The economic growth forecast for 2014 is two percent

The Ministry of Finance reduced the economic growth forecast of 2014 to two percent. The cause for the lower than expected economic growth is primarily the deterioration of growth outlook in Estonia’s neighbouring countries which has postponed the expected increase of export growth and private sector investment growth.
While economic growth is mainly supported by domestic demand at the beginning of this year, it will quicken thanks to recovery of foreign demand in the second half of the year, leading to the export and service industry’s increased contribution to economic growth.

For the next year, the Ministry forecasts an increase of the economy by 3.5 percent, where investment activity and consumption courage should also start to grow with improvement of the  economic conjuncture. Growth of the construction market is expected to recover starting from 2015 as well due to increasing private sector investment activity.

Risks of economic outlook are mainly related to events in Ukraine which have been developing fast in recent weeks and carry economic effects which are difficult to assess with precision before the foreign policy situation has stabilised.

Demand in foreign markets is more modest than expected and export of high-share goods is weak, therefore the export forecast for 2014 was decreased to 2.4 percent. Export will pick up within the next year and the growth opportunities of manufacturing enterprises will be expanded by a gradual recovery of Finnish economy as well. Due to large investment needs, import growth in the forecast period will be somewhat faster compared to export.

Consumer confidence has adhered to a steady growth trend for the past couple of years, therefore it can be assumed that continuation of stable developments and reduction of unemployment will keep the slowing of private consumption’s growth merely marginal during this year and the next so that it will remain just below 4 percent. This year, support for real growth of consumption will come from a deceleration of inflation and next year from lowering of the income tax rate.

Consumer price inflation will remain low at the beginning of this year, quickening somewhat during the last months of the year. Prices will be affected in the second half of the year by an increase of food prices and a decrease of housing expenses due to electricity, district heating and gas becoming cheaper. In 2014 as a whole, inflation  will be just 1.4 percent, becoming 2.7 percent in 2015.

The number of employed people will continue to grow in 2014–2015, and afterwards will probably turn to a small decline. Unemployment rate will decrease below 8 percent in the coming year and if favourable economic developments persist then down to near 6 percent by the end of the forecast period. A fast growth of average salary by nearly 8 percent surprised in 2013 and this growth will remain somewhat lower in the near future, around 6–7 percent. However, low inflation will still keep the growth of average real salary at a high this year (4.8 percent) and it will subsequently remain around 3.5 percent.

Due to a slight deterioration of the economic environment, the forecast of tax revenue has also been lowered, mainly on account of social tax and fuel excise. As a result, this year’s nominal fiscal deficit of the government sector will be 0.7 percent of the GDP; the budget will remain balanced structurally (the position without one-off influences and without the effect of economic cycle). Nominal deficit can be compensated from the state’s liquid financial assets.

The forecast of public finance takes into account the laws in force, therefore possible additional measures (incl. a new coalition agreement) will be added to the forecast when preparing the state fiscal strategy (SFS 2015-2018). With the SFS, the government adopts the fiscal policy principles for the next four years, including targets for the government sector’s fiscal position.
Source: Estonian Ministry of Finance

Estonia’s economic linkages with Russia

Russia’s share in Estonia’s foreign trade is below 10%
Russia’s share in Estonia’s foreign trade is rather small, only 9% in 2013. However, Russia’s market is more relevant for certain sectors, like food industry and agriculture, as well as chemical and textile industries. As a source of raw materials, Russia is important for timber, furniture, chemical, and metal industries. Russia’s market is also significant for Estonia’s exports of transport and travel services.

Russia’s share in foreign investments remains small
The stock of Estonia’s investment in Russia and Russia’s investment in Estonia remains modest. At the end of 2013, the stock of Estonia’s investments in Russia amounted to 4% in Estonia’s total investment abroad, and the stock of Russia’s investment in Estonia was also 4% of all foreign investment in Estonia.

The crisis in Ukraine will affect trade and investment flows
Exports to Russia are affected not only by the decreasing purchasing power of Russians, but also by possible trade barriers. Investment flows will be smaller because investing in Eastern Europe is considered more risky and will be less profitable when economic growth in the region will be slower. If the conflict in Ukraine does not escalate and sanctions remain targeted with a modest impact, the Baltic economies are still expected to grow, albeit slower than anticipated before. Should the conflict escalate and broader trade sanctions be introduced, Estonia and the other Baltic economies will probably be hit harder – in which case a recession should not be ruled out.

Read more from Swedbank Macro Research

Estonian Competitiveness Report 2014

The Estonian Competitiveness Report written by experts from Eesti Pank assesses Estonia’s export strength to give a picture of the  competitiveness of the economy, looking at long-term relative productivity growth and short-term deviations from the path of sustainable growth. It also contains a detailed discussion of the indicators for relative competitiveness in prices and costs, which are based on the comparative dynamics of prices and wages in Estonia and in the country’s main trading partners. It also describes a number of competitiveness factors other than price.

