IMF discussed economic growth and risk

The Annual Meetings of the International Monetary Fund discussed measures that could help support a recovery in growth in the global economy and resilience against risks. An important point for Estonia in the longer term was that growth is likely to be slower in Russia.

Discussions in the IMF’s International Monetary and Financial Committee focused on global growth, which has been poorer than expected, and on ways it can be accelerated and strengthened. In spring most of the recommendations were for short-term monetary and fiscal policy support, but now there were louder calls to adopt economic policies that would have a long-term effect. All countries, including those in the euro area, need to carry out structural reforms in order to strengthen growth, and infrastructure investment needs to be increased in many countries.

“Countries that have carried out important reforms have clearly benefited from them. In the euro area these were particularly the countries that were deeper in the crisis”, said the Governor of Eesti Pank, Ardo Hansson. “Structural reforms are especially important right now as favourable conditions have been created for an economic recovery by short-term monetary policy measures. However, relying only on short-term stimulation could lead to new risks arising, particularly in the financial sector.”

The IMF’s International Monetary and Financial Committee also noted an increase in risks and considered that low interest rates are creating challenges and that risk-taking has increased in financial markets. The main risks to the euro area were identified as slow growth over a long period and inflation, and the impact of geopolitical tensions.

An important topic for Estonia during bilateral talks at the Annual Meetings was the conflict between Ukraine and Russia. Ardo Hansson said that the impact the conflict has had on several economies, including Estonia’s, has so far been modest. Despite this, long-term consequences should be considered, as the economic relations between Russia and the advanced economies will probably not recover in the same form as before.

The Annual Meetings of the members of the IMF and the World Bank are held twice a year. The autumn Annual Meetings were held this year on 10–12 October in Washington, DC. Estonia was represented in the Annual Meetings by Governor Ardo Hansson and Deputy Governor Madis Müller from Eesti Pank and by Vice Chancellor of the Ministry of Finance, Märten Ross.

Source: Bank of Estonia

Consumer prices declined further

A decline in CPI in September in Estonia was expected. Consumer prices decreased by 0.6% compared with last year’s September and 0.2% compared with August.

Annual consumer prices were influenced the most by cheaper electricity, heating and motor fuels. Warm weather, better connectivity with cheaper electricity in the Nordic countries and lower prices of electricity network fees led to cheaper electricity and heating. The weighted average exchange price of electricity was 11% lower in September compared with the same month one year ago.

The prices of transport services decreased because of cheaper motor fuels. The price of oil in the global market has declined due to higher stocks caused by increased production of oil mostly in North America and Libya.

The prices of mobile communication services continued to shrink, year-on-year. Education fees were smaller as free higher education opportunities widened.

Deflation is expected to continue in October, mainly due to lower prices of energy. Oil prices decreased to around 90 USD per barrel globally at the beginning of October. At the same time, euro is expected to weaken further against the USD in the coming months, raising the prices of imports. Around 13% of imports of goods are paid in USD in Estonia.

Source: Swedbank

The consumer price index fell

According to Statistics Estonia, the change of the consumer price index in September 2014 was -0.2% compared to August 2014 and -0.6% compared to September of the previous year.

Compared to September 2013, goods were 0.3% and services 1.0% cheaper.

Regulated prices of goods and services have fallen by 1.1% and non-regulated prices by 0.4% compared to September of the previous year.

Compared to September 2013, the consumer price index was influenced the most by electricity, heat energy and fuels, whereas the electricity that arrived at homes was 7.6% cheaper and heat energy was 4.1% cheaper. Compared to the same period of the previous year, 4.5% cheaper motor fuel, 1.8% more expensive alcoholic beverages and 7.2% more expensive tobacco also had a bigger impact on the index. Compared to September 2013, of food products, the prices of conserved milk have increased the most (18%) and the prices of sugar and apples have decreased the most (39% and 30%, respectively).

In September compared to August, the consumer price index was mainly influenced by the implementation of the higher education reform, which ensures free higher education for all first- and second-year full-time students who enrolled in higher education programmes taught in Estonian. The end of sales of clothing and footwear, 2.1% price increase of electricity and 12% cheaper plane tickets also had a bigger impact on the index. Compared to August, of food products, the prices of tomatoes increased the most (98%) and the prices of potatoes decreased the most (23%).

Change of the consumer price index by commodity groups, September 2014
Commodity group September 2013 –
September 2014, %
August 2014 –
September 2014, %
TOTAL -0.6 -0.2
Food and non-alcoholic beverages -0.2 0.1
Alcoholic beverages and tobacco 3.3 0.3
Clothing and footwear 1.4 3.3
Housing -2.2 0.7
Household goods 1.0 0.3
Health 3.2 0.2
Transport -3.7 -1.2
Communications -4.3 -0.9
Recreation and culture 1.9 -0.1
Education -21.9 -23.5
Hotels, cafés and restaurants 5.2 0.3
Miscellaneous goods and services 2.0 0.4

Source: Statistics Estonia

Research: the Euro changeover in Estonia

Estonia changed over from the kroon to the euro in January 2011. This paper analyses the inflationary effect of this event. The analysis is based on the Harmonised Indices of Consumer Prices. The difference-in-differences method is employed where the treated group is Estonia and the control group consists of the other EU member states. The estimation results imply that the inflationary impact of the euro changeover was either insignificant or small in magnitude, depending on which treatment period is considered. The acceleration in inflation mostly occurred in the second half of 2010, during the six-month period prior to the adoption of the euro. Although the actual effect of the euro changeover on inflation was modest, most Estonian citizens felt that the introduction of the new currency increased consumer prices considerably.

