Final months of the year saw an acceleration in GDP growth

Estonia’s gross domestic product grew by 2.7 per cent in the fourth quarter of 2014 year-on-year, according to the flash estimate of Statistics Estonia. Similarly to the third quarter, private consumption and net exports in some industries aimed at foreign markets supported growth from the side of demand. Full-year GDP grew by 1.8 per cent, which is below the country’s growth potential.
Faster economic growth is still hindered by the weakness of industry and the lack of demand in construction which has deepened in the last two years. However, manufacturing made a positive contribution to economic growth in the fourth quarter. The electronics industry demonstrated rapid growth, but this was largely the result of weak figures in the previous year. The production of heating oil and timber also grew fast, but production volumes continued to decrease in a third of industries. The positive actual contribution of the energy sector was primarily a result of the decrease in prices. GDP growth was slowed by logistics and construction.
Private consumption helped buoy domestic demand, although the growth rates of both wages and retail sales both slowed somewhat in the fourth quarter. Households are increasingly positive about the potential for improvement in their own economic situation, although uncertainly about the economic development of Estonia is increasing due to alarming foreign news. The increase in the purchasing power of the population in the last two quarters of the year was supported by a significant decrease in the price of motor fuel and a small decrease in the price of food. Statistics about property transactions indicate that the rise in housing investments was very rapid at the end of the year.
Net taxes on products also contributed significantly to GDP in the fourth quarter. This is related to the rapid increase in VAT receipts due to companies’ obligation to declare invoices of at least 1000 euros to the Tax and Customs Board, introduced in November 2014. This basically means that the black economy component of the economy has been reduced and the share of legal activities in GDP has increased. This rise should continue and improve tax receipts without increasing tax rates.
Source: Estonian Ministry of Finance
Author: Madis Aben, analyst at the Fiscal Policy Department, Ministry of Finance 
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