The Estonian Competitiveness Report is published once a year and can be read here.

 

COMPETITIVENESS INDICATORS 2013

  • The euro appreciated by a nominal 1.4% in 2013 against the currencies of Estonia’s trading partners in the EA+40. This slowed price growth in Estonia but was restrictive for exports. In conjunction with the strengthening of the real exchange rate there was also a decline in the price advantage in export markets that had arisen following the crisis.
  • A statistically significant near unit elasticity has been found between the unit labour cost based REER and the growth in Estonian exports of goods. This means that the faster rise in unit labour costs in relative terms in Estonia restricts the growth in goods exports to almost the same amount.
  • The IMF methodology for the equilibrium current account position and the real exchange rate assessment implies that the real exchange rate of the euro could be around 10% undervalued for Estonia. This should continue to favour opportunities for growth for Estonian exports.
  • Total weighted import demand from Estonia’s foreign partners declined by 1.7% over the first three quarters of 2013 at current prices while exports of goods and services grew by 3.6% during the same period. Growth slowed in Estonian exports in 2013, but market share increased in target markets a little faster than before and was 5.5% bigger over the year.
  • The market share of Estonian exports in the global economy increased by an average of 5.4% a year in 1999-2012. Growth in market share was helped by a good composition of Estonia’s target markets and the products exported. Even so there were missed opportunities for products or markets where demand was growing rapidly or for expansion in new markets or with new products. Estonia managed to expand its market share for exports even given these factors.
  • Value added of exports increased more stably than the total value of exports during the past decade, but their average growth rate was similar. Data for the first three quarters of 2013 show that value added in exports was up 4.0% at current prices over the year, which was 0.5 percentage point more than the growth in the value of non-oil exports.
  • Wage costs increased as a share of value added in 2013 and unit labour costs increased as profit growth slowed sharply. In the longer term, if there is an acceleration in growth in prices of commodities and energy and other costs, it will increase the risk of higher inflation stemming from cost pressures or of a slowdown in economic growth.
  • The productivity of labour in Estonian companies is higher than in other central and eastern European countries and the differences between companies are smaller. Estonia stands out from other countries in the allocation of resources by having a relatively efficient service sector. More productive companies have taken market share from the less productive since the crisis and their contribution to overall Estonian productivity growth has increased.

Source: Bank of Estonia

 

In January foreign trade decreased

According to Statistics Estonia, in January 2014, exports of goods decreased by 20% and imports by 15% at current prices compared to January 2013.

The substantial decrease in trade was partially influenced by the high reference base of January 2013 caused by single transactions involving sea vessels. After eliminating these outliers, exports and imports decreased 7% in January 2014.In January, exports from Estonia amounted to 904 million euros and imports to Estonia to 973 million euros at current prices. The trade deficit was 69 million euros (22 million euros in January 2013).In January, the biggest share in Estonia’s exports was held by electrical equipment (a fifth of Estonia’s total exports), followed by agricultural products and food preparations (11%) and mineral products (10%). A significant decrease occurred in the exports of transport equipment and electrical equipment (down by 76% and 23%, respectively). At the same time, the exports of wood and products thereof increased (8%).In January the main commodities imported were electrical equipment (18% of Estonia’s total imports), mineral products (13%) and agricultural products and food preparations (11%). The biggest decrease occurred in the imports of transport equipment (54%). There was also a substantial decrease in the imports of mineral products (incl. heavy oils, natural gas). At the same time, the imports of plastics and rubber articles increased (7%).

The top destination country of Estonia’s exports was Sweden (18% of Estonia’s total exports), followed by Finland (16%) and Latvia (11%). Electrical equipment and wood and products thereof were the main commodities exported to Sweden; electrical equipment and furniture were the main commodities exported to Finland; and mineral products (incl. electricity) and agricultural products and food preparations were the main commodities exported to Latvia. The most significant fall occurred in exports to Finland and USA (down by 51% and 35%, respectively). At the same time, exports to Latvia and the United Kingdom increased (by 10% and 38%, respectively).

In January, the main countries of consignment were Finland (17% of Estonia’s total imports), Germany (12%) and Sweden (11%). Mineral products (incl. motor spirits) and electrical equipment were the main commodities imported from Finland; transport equipment and mechanical appliances were the main commodities imported from Germany; and electrical and transport equipment were the main commodities imported from Sweden. Imports from Finland and Russia decreased the most (by 37% and 35%, respectively). Imports of goods from Germany increased by 9%.

In January 2014 compared to December 2013, exports increased by 2% and imports decreased by 3%. Export and import prices decreased by 1.5% compared to January 2013.

