Economic growth above expectations

According to the flash estimates, the GDP turned to the real growth of 2.2% in annual comparison in the 2Q. In quarterly comparison the GDP increased by 0.5% (seasonally and working-day adjusted).

Although we forecasted modest recovery of the growth in the second quarter, this one was above our expectations. At the same time, it should be taken into account that this figure is not precisely comparable with the 1Q growth rate (-1.4% y-o-y), as it is based on revised time series (excluding ESA 2010, which will be done in the beginning of September this year).

Despite the acceleration of the decrease in export of manufacturing goods, the largest contribution to the GDP growth came from the manufacturing sector value added. The decrease of export of goods accelerated to -3.5% in annual comparison, while import decreased by 0.5%. At the same time, first two months in the 2Q showed considerable improvement of the growth of export of services, above the growth of import of services, which softened the negative effect of the worsened foreign trade balance on the GDP growth.

After five consecutive quarters of decrease, net taxes on products turned to the growth contributed by the improved receipts of VAT and excise taxes, as well as, decline in product subsidies. All EU member states (not to mention all countries in the world) do not deflate this transaction identically, therefore both net taxes on products, as well as the GDP, is precisely comparable between countries.

According to our estimates, retail trade and private consumption had considerable contribution to the GDP growth, based on robust growth of real wages and improved consumer confidence. Growth of investments is limited by the persistent decrease in public sector investments. Households’ investments have moderate growth based on the investments in dwellings. Due to the weak demand and low confidence among our corporations, corporate sector investments stay quite modest in this year, being quite volatile by quarters and not sufficiently broad-based.

The decrease in the value added of real estate activity inhibited the GDP growth the most. In addition, value added in construction and transport sector decreased, as we expected. Construction of structures depends largely on public sector orders, which we do not expect to improve in the near future. At the same time, construction of buildings is improving. Altogether, we expect that construction sector will be weak during this year. Decrease in transport sector value added comes primarily from the lessened transit trade and the decrease in transport and storage services.

Robust recovery of the economic growth in Estonia depends substantially on the improving demand of our trade partners and how flexibly, compared to global large corporations, can adjust our enterprises with the weakened demand and/or enter new markets. However, export growth will remain on the negative territory in this year, which inhibits more robust recovery of the GDP growth in Estonia.

Source: Swedbank

Growth in 2Q was better than expected

The flash estimate from Statistics Estonia shows that the economy grew in the second quarter by 0.5% quarter-on-quarter and 2.2% year-on-year. Eesti Pank had forecast an acceleration of economic growth in the second quarter.

The manufacturing sector made a positive contribution to annual and quarterly economic growth. Expectations for manufacturing output fell directly after the events in Crimea, but developments in manufacturing have been relatively stable. The economy grew faster than in the first quarter as the temporary impact of the mild winter on the energy sector receded. Strong retail sales continue to have a positive impact on growth and are themselves supported by strong confidence among households.

The outlook for economic growth has become more pessimistic due to the conflict between Ukraine and Russia. If the amplification of Russian sanctions through consumption and investment is not considered, the direct impact of sanctions will be 0.2%–0.3% of GDP. This effect is from import restrictions that will directly affect exporters to Russia and also other Estonian companies that provide inputs in Estonia and abroad for the production of goods bound for Russia. Sanctions will primarily lead to changes in food processing and agriculture, but they will also affect other sectors such as wholesale and transport, and will affect around 1500-2000 jobs.

Sanctions will affect production chains throughout the European Union meaning they may affect Estonian external demand and impact the economy not only via Russia but also by indirectly reducing Estonian exports to other destinations.

The flash estimate of GDP is based on an updated time series and so is not directly comparable with the most recent Eesti Pank forecast. The aggregate time series using the new methodology will be published by Statistics Estonia in September. Eesti Pank’s forecast expects economic growth for 2014 as a whole to stand at 0.7%.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Economy increased 2.2 pct in 2Q

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 2.2% in the 2nd quarter of 2014 compared to the same quarter of 2013.

Compared to the Ist quarter, the seasonally and working-day adjusted GDP increased by 0.5%.

According to preliminary calculations, the main contributor to GDP growth was Estonia’s largest economic activity – manufacturing, and the largest contribution to the growth was made in the manufacture of wood and coke. At the same time, the growth of manufacturing continued to be slowed down mainly by a decrease in the value added in the manufacture of electronic and chemical products. In the 2nd quarter of 2014, compared to the same quarter of the previous year, the growth in manufacturing was supported by an increase in the monetary volume of industrial new orders (the previous time that orders grew in the same comparison was in the 2nd quarter of the previous year). However, due to weak external demand, there was a decrease in the exports of both manufacturing and the total economy. In the 2nd quarter of 2014, real export of goods decreased in real terms for the fourth quarter in a row. The decline in the 2nd quarter of 2014 was 3.5%. The import of goods fell 0.5% in real terms.

The Estonian economy was slowed down the most by real estate activities, mainly due to an accelerated rise in prices. According to preliminary estimates, the GDP growth was also significantly influenced by increased receipts of excise taxes and value added tax, which are a part of net taxes on products.

The flash estimate of economic growth has been calculated according to revised time series. Therefore, the GDP values and growth rates currently available in the Statistics Estonia’s database are not directly comparable to the growth rate presented in this news release.

