Higher wages support consumption

In Estonia, monthly gross wages amounted to 1,010 euros, up by 4.5% in Q1, yoy.
Net wages jumped by 7% in Q1 because of lower labour taxes and deflation.

The growth of gross wages decelerated from 5.5% in 2014 to 4.5% in Q1 2015. Irregular bonuses and premiums decreased by 15.6% per employee in Q1 of 2015, yoy. Without irregular bonuses and premiums, the average monthly gross wages grew by 5.3%.

Wages increased less due to worse economic situation in some sectors. Another possible reason behind the deceleration in the growth of wages was the introduction of the labour registration obligation from July 1st 2014, which increased the official number of employees in sectors, where wages are smaller (tourism, domestic trade, construction, etc.).

Gross wages increased the most in the real estate sector, followed by the public sector (education, health care). Average gross wages decreased in the construction and mining, and did not change in the energy and logistics sectors, compared with the same period last year. Households’ real purchasing power will grow markedly this year. Although the growth of gross wages will slow a bit, smaller labour taxes and very low inflation will result in a remarkable surge in the households’ purchasing power. Net wages were up by 7% in the first quarter, year on year.

Average wages were pushed higher by a 10%-increase in minimum wages in January. A rise in pensions and other social benefits will further support private consumption, which will be the biggest contributor to GDP growth in 2015. Retail trade volumes rose by as much as 8%, year on year, in the first quarter.

SOurce: Swedbank

Continuing wage pressures ahead

Annual growth in employment accelerated to 2.9% in the first quarter of 2015, while unemployment stood at 6.6%. The low comparison base from the first quarter of 2014 played a part in the rapid annual growth in employment. Seasonally adjusted employment was unchanged from the previous quarter.

Data from the Tax and Customs Board also showed that the number receiving taxed wage income increased in the first quarter, and official data put the rise at 1.8%. The number employed by the general government continued to fall, having started to do so in the second half of 2012, and the number of businesses registered in the commercial register rose. The number receiving wages from private companies was boosted by the employment register that was launched in July 2014.

Although unemployment was a little higher than in the previous quarter at 6.6%, seasonal factors can explain the difference, and if they are taken into account, then unemployment actually fell. Employment contracts are often changed and ended at the turn of the calendar year, and many seasonal workers in construction or agriculture for example are without work during the winter months. A little over 60% of the unemployed in Estonia are registered with Töötukassa, the unemployment insurance fund, and the data show that the number registered as unemployed is now falling at a slower rate after falling rapidly for a long time. Seasonally adjusted registered unemployment has been generally stable for half a year.

The main source of risks in the quarters ahead is continuing wage pressures, which can be seen in the notably faster growth in wages than in productivity. If this continues it could lead to a rise in unemployment. The disappearance of less productive jobs is a part of the development of the economy, but if rapid wage growth leads more jobs to lose profitability than are created, structural unemployment rises.

In the short term, employment will be boosted by the increase in economic growth resulting from the strengthening of the European economy, which will allow labour resources to be used more efficiently than earlier. In the long term, shrinking labour resources make it important to create the conditions for growth in productivity and to engage as much as possible of the working age population in the labour market. In this context the high labour force participation rate of the first quarter was particularly welcome.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

There were 10 pct fewer visits to Estonia in 1st Q

There were 10% fewer visits to Estonia by non-residents in the first quarter than in the first quarter of 2014. The biggest change was in the number of tourists coming from Russia to Estonia, which was 140,000 lower than a year before. There was also a fall in the number of visits from Finland, but the numbers coming from Germany, the USA and China increased.

There were 3% fewer visits by Estonian residents to foreign countries than in the same quarter of the previous year. The number of multi-day trips was the same, but there were one tenth fewer single-day trips. The main reason for both falls was that there were 20,000 fewer visits to Finland than a year ago. There were also slightly fewer trips to other neighbouring countries than in the first quarter of last year.

Source: Bank of Estonia

The current account was in deficit in March

The flash estimate1 put the Estonian current account at 62 million euros in deficit in March 2015. Exports of both goods and services were higher than in March last year and imports of goods were also higher, though imports of services were smaller than a year ago. Foreign investment dividends paid and received dominated in incomes.

The current and capital accounts were also negative in March. This means that the Estonian economy was a net borrower from the rest of the world, so the country as a whole received more resources from abroad than it invested there.

Eesti Pank publishes the flash estimate of the balance of payments monthly for the last month but one. From January 2015 Eesti Pank accompanies the publication of the flash estimate with a short comment. The statistics on the first quarter of 2015 will be published with a comment on 9 June.


1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

See graph here: Bank of Estonia

Labour market is tightening

• Employment up by 2.9%, yoy, and unemployment down to 6.6% in Q1 2015
• Mounting wage pressures (+6%, yoy, in Q1, according to the Tax Board)

The labour market is expected to tighten in 2015; thus wage growth will remain strong. The working-age population is decreasing, the employment rate is already high, and the unemployment rate will drop further this year.

The working-age population decreased by 7500 persons or 0.8% in 2014. That was somewhat less than in previous years as the number of emigrants was smaller. In the first quarter of 2015, employment grew by 17 000 persons or 2.9%. One of the factors behind higher employment figures is the labour registration obligation, which will push up official employment statistics in the first half of the year.

