Estonia Infrastructure Report 2007

In the second quarter of 2006, the value of production by Estonian construction enterprises amounted to EEK8bn (US$652.82mn). Witnessing a robust uptrend, total production by Estonian construction enterprises at home and in foreign countries added 34% in Q206 over the same period last year. The ongoing uptrend in construction activity has led to a sharp increase in the sale of building materials, and has prompted companies to invest in expansion. Estonia's construction industry is likely to top US$1bn in 2007, and BMI forecasts an average growth rate of 7% over 2006-2010.

In Q206, growth in construction was mainly attributed to an increase in building construction, which constituted 67% of total construction volumes in the domestic market. According to data from the Construction Works Register, the number of dwelling completions in Q206 was 894. The demand for new dwellings continued in Q206 with building permits being issued for the construction of over 4,000 units in the quarter.

However, a shortage of raw materials and labour might prove to be an obstacle to faster growth in the Estonian construction industry. In Q306, the Estonian Construction Price Index was 11.2% higher than in Q305, according to the Statistical Office. Rapidly rising construction prices could affect ongoing environmental and transport projects that have EU subsidy support. Over the past five years, Estonian wages and salaries have risen close to 11% per year on an average. On the political front, rifts could emerge within the coalition over public expenditure, particularly as the electoral cycle approaches its peak.

With an expanding house-building segment and large government infrastructure projects, the construction industry in Estonia is all set for strong medium-term growth. BMI expects the industry to contribute about 6.25% to the nation's GDP in 2006. Further, inflation is projected to trend downwards as the oil price shock passes through the system and the flexible labour and product markets contain upward pressure on core prices. On the BMI Business Environment Ranking matrix, Estonia receives a composite score of 32, which ranks it fifth out of the 14 states included from Emerging Europe.