Read more from the Bank of Estonia research paper

GDP growth has been faster than what was reported before

GDP data magic

• GDP growth has been faster than what was reported before
• But growth is still unbalanced …
• … and downside risks prevail

GDP growth has been faster than what was reported before
Economic growth in Estonia looks much stronger in the first half of this year after the substantial data revisions by the Statistical Office this September. There was no decline in economic activity in the first quarter as was reported earlier. According to the revised data, GDP growth accelerated from 0.3% in the first quarter to 2.4% in the second quarter. Higher GDP growth is more in line with other economic indicators, i.e., the fast growth in wages, retail sales, and real estate prices.

But growth is still unbalanced and therefore unsustainable …
In the second quarter of this year, economic growth was still too dependent on private consumption. Investments grew modestly. The growth of exports remained small, affected by weak external demand and increased geopolitical tensions. In a tiny, open economy like Estonia, consumption-based growth cannot continue for long, if exports and investments do not pick up.

… and downside risks prevail
As the economic growth rate of Estonia for the first half of the year was lifted considerably, analysts might consider revising their forecasts upwards later this year. At the same time, negative external risks have clearly grown. The Russia-Ukraine conflict and new round(s) of sanctions from both sides have increased the instability in the region and will dampen trade and investment flows.

Source: Swedbank

Read more from here

The current account deficit replaced by a surplus in 2Q

Economic growth in Estonia in the second quarter was expected to be based primarily on domestic demand. Growth based on domestic demand has generally meant for Estonia a larger or smaller current account deficit. Given that, the small surplus in the second quarter of around 1% of GDP of the quarter was somewhat surprising. The cause of the surplus is the surplus on the foreign trade account, while the net outflows of primary and secondary income pushed the balance rather towards deficit. For GDP growth this means more balanced growth than had been expected, as the contribution from net exports was positive for a long time.

Exports of services saw relatively robust growth from the levels of the previous quarter and of the same quarter of last year. Imports of services grew little during the quarter and the surplus on the services account increased to 8.7% of GDP in the second quarter. Both the imports and exports of goods fell again, and the deficit on the goods account stood at 4.9% of GDP, which was lower than the average for 2013. The continuing fall in goods imports since the third quarter of last year can partly be explained by weak investment activity.

The question arises again of whether the moderate deficit on the current account in recent years was more a consequence of low levels of investment activity or of structural changes and less capital-intensive growth.

See also: The Estonian balance of payments, international investment position and gross external debt for the second quarter 2014

Source: Bank of Estonia

Author: Andres Saarniit, Economist at Eesti Pank

Economy grew 2.4% in the 2nd quarter

According to the second estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 2.4% in the 2nd quarter of 2014 compared to the 2nd quarter of the previous year.

The GDP has been calculated on the basis of the methodology of the new European System of National and Regional Accounts, ESA 2010. In the 2nd quarter, the seasonally and working-day adjusted GDP increased by 1.1% compared to the 1st quarter of 2014 and 2.9% compared to the 2nd quarter of 2013.

In the 2nd quarter, the GDP at current prices was 4.9 billion euros.

In the 2nd quarter of 2014, the GDP growth was influenced the most by a rise in the value added in professional, scientific and technical activities, trade and energy. The GDP growth was also positively influenced by increased receipts of excise taxes and value added tax, which are a part of net taxes on products. The value added in construction slowed the Estonian economy down the most, mainly due to decreased construction volumes. In addition, the GDP growth was substantially decelerated by a decrease in health and transportation.

The export of goods decreased for the fourth quarter in a row, while the export of services continued to increase. The decrease in the export of goods was influenced the most by a deceleration in the export of electronic, other manufacturing and chemical products. The import of goods and services decreased at real prices by 0.7%.

Net export was positive in the 2nd quarter of 2014, amounting to 3.7% of the GDP. The previous time that net exports were on a similar level was in 2011.

The Estonian economy was continuously supported by growing domestic demand. Domestic demand increased at real prices by 4.4%, mainly due to the household final consumption expenditure and changes in inventories. The household final consumption expenditure increased by 3.6%. The expenditures on food, clothing and catering services increased the most. Inventories grew mainly due to an increase in the inventories of goods and raw materials.

The gross fixed capital formation increased by 0.7% in the 2nd quarter. The growth was mostly influenced by the investments in buildings and structures by the sector of non-financial corporations. At the same time, the investments of the general government sector and the investments of non-financial corporations in transport equipment decreased.

In the 2nd quarter, domestic demand was smaller than the GDP, accounting for 96.9% of the GDP.Diagram: Real growth of the GDP, exports and imports of goods compared to the same period of the previous year

Statistics Estonia revised the GDP time series data from 2000 onwards. The data have been recalculated on the basis of the European Parliament and the Council Regulation (EU) No 549/2013 on the European system of national and regional accounts in the European Union (ESA 2010). In addition to the above-mentioned revisions, the reference year of the GDP calculated with the chain-linked method was shifted from 2005 to 2010.

Additional information about the revisions is available here.

Source: Statistics Estonia

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