Economy grew by 11.4 percent in 2006

The Estonian economy grew by 10.9 percent in the last quarter of 2006, bringing annual growth to a total of 11.4 percent. The rate of economic growth was one of the most rapid in the European Union, second only to Latvia’s 11.9 percent. The average of all of the member states for the year was 2.9 percent.Much of the reason for this growth was internal demand, with dramatic increases in individual consumption and investment. Consumption expenditure in current prices reached 104.3 billion kroons, representing real growth of a record 15.8 percent. The greatest contributing factor here was the rise in average salaries and employment, but strong borrowing continued to play a significant part. Furthermore, the number of consumer loans in 2006 almost doubled on the previous year, and the balance of home loans grew to more than 60 percent. Rapid growth in borrowing enables consumption to be quickly raised to the kind of stable level which will take expected income into account in future. Growth in loans could already be seen to be stabilising by the end of 2006, which indicates that consumption will grow at a comparable rate to real growth in salaries in the longer term.

Growth in investment during the first earlier quarters of 2006 was mostly due to companies, and the remarkable rise in the fourth quarter is also likely to have been caused by businesses making high-volume capital investments in the closed sector. These investments will contribute greatly to economic growth in the short term, but in order to maintain this growth more capital needs to be directed to the manufacturing sector, which comes with high added value and is oriented towards exports.

The role of exports in economic growth decreased in 2006 by half due to the significant slowing of export growth in the second half of the year. This was due to problems with competitiveness, as growth in foreign demand actually increased. The volume of exports of a number of mainly labour-intensive goods groups fell or growth in volume slowed significantly. Growth in imports slowed only marginally due to the slowing of the growth in exports, as the subcontracting industry required less production input. Imports continued to be fed by significantly strengthened internal demand. The goods groups that made the greatest contribution to import growth were mineral products and means of transport. Growth in the import of services slowed significantly due to reduced growth in transport services and a fall in outsourcing of building services.

Growth in added value accelerated in 2006 in both the service and industrial sectors. The field that made the greatest contribution to economic growth was the processing industry, whose growth reached 12.8 percent. The branches of industry that most supported growth were the manufacturing of building materials, metal, rubber and plastic products, foodstuffs and beverages and electrical machinery and appliances.

Growth in the service sector was most greatly influenced by internal commerce, real estate, research and business activities, transportation, storage and communications and financial intermediation, which produced 80 percent of the growth in added value in services in 2000 constant prices. Contributing to the 12.6 percent growth in internal commerce were increased sales volumes and the rise in productivity in both wholesale and retail trading. The 9.7 percent growth in real estate, research and business activities was supported by the continued rapid rise in activity on the real estate market. The 10.9 percent growth in transportation, storage and communications was influenced by increased transport volumes and rapid developments in logistics and warehousing. The 22.8 percent growth in financial intermediation was due to active borrowing and leasing activities and the increased efficiency of intermediation itself. The building sector also made a significant contribution to growth, although real growth in its added value slowed to 13.3 percent as a result of acceleration in the rise of costs.
The Ministry of Finance expects to see a reduction in the rate of economic growth in 2007, but due to a certain inertia it is unlikely to decrease rapidly. Economic activity remained high at the beginning of the year, hinting at continued rapid growth – as confirmed by security indicators among consumers and the business sector, the development indicators for branches of the economy and state budget revenue received.

This press release is based on data from Eurostat, the Statistical Office, the Estonian Institute of Economic Research and the Bank of Estonia.
Source: Ministry of Finance