Read more from Statistics Estonia here

Estonia’s foreign trade by month, 2013–2014

Estonia’s foreign trade by month

What happened to Estonia’s exports?

Export growth disappointed in 2013
The growth of exports slowed even more in 2013. One of the reasons was sluggish demand in Estonia’s export markets. But some of the major export industries faced additonal challenges. The exports of fuel and rail transport services have fallen because Russia is directing more of its oil through its own ports. The metal and electronics industries are facing smaller demand and stronger competition, especially from the east.

Estonian exporters have increased their market share
Estonia’s exporters have become more competitive and managed to increase their market share, both in the world and in Europe, although their own assessment is that their competitive position has been on a downward trend since 2011. Amongst the three Baltic countries, Lithuania has been much more successful in lifting its exports. From 1995 to 2012, Lithuania was able to increase its market share in the world by 0.11 percentage point, compared with only 0.05 percentage point for Estonia and Latvia.

Growth of exports expected to slightly accelerate in 2014
The growth of exports is expected to pick up in 2014, supported by a more benign outlook for Estonia’s trade partners, especially in Finland and Sweden. Swedbank expects the growth of Estonia’s exports to accelerate from 1.9% in 2013 to 4.3% in 2014. Recent events in Ukraine pose a negative risk to the outlook as instability in the region will reduce trade and investment flows and slow GDP growth.

Source: Swedbank

Market share in target export markets increased last year

Although growth slowed in Estonian exports in 2013, market share increased in the markets of Estonia’s eleven main trading partners a little faster than before in the first three quarters of the year, and was 5.5% bigger over the year. Demand decreased by 1.7% at current prices in the eleven main trading partners in the period, while Estonian exports grew by 3.6%. Improved competitiveness and an increased market share for exports helped offset weak foreign demand to a significant degree. The better competitiveness of the Estonian economy will be seen in the long-term in GDP per capita growing faster than it does in Estonia’s trading partners. Faster growth in incomes will ensure a larger market share for Estonian exports in the main target markets.

The market share of Estonian exports in the global economy increased by an average of 5.4% a year in 1999-2012. Demand has grown faster in Estonia’s main trading partners than the global average, and this has aided the growth in market share, while global demand for the products that Estonia exports has also increased. Improved competitiveness has also aided the growth in market share.

The faster rise in unit labour costs in Estonia than in those of competitor countries has restricted the ability of goods exports to grow by almost the same amount. The euro appreciated by a nominal 1.4% in 2013 against the currencies of Estonia’s trading partners. This slowed price growth in Estonia but was restrictive for exports. In conjunction with the strengthening of the real exchange rate there was also a decline in the price advantage in export markets that had arisen following the crisis. An important role was also played by non-price competitiveness factors, which include the features of goods and services, changes in their appearance or quality, the division of labour within industries, and the increasing importance of services.

The labour productivity in Estonian companies is among the highest in central and eastern European countries. Differences in productivity between companies are also smaller than those in other countries. That these differences are small is in one sense good, as the bulk of companies are in the lower ranges of productivity, and these companies are relatively competitive in Estonia. In another sense it is not so good as the highest productivity levels in the top Estonian companies are relatively close to the average. Estonia stands out from other countries in the distribution of resources by having a relatively efficient service sector. More productive companies have grown faster than less productive ones since the crisis, which shows that the effective distribution of resources has increased growth in Estonian labour productivity.

Source: Bank of Estonia

Author: Natalja Viilmann, Economist at Eesti Pank

Estonian food producer: trade with Russia is key

Ago Teder, CEO of Estover Piimatööstus, a major exporter of Estonian milk products to Russia, told Äripäev that he expects the border treaty that will be signed today to give a boost with trade with Russia.

Teder said that Estonian producers would be fools not to try to sell their food in Russia because there is positive awareness about the quality of Estonian food among Russian consumers.

„We can say that while Russians welcome Estonian food, our products are not welcome in Europe,” he added.

Read more from BBN

Last year Estonia’s trade decreased

According to Statistics Estonia, in 2013, exports of goods decreased by 2% and imports by 1% at current prices, compared to 2012. In 2013, exports and imports decreased after three years of successive growth.

In 2013, exports from Estonia amounted to 12.3 billion euros and imports to Estonia to 13.7 billion euros at current prices. The trade deficit was 1.4 billion euros (in 2012, 1.3 billion euros). The largest trade surplus was recorded in trade with Sweden and Russia and the largest trade deficit occurred in trade with Germany and Lithuania.

In 2013, the main countries of destination were Sweden (17% of Estonia’s total exports), Finland (16%) and Russia (11%). Electrical equipment and wood and products thereof were mainly exported to Sweden, electrical equipment and furniture to Finland, and mechanical equipment and agricultural products and food preparations to Russia. The largest decrease was recorded in exports to the USA and Russia (down by 39% and 7%, respectively), while exports to Latvia increased by 16% and to Finland by 8%.

