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Estonia Faces Risks From Wages to Property Costs: Hansson

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Nov. 25 (Bloomberg) -- Estonia needs to stem accelerating wage growth and housing prices to protect the economy of the newest euro-area member, central bank Governor Ardo Hansson said.

Wage pressure, driven by excess labor demand in some regions and industries, is starting to spill over into inflation even as one-time effects such as free public transport in the capital, Tallinn, balance them out, Hansson said in an interview Nov. 22. Unemployment is “below the natural level,” having declined to 8 percent in the third quarter from 19.8 percent in 2010, he said.

Estonia’s $22 billion economy, part of the euro area since 2011, hasn’t returned to output levels before a 20 percent contraction in the wake of Lehman Brothers Holdings Inc.’s 2008 demise. The slump was worsened by the collapse of a property boom after housing prices in Tallinn doubled in three years and the average wage grew 20 percent in 2007 alone.

“We see the trends that are starting now in terms of wage growth and property prices starting to pick up again,” Hansson said. “If it were to continue now for several quarters, several years, you could get into a situation where some of the imbalances start reappearing.”

Hourly labor costs grew 7.7 percent from a year earlier in the second quarter, the fastest increase among the European Union’s 27 members before Croatia joined in July, according to Eurostat. That compared with an average increase of 0.9 percent, the trading bloc’s statistics office said.

Economy Slows

Housing prices jumped 8.1 percent, second only to Latvia which will adopt the euro in January, according to Eurostat.

Estonia’s gross domestic product grew 0.4 percent from a year earlier in the third quarter, the slowest pace since it exited a recession in 2010, as construction slumped amid declining public investment and export demand from Finland and Russia weakened.

While the strength of the jobs market may be explained by the expansion of labor-intensive industries, such as wholesale and retail trade, Hansson said he sees export demand from Estonia’s main partners improving next year.

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net; Stefan Riecher in Tallinn at sriecher@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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