IBR

It can’t get any better

Mati Nõmmiste Mati Nõmmiste

This year is the point where the economy peaked – it can’t get any better. We already see economic growth tapering off in Estonia, the EU and elsewhere. But will we lose our footing as we slide downhill or will we be able to softly glissade down the easy slopes?

The International Monetary Fund’s overview of the state of the world’s economy predicts that the economy will not continue growing at its current pace. Eurostat data on EU economic growth in Q2 show that GDP grew 2.2% compared to the same period last year, which means that the growth rate has slowed. The Bank of Estonia is calling for 3.5% growth this year, 3.6% next year and 2.5% in 2020.

Populism and trade war breed caution

For business people, the news of the slowdown in growth has also arrived. The results of a recent study by accounting and business advisory company Grant Thornton conducted among 3,500 companies in 35 countries show that while for the last two years, optimism had been consistently increasing among the business community in regard to their outlook for their own company and their country’s economy, the optimism index saw a downturn this Q2. In spite of the fact that entrepreneurs are not particularly worried – 59% of those surveyed said they believed their turnover would increase in the next 12 months – they are still more cautious now, as the economic climate is being negatively influenced by political instability. “Trade war” is the main keyword here, but so is populism, which may have a faster and stronger effect on the economy than we can currently forecast.

The increased cautiousness among entrepreneurs may lead to deepening of a negative tendency. Namely, investments have not been made at the same pace as economic growth. Unfortunately, Estonian companies stand out in this regard, being under the EU average. However, investments are critical for companies to be able to maintain sustainable growth.

Promoting innovation in words alone

Looking at the distribution of companies’ investments, we see that Estonia’s situation is particularly odd. On one hand, we are building an international image as an innovative digital society. On the other hand, of the already low total investment by companies, under one-third is spent on training people and R&D, while the rest is invested into equipment and machinery (source: a Tallinn University of Technology study on whether corporate investments will attain productivity).

Yet R&D is exactly the magic bullet that can support innovation as we come up with innovative goods and services by rethinking the way work is done and training employees. This is the basic building block of ensuring economic growth and increasing productivity.

The state, too, can – and should – support companies’ investments into R&D. One way to do so is to institute taxation measures, such as tax breaks. True, Estonia offers income tax exemptions for investments but compared to buying machinery, R&D is a long-term investment that will generate a return only years later.

Considering that the general election will take place this coming spring, we will soon see parties tumbling over one another to dispense generous promises. I advise entrepreneurs to also follow the debate from the perspective of what will be pledged by whom for incentivising investments, particularly investments into R&D.

Once every quarter, Grant Thornton International Business Report (IBR) surveys business people in 35 countries to find out their expectations about their country’s economy and their business. The data on optimism in the business community were collected from more than 2,500 executives in May and June 2018.