The main countries of consignment were Finland (15% of Estonia’s total imports), Germany (11%) and Sweden (10%). Mineral products (incl. fuels) and electrical equipment were the main commodities imported from Finland, mechanical and transport equipment from Germany and electrical and transport equipment from Sweden. The most significant decrease occurred in imports from Russia and the Netherlands (down by 22% and 16%, respectively). Imports from Poland increased by 24% and from Finland by 4%.

The most important commodity group in exports was electrical equipment (20% of Estonia’s total exports), followed by mineral products (incl. motor spirits, shale oil and electricity) (11%), and agricultural products and food preparations (10%).

The decrease in Estonia’s exports in 2013 compared to 2012 was mostly caused by the decrease in the exports of mineral products and metals and products thereof (down by 31% and 14%, respectively).

In 2013, the biggest share of Estonia’s imports was held by electrical equipment (18% of Estonia’s total imports), followed by mineral products   (13%), and agricultural products and food preparations (11%). Imports of mineral products decreased the most (by 19%). At the same time, the imports of transport equipment (incl. vehicles and railway rolling stock) and agricultural products and food preparations increased (by 12% and 9%, respectively).

In December 2013, the value of exports of goods was 0.9 billion euros and the value of imports was 1 billion euros. Compared to December 2012, exports remained at the same level, but imports decreased by 9%.

In 2013 compared to 2012, export prices fell by 1.1% and import prices by 1.6%. The last annual decrease of export and import prices was recorded in year 2009.

Read more from Statistics Estonia

Krimelte acquires Spanish rival

An Estonian-owned construction material manufacturer, Krimelte, has acquired a majority holding in a Spanish firm, Olivè Qukmica, a move characterized as a breakthrough into a blue chip, Old World market.

Krimelte’s plants in Estonia, Russia and Brazil produce foams, sealants and adhesives.

Read more from ERR

In November exports declined

According to Statistics Estonia, in November 2013, exports of goods decreased by 9% and imports remained at the same level at current prices, compared to November 2012. Compared to October 2013, exports declined by 4%.

In November, exports from Estonia amounted to 1.06 billion euros and imports to Estonia to 1.15 billion euros. The trade deficit totalled 96 million euros (there was a surplus of 10 million euros in November 2012).

In Estonia’s exports, the biggest share was held by electrical equipment (19% of Estonia’s total exports), followed by agricultural products and food preparations (13%) and mineral products (incl. motor spirits, shale oil, electricity) (11%).

The decrease in exports in November 2013 compared to November 2012 was mainly influenced by the decrease in the dispatches of electrical equipment and chemical products (incl. organic chemicals) (down by 23% and 30%, respectively). At the same time, the dispatches of wood and products thereof and transport equipment increased (up by 14% and 18%, respectively).

In November the biggest share of Estonia’s imports was held by electrical equipment (17% of Estonia’s total imports), followed by mineral products (13%) and agricultural products and food preparations (12%). Arrivals of electrical equipment decreased the most (by 21%). At the same time, arrivals of transport equipment (incl. vehicles and railway rolling stock) and mineral products (incl. motor spirits) increased (by 32% and 20%, respectively).

The top destination countries of Estonia’s exports were Sweden (18% of Estonia’s total exports), followed by Finland (15%) and Russia (13%). The decrease in total exports compared to November 2012 was mainly influenced by the decrease in the dispatches to Russia and Sweden (down by 19% or 10%). The fall in exports to Russia was mainly influenced by the decline in the dispatches of organic chemicals; exports to Sweden decreased mainly due to the decrease in the dispatches of electrical equipment. At the same time, exports to Latvia and the United Kingdom increased (by 7% and 34%, respectively). The growth of exports to Latvia was supported by mineral products (incl. electricity). Exports to the United Kingdom were boosted by the increase in the dispatches of electrical equipment.

In November, the main countries of consignment were Finland (14% of Estonia’s total imports), Germany (11%) and Lithuania (10%). In November 2013 compared to November 2012, the growth of imports was slowed down by the fall in the arrivals from Sweden and Latvia (both down by 9%). Imports from those countries decreased mainly due to the decrease in the arrivals of electrical equipment. At the same time, arrivals of goods from Lithuania increased by 15% and from Russia by 18%, mainly due to the increase in the arrivals of mineral products.

In November compared to October 2013, exports decreased by 4% and imports by 6%. The monthly decrease in exports was mostly influenced by the decrease in the dispatches of electrical equipment and metal scrap, while imports decreased mainly due to the decrease in the  arrivals of railway rolling stock and mechanical equipment.

In November 2013 compared to the same month of 2012, export prices fell by 1.5%, while import prices rose by 1.2%.

Read more from Statistics Estonia

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