The revised GDP estimates for the 2nd quarter of 2014 will be published by Statistics Estonia on 8 September. In addition, data for 2010–2013 and the 1st quarter of 2014 will be updated according to the regular revision based on the supply and use tables and the annual reports of enterprises. Also, GDP figures since 2000 are improved due to reservations. On 8 September, Statistics Estonia will also publish the revised GDP figures for 1st quarter 2000 – 2nd quarter 2014 according to the new European System of Accounts (ESA 2010).

For additional information about reservations and ESA 2010 changes, please see theQuarterly Bulletin of Statistics Estonia 2/14.

Source: Statistics Estonia

Consumer prices continued to decline in July

Data from Statistics Estonia show that consumer prices in July were 0.4% lower than a year earlier and 0.2% lower than in June. Preliminary assessments show that harmonised consumer price inflation for the euro area slowed to 0.4% in July.

The main causes of the decline in the Estonian consumer price index were falls in the prices of energy and food and a further drop in the price of durables. Slower growth in the prices of food on world markets has come in response to several factors, and the impact of this has also been passed into Estonian consumer prices. One factor is that the slow economic growth in emerging markets has reduced price pressures from demand for food commodities, and another is that favourable weather conditions have boosted harvest expectations, which have prevented prices from rising. The result has been that the price index for cereal fell by 7% over the month on world markets in June and by a further 9.7% in July. Global prices for dairy products also fell due to increased supply, though Estonian prices for dairy products continued to rise relatively rapidly in July. The effects of global prices can take up to six months to be reflected in Estonian dairy products. Food prices may rise more quickly in the second half of the year as prices for fruit and vegetables climb from their current very low levels.

Core inflation remained low in July. Among imported manufactured goods, cars and home electronics fell in price again in July, and were joined by clothing and footwear, which were affected by seasonal sales. The decline in core inflation to 0.3% indicates not only that import prices have fallen, but also that domestic price pressures are lower. Domestic inflation has been driven in recent years by rapid wage growth, which has now slowed somewhat. Growth in real wages remains fast as the consumer basket becomes cheaper, and it stands at around 5%. Services inflation is restrained by free higher education and constantly falling prices for communications.

Eesti Pank forecasts that inflation for 2014 will be 0.8%.

Source: Bank of Estonia

Author: Rasmus Kattai, Head of the Economic Policy and Forecasting Division, Eesti Pank

Deflation continued in Estonia in July

In July, consumer prices decreased by 0.4%, year-on-year, and 0.2%, month-on-month. Regulated prices rose by 0.3%, non-regulated prices declined by 0.7%, yoy. Regulated prices were pushed up by increased prices of alcohol and tobacco after the excise tax hikes at the beginning of the year.

Food prices declined more than expected. Warm weather and lower prices of electricity network fees led to cheaper electricity and heating. The prices of transportation, mobile communication services, and higher education also declined. Motor fuel was a bit more expensive than in July last year despite cheaper euro and declined oil prices globally.

Inflation should accelerate in the second half of the year. We expect food prices to rise and euro to weaken. The impact of free higher education, implemented last autumn, will also disappear from September onwards.

Eurozone inflation decelerated to 0.4%, year-on-year, in July, the lowest level in 4 and a half years. Nevertheless, we expect the ECB to refrain from further monetary policy action at today’s meeting as the impact of their previous policy measures are still to unfold.

Source: Swedbank

Dropping number of post offices

Forty of the country’s 194 rural municipalities have fewer than 1,000 people but all of them are required to have a post office, something that a daily says is costing the postal service 2.6 million euros a year.

Postimees said it is part of the universal postal service provider’s obligation to maintain the post offices.

Under regulations by the Minstry of Economics, all municipalities are required to have a post office, even amidst dwindling population in some locations, and rising utility costs. Since October 2013, there are total of 215 municipalities in Estonia, 30 urban and 185 rural.

The postal service has been downsizing post offices and in the past five or six years, merging some of them with other service providers, such as libraries and village stores. The number of post offices has dropped from 500 to a little more than 300 during that period.

Source: ERR News

Prices temporarily declined compared to last year

Data from Statistics Estonia show that prices did not change for consumers during June but they were 0.4% lower than a year earlier. The main reason for the fall in prices was that electricity was 13% cheaper than a year earlier. The price of electricity hit a record peak last June as generation capacity in the Baltic states was restricted by interruptions to supply, but in June this year the electricity price on the power exchange was one of the lowest ever recorded. Prices also fell for fruit and vegetables and for communications services.

Preliminary assessments show that inflation in the euro area stood at 0.5% in June, which was the lowest for several years. Although inflation is picking up in the euro area, it will remain modest as economic activity there is only growing slowly. Low price pressures in the external environment and lower prices for imported goods contributed a significant amount to the fall in Estonian prices, with durables that mostly include imports falling in price by 3.6% in June. An exception was motor fuels, which rose in price by 0.8% as global oil prices started to rise in response to geopolitical tensions. The oil price in euros has been stable since 2011, fluctuating within a narrow range of 80-90 euros a barrel.

Although falling prices generally hinder economic growth, the effect this time is rather the opposite, as falling prices driven mainly by energy prices favour both households and companies. Falling prices reduce economic activity if the fall continues for a long time as they can cause consumption decisions to be postponed. The current fall in prices will prove only temporary because inflation will pick up in the second half of the year as energy prices stop falling and food prices rise more quickly. Eesti Pank’s forecast expects that prices will rise by 0.8% in 2014.

Source: Bank of Estonia

Author: Rasmus Kattai, Head of the Economic Policy and Forecasting Division, Eesti Pank


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