Prices continued to rise rapidly in September

  • Inflation is due to higher prices for food and energy and rises in excise
  • The consumer price index was 0.1% lower in September than in August because of seasonal factors

Data from Statistics Estonia show the consumer price index was up 3.7% on the year in September. Despite slowing slightly from August, inflation remained elevated because of both higher import prices and  domestic factors.

Food prices were up 7% in September and energy prices 6%, mainly because of price developments in global markets. The oil price rose to 57 dollars a barrel by the end of September, because demand for oil has recovered slightly while supply remains constrained by the agreement between OPEC members. The yearly growth in the oil price in euros has been relatively modest, because the euro has appreciated against the dollar at the same time. Around one percentage point of the inflation in the consumer basket this year has been due to rises in excise. Higher tax rates will continue to contribute to inflation of food and energy prices in the next year, but the impact of the pass-through of commodities prices should start to ease gradually.

Factors in the domestic economy have also encouraged prices to rise this year. Core inflation in manufactured goods and services, which depends mainly on domestic factors, stood at 1.3% in September. Wage growth has remained strong in Estonia, and this has induced higher production costs. Increased production volumes and a rise in the price level have together allowed companies to restore their profits again for the first time in a few years.

Inflation in the euro area remained at 1.5% in September, which is below the 2% inflation target of the European Central Bank. Inflation has been restrained by the unexpectedly low wage growth in the larger countries of the euro area  in contrast to other activity indicators of the economy. The unemployment rate has now fallen to its levels of before the crisis, and faster economic growth has also supported inflation in the euro area. Slow growth in labour costs for companies in the euro area has so far offset higher prices for other production inputs including commodities.

Inflation in Estonia and euro area

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

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Food and dwelling expenses account for 40 pct of the household budget

According to Statistics Estonia, in 2016, a household member spent an average of 408 euros per month, which is 13 euros more than in 2015. Compulsory expenditure, i.e. unavoidable food and dwelling expenses, accounted for 40% of the household budget, remaining at the level of the previous year.

In 2016, compulsory expenditure in the household budget was on average 162 euros per month per household member. Although the compulsory expenditure increased by 5 euros compared to 2015, its share in the household budget remained at the same level.

In 2016, a household member spent the most on food and non-alcoholic beverages (95 euros per month), which accounted for 23% of the total expenditure. Compared to the previous year, expenditure on food increased by 3 euros per month. Expenditure on dwelling was on average 67 euros per month, which is 2 euros more than in 2015.

Expenditure on transport was on average 50 euros, leisure time 41 euros, housekeeping 31 euros and clothing and footwear 22 euros per month per household member. Compared to 2015, of the listed expenditures, housekeeping expenses increased the most – from 26 euros to 31 euros.

Households in urban areas spent more on dwelling than households in rural areas. Per member of an urban household, dwelling expenditure was 13 euros higher than in rural areas (71 and 58 euros per month, respectively). Compared to urban households, rural households spent more on transport – in rural areas slightly more than 14% and in urban areas 11% of the household budget. While in an urban settlement, a household member spent 48 euros per month on transport, in rural settlements 54 euros was spent per month.

By county, the largest expenditures of households were in Harju, Rapla and Tartu county (459, 447 and 427 euros per month per household member, respectively) and the smallest in Ida-Viru and Põlva county (296 and 299 euros per month per household member, respectively).

The estimates are calculated according to the data of the Household Budget Survey conducted in 2016. More than 4,400 households participated in the survey. A household is a group of persons who live at the same address and share joint financial resources and whose members consider themselves to be members of one household. In 2016, there were over 592,000 households in Estonia and the average size of a household was 2.2 persons.

Mortgage payments, real estate purchases, financial investments, expenses on major repairs or construction and other investments are not taken into account as household consumption expenditure.

For the statistical activity “Household Budget Survey”, the main representative of public interest is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia collects and analyses the data necessary for performing this statistical activity.

Source: Statistics Estonia

88 pct of Estonian households have internet connection

According to Statistics Estonia, 88% of Estonian households had internet connection at home in 2017. The share of households using mobile internet connection has reached 82%, increasing by four percentage points in a year.

The share of households with internet connection at home increased two percentage points compared to the previous year. Nearly nine out of ten households with internet connection had a fixed broadband connection (wired or wireless) and eight had mobile internet connection. The share of households with mobile internet connection increased four percentage points in a year. Slightly more than two-thirds of households without internet connection at home cited lack of need or interest as the main reason for not having the connection at home.

