In 2017, Estonia’s GDP growth accelerated to 4.9% in real terms and to 9% in nominal terms. Economic growth was the fastest of last six years. The growth exceeded our expectations (our recent forecast in January was 4.4%). The growth was broad-based – the largest contribution came from construction and ICT sectors and professional and technical services. Besides economic activities dependent on foreign demand, activities related to the domestic demand grew fast, as well.
Export growth decelerated due to the decreased exports of mobile equipment
Despite the recovered foreign demand, Estonia’s export growth decelerated to 3% and export of goods growth to only 1%. The reason for this weak result was sharp decline in exports of mobile equipment. Without this product group, export growth should have been considerably stronger. Export of services increased 6% contributed primarily by transport and IT services.
Productivity growth has enabled to slow the decline in price competitiveness
Last year’s robust economic growth contributed to the accelerated growth of labour productivity, especially in nominal terms. Although the growth of labour costs exceeded productivity growth, the gap has narrowed. Thus, we are still losing our price competitiveness against our trade partners, but the trend has decelerated.
Investments picked up after three years of decline
Investment growth (13%) made a robust recovery after three years of decline contributed by nonfinancial corporations and government sector (investment growth rates respectively 15% and 24%). Although, investment growth of these sectors was broad-based by assets, the largest contribution to the government sector investments came from investments in structures.
Private consumption growth is expected to pick up again this year
Last year, private consumption growth slowed to 2%. The reason for this deceleration was the slowdown of real growth of net wages. Slowdown of private consumption was broad-based.
We expect slowdown of economic growth in 2018
In our last Swedbank Economic Outlook in January, we forecast that GDP growth would slow to 3.9% in 2018. Despite the expected weakening of foreign demand, we forecast some pick up in export growth. The sharp drop of exports of mobile equipment should fade, at least due to the base effect. Although, investment growth is expected to decelerate, the level of investments in GDP should rise in 2018. We forecast pick up of private consumption growth in 2018, as the increased level in income tax exemption would rise purchase power of the majority of wage earners, especially of those with less than average income.