Analytics, Banks, Construction, Estonia

Even though the construction volume of Estonian companies in Estonia and in foreign countries slowed down to 16 percent in the third quarter, and to 18 percent on the Estonian market only, Mertsina said these numbers are still strong. He added that it also indicates that the construction sector made a relatively significant contribution into the growth of the economy in the third sector, too.

In year-on-year comparison, the production value of civil engineering showed strong growth in the third quarter of 2018. Civil engineering accounted for 39 percent of all construction and resulted mainly from state contracts, Swedbank said.

The ratio of investments by Estonian government to GDP is one of the EU's highest. Even though the growth in investments is to slow down in the coming few years, the head economist estimates the ratio of investments to GDP will remain consistently high and this will continuously stimulate the economy. 

Mertsina said, however, that the growth of construction volume for dwellings will slow down next year.

"If the number of construction permits for dwellings is much lower than during the peak of the previous boom, then the number of permits for use already reaches that of the peak of 2007. Meanwhile, the number of new constructions permits for dwellings has already decreased this year, and the growth in the number of permits for use, too has been slowing down for three consecutive years," he said.

"Therefore, it can be presumed that the growth in construction volume of dwellings will continue to slow down. The number of permits for use for non-residential premises, however, has reached 85 percent of the peak level of the previous boom and the growth has remained strong in the past two years," Mertsina added.

Households' sense of confidence regarding the purchase or construction of housing has sharply declined, the economist noted, indicating that the increasingly intense statements and articles of a looming economic crisis and possible rise in interest rates could be the reason.

Mertsina said that on the other hand, none of the forecasts for the coming years includes in its baseline scenario an economic crisis, and the rise in interest rates, too, ought to prove to be slow.

"Considering the continued swift wage growth in Estonia, the rise in interest rates should not pose any problems for those seeking to get a housing loan. The affordability of housing has not deteriorated in the past years. Even though housing prices have grown rapidly along with the high demand, the growth in net salary has been strong as well," he said.

The construction volume of Estonian construction enterprises in foreign countries has been in decline for the entire year and the ratio of construction works abroad of the entire volume of construction has decreased. If the growth in construction still remains strong in the Baltic states, then in the Nordic countries it has been slowing down for a while, and in Sweden construction volumes have decreased this year.

"In the Baltics, there is a lag in the construction cycle -- if in Estonia, construction volumes were on the rise in the first quarter of 2016, then in Latvia and Lithuania, the rise occurred 3-4 quarters later," Mertsina added.

Despite the use of foreign workforce, labor shortage is still prevalent in construction. "Labor shortage has not, however, caused excessive wage pressures, at least not according to official statistics, as labor costs have grown more slowly than sales revenues," the chief economist said.