Estonia at risk of overheating

  • 2006-06-07
  • From wire reports
TALLINN - Preliminary data shows that Estonia's economy grew 11.6 percent over the first quarter, the Statistical Office announced on June 5. The data, based on administrative databases and monthly statistical observations, comes after the country posted a stellar 10.5 percent growth in the fourth quarter of 2004.

Analysts said the growth was higher than expected, as many estimates had been in the 9 -'s10 percent range.
Meanwhile, the Bank of Estonia said in its latest labor market survey that increased employment and higher wages in the first quarter, combined with the rapid growth of GDP, point to the possibility that the Estonian economy may overheat.
If last year's increase in productivity matched the rise in labor costs, then in the first quarter of this year the increase in employment and wages accelerated significantly and will probably outpace the growth in productivity, the bank said.
"Risks for the future remain 's there's no doubt about it," Ulo Kaasik, head of the sub-department for economic policy at the central bank, told reporters on June 2.

The rate of increase in employment sped up to 2 percent last year, while unemployment was close to 8 percent, dropping to 7 percent in the second half of the year. In the first quarter of 2006, a rise in employment accelerated to 6.8 percent and the rate of unemployment dropped to 6.4 percent.
"Shortage of labor is on its turn, putting pressure on base inflation," Kaasik said.
During the first quarter of this year, the wage increase was fastest in construction (23 percent) and wholesale and retail trade (21 percent). Employment in the two sectors grew as well. In 2005, hotels and restaurants saw the biggest annual pay rise (22 percent), while agriculture, backed by EU funds, posted an increase of 18 percent.

The mere mention of economic overheating comes at a sensitive time after Estonia was barred from adopting the euro beginning in 2007 due to high inflation. The country had been hoping to become one of the first new EU member states to phase in the common currency, and there is a chance that, due to high inflation, it may not even see the euro in 2008.