because exports to euro area countries increased. Exports to countries outside the European Union and to non-euro-area EU countries declined. A similar trend was visible in manufacturing sales.

“Domestic demand from Estonian companies and households contributed unexpectedly little to economic growth, mainly because business investment declined,” Oja said. At the same time, construction volumes and imports of capital goods increased.

Oja said investment data were difficult to measure precisely in real time and that initial estimates of investment growth had often been revised upwards later. He therefore considered it possible that the estimate for second-quarter investment could become more positive as new data arrive.

Household spending on goods and services grew more slowly in the second quarter than in the first. Oja said this was partly influenced by faster price growth, supported by rising fuel prices.

He explained that GDP price changes are calculated based on the goods and services consumed during the current period, while the consumer price index uses average consumption from the previous year. As a result, price changes in GDP components may differ from those shown by the consumer price index.

Among economic sectors, Oja noted weaker-than-expected performance in some activities focused on the domestic market, which may have been affected by rapid price growth, particularly higher fuel costs. For example, the trade sector’s value added fell by 3 percent in constant prices from a year earlier, while rising by nearly 11 percent in current prices.

Although second-quarter GDP growth was slower than in the first quarter, companies’ assessments of the economic situation have become more positive, Oja said, suggesting that the economy would continue to grow in the second half of the year.

Eamets says investment fell for second consecutive quarter

Eamets said economic growth was slightly lower than in the flash estimate, but growth in production volumes across several sectors supported an economic recovery.

“The growth in private consumption and the increases in exports and imports were positive. On the negative side, investment declined for the second consecutive quarter. Investment fell by 11 percent in the first quarter and by 6 percent in the second quarter,” he said.

“Investment is the key to future economic growth, and if the private sector does not invest, or does not invest in Estonia, there will be nothing on which to build future growth,” Eamets said.

He also viewed positively the fact that manufacturing made the largest contribution to economic growth and that construction contributed as well. Trade remained in negative territory in the second quarter, although June data showing growth in retail sales volumes offered grounds for cautious optimism.