Economy robust, but leaders spar over role of private savings

  • 2005-01-12
  • By Aleksei Gunter
TALLINN - The Estonian economy is poised to continue growing at the same rate as last year, leading officials claims, though a disagreement has emerged among them as to how much consumers should be spending or saving.

Commenting on this year's outlook, Minister of Economic Affairs and Communications Andrus Ansip said that Estonia should not rest on its laurels because of high positions it has earned in a number of global ratings recently. He said that the Estonian economy "has certain areas to improve." Perhaps more controversially, however, he took the opposite viewpoint of Hansabank Group CEO Indrek Neivelt, who recently said Estonians should take advantage of the cheap mortgage loans and borrow more.

"While domestic consumption is not purely harmful, I would call my compatriots to save more. I do not agree with one bank head who has recently called to borrow more," said Ansip. "Every good thing is followed by a bad one."

The minister noted that, unfortunately, a majority of Estonians still tended to think that saving means money deposited in a bank account or at home in the closet. As a result, they fail to invest in real estate, the stock market and in pension funds.

Leev Kuum, a leading expert of the Estonian Institute of Economic Research, compared Estonian economy to a fast-moving car. Changes in the country's economy over recent years, he said, have been made as quickly as if they were taken from examples in a macroeconomics textbook.

The institute's preliminary data, which has yet to be confirmed by the statistical office, showed that GDP grew from 135 billion kroons in 2003 to 138 billion kroons (8.62 billion euros) in 2004, thus leaving real economic growth in 2004 at the 6.2 percent mark - roughly similar to the last four years.

Kuum said that although growth in the service-export sector turned out as expected, the average salary increase was slightly below the amount predicted. "Investments into human resources were growing slower than those into machinery and equipment," he said.

As for the coming year, experts from the Estonian Institute of Economic Research are generally positive, "although no scenario can be ruled out," said Kuum.

Institute experts believe that GDP growth will reach 6.5 percent this year and that salaries will grow by about 10 percent. They said the national budget for 2005 is "good" or "satisfactory."

A quarterly poll carried out by the institute among local businesses in December 2004 revealed positive expectations for the first three months of 2005 in the retail trade sector. Among other things, the survey revealed that Estonian construction companies maintain a lucrative contract portfolio and that construction prices are continuing to rise. The most troubling matter for the construction sector is the lack of qualified labor, 40 percent of respondents said.

In general, Estonian consumers expressed modest expectations for the coming year, which is common for December surveys. A majority expected inflation to reach 13.7 percent in 2005, while Bank of Estonia experts predicted a 3.5 percent inflation rate. Traditionally, inflation expectations among residents exceed those issued by central bank experts by about 10 percent.

Average annual inflation last year amounted to 3 percent, though December 2003 - December 2004 inflation comprised 5 percent.