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Estonian construction sector as engine of economic growth is decelerating – SEB

BC, Tallinn, 26.10.2018.Print version
SEB analyst Mihkel Nestor said that the Estonian construction sector as engine of economic growth so far is decelerating, but compared to the pre-crisis period, the market is in a significantly better balance, cities LETA/BNS.

"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.

 






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