ESTONIAN ENVIRONMENTAL REVIEW 2009

2. The economy
Estonia’s economy experienced very successful years in the last
decade. In 2006, Estonia ranked second in Europe in terms of economic
growth. Even though economic growth is not necessarily accompanied
by increased pressure on the environment, such has been the case in
Estonia. High demand for transport, fuels and electricity during the
boom in consumer spending and construction led to higher levels of
emissions and amounts of waste generated.
2.1. Gross domestic product and
consumer price index
Starting in the beginning of 2000, Estonia’s gross
domestic product (GDP) began growing very rapidly –
more than 10% per year by 2006 (see figure 2.1, table 2.1).
In Europe, Estonia was second only to Latvia in economic
growth in 2006. The rapid economic growth was based
primarily on brisk internal demand, which rose to record
levels in 2004–2006 thanks to good loan conditions. Private
consumption was also favoured by positive trends on
the labour market, high consumer confidence, rapid wage
growth, lowering of the income tax rate, and growth of
old age pensions. Investments also grew, and their rapid
growth was conditioned by the brisk investment activity
on the part of companies, encouraged in turn by low
interest margins and high influx of foreign investment.
Compared to 2005, the gross domestic product increased
10.4% in 2006. This was the highest growth rate of the
2000s. Private consumer spending in 2007 was 2.8 times
higher than in 1995.
The cooling of Estonia’s economy took place gradually,
when internal demand began decreasing in 2007. Growth
fell from 10% in the first quarter of 2007 to 4.8% in the
fourth quarter. While investment growth slowed down in
early 2007, private consumer spending was at the highest
level in recent years. But the major price rise and lower
consumer confidence affected consumer behaviour and
the second quarter of 2007 saw the beginning of lower
consumer spending. This was accompanied by a cooling
of the real estate market, which had seen very rapid
development in the preceding years. Economic growth
slowed down to pre-EU-accession levels. In 2008, internal
demand continued to drop and as the impact of the
international financial crisis began to be felt by Estonia’s
primary trading partners, the Estonian economy began
rapidly heading downhill. In 2008, GDP fell 3.6%. In the
fourth quarter alone, the drop was 9.7% year-on-year.
According to the forecasts from Eesti Pank, the economy
will contract by 12.3% in 2009.
Along with the rapid economic growth, prices rose
as well. The standardized consumer price index was
still 4.1% in 2005, but rose to 6.6% in 2007 (figure 2.2).
The price rise was supported by rapid growth in internal
demand and wages that persisted for several years and
was reflected in the price of services. Even though internal
demand fell in 2007, the rise in the prices was impacted
by the rise in the price of fuel and external factors. The
price increases continued in 2008 and the average for the
year was 10.4%. The primary reason was the steep rise in
oil and food prices in the world market. Along with the
economic recession, inflation pressure started dropping
as well. From autumn 2008, growth in consumer prices
started slowing and in early 2009, the annual growth in
the consumer price index had dropped to 3.9%. According
to the forecasts from Eesti Pank, the economy will
contract by 0.5% in 2009.
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