Employment increased the most in the services’ sector. According to the Estonian Tax and Customs Board, the number of employed grew in domestic trade, tourism and timber industry. Employment rate in Estonia is already one of the highest in the European Union. Still, there is some room to lift the employment rate to reach the levels of some Scandinavian countries or Germany.

In the first quarter of 2015, the number of unemployed declined by 12 000 compared with one year before and the unemployment rate reached 6.6%. The number of unemployed amounted to 44 000. Around 70% of the unemployed had been looking for a job for more than a year. The unemployment rate in Estonia is well below the EU average, but there are big regional differences on the tiny market, ranging from 4.8% in Southern Estonia to 11.0% in the North East.

Source: Swedbank

European economy and the rouble

The flash estimate from Statistics Estonia shows that the economy grew in the first quarter by 1.2% year-on-year and declined by 0.3% quarter-on-quarter. This is weaker than was expected in the Eesti Pank December forecast, though it is still only a preliminary estimate. Lower growth than in the fourth quarter was partly a reflection of the depreciation of the rouble in November and December against the euro.

Russia has only a limited influence over the Estonian economy as a whole. However, exports to Russia have still halved compared to what they were earlier and this has hit sectors that were exporting mainly to the Russian market or intermediating goods bound for Russia. Evidence of this comes from the transport sector acting as the biggest brake on growth in the first quarter. The impact of the rouble depreciation is also indicated in the survey of manufacturing companies organised by the Estonian Institute of Economic Research, which found there were more companies in January that perceived a deterioration in competitiveness outside the euro area than those that perceived an improvement. As the rouble strengthened against the euro during the first quarter, there were more companies by April that perceived an improvement in competitiveness. After the initial shock of the fall in the rouble, exports to Russia have started to pick up again.

The strengthening of the European economy supports growth in Estonia. The turnover of goods exports was about the same in the first quarter as a year earlier with exports to the European Union growing by 5% and exports outside the European Union declining by 14%. The expectations of people and of companies for faster growth in Europe have also strengthened in recent months. The economic confidence index for the euro area, which combines the indicators for the outlook in several sectors, was at its highest level in March since August 2011.

The fall in the oil price has had a dual effect on the Estonian economy, but mostly it has been positive. The fall in the oil price at the end of 2014 contributed to the fall in consumer prices and through this it supported growth in consumption. The negative effect of the oil price fall is seen in the shale-oil extraction industry. The seasonally adjusted output of the oil industry was a quarter smaller in the first quarter than in the fourth quarter. The effect on the economy of the fall in the oil price dissipated during the quarter as the oil price rose and the euro depreciated.

Domestic demand has increased mainly because of increased consumption. The volume index for retail sales rose by around 8% in the first quarter as inflation was low and wage income increased. However the trend for investment was probably similar in the first quarter to what it was in the second half of 2014. Investment growth has been held back by large investment projects coming to an end in certain sectors, particularly energy, while investments in other corporate sectors have increased. However there was a fall in the first quarter in the utilisation rate for production capacity, which indicates that the economy still has some room for production volumes to increase even without an increase in investment.

The main domestic risk to economic growth continues to be wage pressures, which may cause unemployment to rise if labour productivity fails to grow at the same time as wages and employees do not move to more productive sectors. The negative effect of wage pressures on the economy as a whole has not yet been significant however. Despite the wage pressures, manufacturing companies feel that their competitiveness in the European market has strengthened in the past half year.

Source: Central bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Economic growth decelerated as expected

According to the flash estimates of Statistics Estonia, GDP decelerated to 1.2% YoY in the first quarter of 2015. The seasonally and working-day adjusted GDP increased by 1.8% YoY. Compared to the previous quarter, economic growth decreased by 0.3%.

Deceleration of export growth and decrease in investments slowed the economic growth the most. Exports of goods grew by 3% in real terms in the first quarter. Decreased export volumes to Russia had the largest negative impact, but it was partially compensated by the fast growth of electronics exports. Electronic equipment has considerable contribution to the export growth and, in turn, to the economic growth. Unfortunately the orders of electronic equipment have decreased and its export has decelerated this year.

Although export growth has decelerated, the growth of import was even weaker in the first quarter, only 1%. This referred to the continuous decline in investments. In the second half of last year import growth accelerated, but that did not increase investments, which means that a large share of imported goods was used in intermediate consumption.

Private consumption contributed the most to the economic growth, supported by robust growth of real wages and solid consumer confidence. Lower prices of motor fuel helped consumers to save money or spend it on something alternative. Increased receipts of excise taxes and value added tax made a strong contribution to the GDP growth.

We expect Estonian economy to grow by 2.1% in 2015, mainly supported by strong private consumption. Steep decrease in exports to Russia will continue. Meanwhile the companies have increased their exports to other countries – to Sweden, the Netherlands, the US, Poland and Spain. If orders of electronic equipment will not turn to the growth in the coming months, it will have a negative impact both on our exports, as well as, on our economic growth. Although foreign demand will be weaker this year, we are more optimistic than few months ago. The European economy is improving, which gradually gives more opportunities to our exporters. We expect weaker euro to have a positive impact on our competitiveness and exports, but it will only affect about 1/3 of the exports, which is denominated in US dollars. Enterprise investments will remain modest, whereas public sector investments are expected to grow.

Source: Swedbank

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