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Friday, 26.04.2024, 10:44
Estonian construction sector as engine of economic growth is decelerating – SEB
"Events
in the construction sector have been a hot topic for quite some time already.
According to gross domestic product (GDP) statistics, it is namely construction
that has been the main carrier of economic growth in the recent quarters.
As a result of high demand, construction volumes have by now exceeded even the
2007 rate. Should we rejoice or grieve over the increased importance of
construction? There is definitely no need for panic. There are a number of
completely objective factors behind the increase in construction volume,"
Nestor said in a press release.
According
to the analyst, the economic environment has been good in recent years and
therefore it is logical that companies need a greater surface for operating
during these times. When developing residential real estate, buyers are
also usually found for new homes and relatively high activity there is
explained by an increase in the number of those occupied with work, the fast
gross salary growth to 1,300 euros per month and the demographic situation,
where housing is being bought by the large so-called "Singing Revolution"
generation born in the 1980s.
"In
addition to the private sector, the state has also contributed to construction.
The government has been criticized a lot for its investment program during
economically good times. Of course, state investments at a time when the construction
market is already cramped are not appropriate. At the same time, it is clear
that by predominantly using the money of the European Union, the state is not
free to decide when exactly to let the excavator start digging. Another problem
of its own has also been changes in the understanding of how quickly the
economy grows. While at the beginning of 2017 it was thought that economic
growth will be limited to a lousy 1.5%, then in retrospect, the GDP growth in
2016 turned out to be more than twice faster. The stimulation of the 1.5%
economic growth with construction investments by the government may have even
been reasonable, while it certainly would not be so with a 3.5% GDP
growth," the analyst said.
Nestor said
that noteworthy on its own is the fact that high demand in the construction
sector has not been expressed in construction price statistics, but said that
the reason behind this is the illegal activity in the construction sector.
"It is
clear that construction is one of the most 'grey' sectors of the Estonian
economy. Even the main contractor does not often know who actually
holds the trowel at the construction site. It is difficult to monitor the
movement of money along a long chain of subcontractors and it can be presumed that
quite a few state taxes are left unpaid. The work relations of the sector are
also much more unstable in nature than elsewhere. This does not of course
promote the drawing up of adequate and exact statistics, which is why when it
comes to price statistics, greater trust limits have to be implemented than
with many other statistical indicators," Nestor said.
At the same
time, Nestor said that when it comes to the current state of the construction
sector, a positive factor is that unlike the pre-crisis time, the construction
sector has not distorted the labor market very significantly.
"Surprisingly,
the labor market studies of Statistics Estonia show that employment in the
construction sector has actually decreased. While in 2015, altogether 62,000
people or nearly 10% of all employed worked in the construction field, the
number stood at only 57,000 or 8.7%. This likely indicates at least partly the
wider use of foreign workforce. The Interior Ministry said that as of September
2018, temporary work permits for employment in the construction field had been
issued to approximately 5,000 foreigners, most of whom are citizens of Ukraine.
In addition, people knowledgeable about the field say that part of the foreign
workforce also arrive here without the necessary permit," Nestor said.
Nestor said
that it is unlikely that the current construction volumes can be maintained in
the future. "Statistics regarding issued construction permits published
last week show that compared to the same time the year before, the number of
construction permits is decreasing for the third quarter in a row.
Compared with 2017, altogether 13% fewer construction permits
for residential premises have been issued this year, while the drop
reaches 23% for non-residential premises. The outlook is that the number will
decrease even more," he said.
"The
confidence indicators of companies have worsened compared to last year and on
the background of news regarding the upcoming turn of the economic cycle, not
much eagerness to throw money in concrete can be seen. In terms of residential
real estate, demand is stipulated both by the economic environment and
demography. Even though Estonia's employment and salary growth are still very
high, the number of potential home buyers has already reached its
maximum," Nestor said.
"Luckily,
the Estonian economy is on much firmer feet today than in 2008 and the
deceleration of the construction tempo alone should not be tragic for economic
growth," he said.