Business investment key to recovery

TALLINN - Eesti Pank economist Peeter Luikmel said on May 12, commenting upon the announcement that Estonia posted 8 percent economic growth in the first quarter, that the very fast expansion has partly been driven by one-off factors and the growth rate is forecast to slow in the second half of the year, reports news agency LETA. According to the flash estimates of Statistics Estonia, the gross domestic product of Estonia grew by 8 percent year-on-year in the first quarter of 2011.
Growth was dynamic also on a quarterly basis: the first-quarter GDP increased by 2.1 percent compared to the fourth quarter of 2010. The last time the first quarter showed such vigorous growth was in 2007.

Export growth continues to stimulate economic growth. Manufacturing volumes expanded owing to both strong external demand and a pick-up in Estonia’s competitiveness achieved owing to adjustments during the recession. The country’s main target markets - Finland and Sweden - have enjoyed somewhat more dynamic growth than the average in Europe. This has boosted Estonia’s exports as well.

Since global investment activity has picked up, demand for investment goods (such as machinery and equipment) has increased. The Estonian exporters have been able to win market share after recovering from the crisis. This has happened partly due to local lower labor costs, but also owing to the ability to restructure manufacturing according to rapidly changing external demand.

Investment activity, which started recovering at the end of 2010, increased even more in the first quarter of 2011, referring to expanding production capacity. Household consumption has been resuming more modestly, mostly because of the need to repay earlier loans and the high unemployment rate. Excessive pessimism and cautiousness related to the adoption of the euro are now, however, withdrawing.

The faster than forecast growth at the start of this year was mostly driven by the more rapid recovery of external demand. This has been beneficial to countries that are open to external trade. Another factor contributing to export growth was the relatively low reference base, but its impact will draw back in the second half of the year. The growth rate of exports will slow from now on, and this will also be reflected in growth figures.

The resumption of domestic demand will become increasingly more important, with consumers and investors playing the key role here. As regards external factors, risks related to the high volatility of commodity and food prices continue to persist.