While 97% of 16–54-year-olds used the internet in the last three months, the same indicator among 65–74-year-olds was 68%. The share of internet users among 65–74-years-olds increased two percentage points in a year, reaching 53%. Nevertheless, the digital divide between the youngest (16–24-year-olds) and the oldest (65–74-year-olds) age group was 46 percentage points. 90% of internet users used the internet and 85% of them used a computer daily.

While on the move (away from home and work), 73% of internet users used the internet on a smart or mobile phone and 32% on a portable computer in the last three months. Compared to 2016, these indicators had risen seven and three percentage points, respectively. By age groups, the use of internet on the move was the highest among 16–24-year-old internet users.

In the last three months, the most popular internet activities among 16–74-year-old internet users were: using internet banking services (90%), reading media publications (90%) and using e-mail (89%). In the last 12 months, 22% of internet users booked transport service (e.g. on Taxify or Uber) and 17% booked accommodation service (e.g. on Airbnb.com) from a private person by using a website or mobile app.

In the last 12 months, 65% of internet users bought or ordered some product or service online, which is one percentage point more than a year ago. E-commerce users ordered mostly travel and accommodation services (61%) and tickets to concerts, cinema, theatre and other events (57%). Slightly more than one third (35%) of e-commerce users bought or ordered food and staple goods and a quarter bought electronic equipment online.

96% of Estonian enterprises with 10 or more employed persons used computers every day, 95% of them used the internet. Fixed broadband internet connection is used predominantly, but almost three‑quarters of enterprises also used mobile internet for work purposes. The speed of used internet connections has increased year by year. For 80% of enterprises with a fixed broadband internet connection the fastest download speed was over 10 Mbit/s. 97% of enterprises using fixed broadband internet access were satisfied with the connection.

In 2017, 15% of Estonian enterprises employed qualified information and communication technology (ICT) specialists. 8% of companies encountered difficulties recruiting ICT specialists. As the use of ICT tools is indispensable in everyday life, the continuous improvement of ICT skills is inevitable. One tenth of Estonian enterprises trained their employees in information and communication technology, 8% of companies trained ICT professionals working in the enterprise.

In 2017, 18% of Estonian enterprises sold their products or services electronically. E-commerce sales accounted for 21% of the total turnover of enterprises engaging in e-sales. The largest e‑sales users were wholesale and retail trade and accommodation and food service enterprises.The use of information technology among persons aged 16–74, households and enterprises is studied based on a harmonized methodology in all European Union Member States. Statistics Estonia studies the use of information technology in households and among inhabitants aged 16–74 annually in the 2nd quarter. From 2005 to 2013, this was part of the Labour Force Survey, since 2014 an independent survey. A household is a group of persons who live at the same address and share joint financial resources and whose members consider themselves to be members of one household. It differs from family, which is based on family relationships or kinship.

Statistics Estonia has surveyed the use of information technology in enterprises since 2001. 3,400 enterprises participated in the survey in 2017. The survey covers enterprises with 10 or more persons employed.

For the statistical activity “Information technology in households” and “Information technology in enterprises” the main representative of public interest is the Ministry of Economic Affairs and Communications.

Source: Statistics Estonia

 

Exports of both goods and services increased in July

The flash estimate1 put the Estonian current account at 49 million euros in surplus in July 2017. The surplus on the goods and services account was 87 million euros, which was 17 million euros less than a year earlier. Volumes of both goods and services increased. Goods exports were up by 8% over the year and imports by 11%, and so the deficit on the goods account increased by 34 million euros over the year to 131 million euros. The surplus on the services account was large in the summer months and stood at 218 million euros, up 17 million euros over the year. Services exports grew by 8% and imports by 7%. The net outflow of investment income and current transfers, or the primary and secondary income accounts, increased by 8 million euros to 38 million euros.

The current and capital accounts were in surplus by a total of 112 million euros, meaning that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more financial assets abroad than it received from there.

 Source: Bank of Estonia

Investments in European securities will become cheaper for local investors

On Sept.18, 2017 the Baltic states joined the single European settlement platform TARGET2-Securities, where around half a million transactions are made each day with a total turnover in excess of 700 million euros. Joining the platform will allow Estonian investors to buy and sell European securities more cheaply than before.

On Monday the Nasdaq CSD, which was formed by the merger of the Estonian, Latvian and Lithuanian depositories, and the Spanish depository joined the TARGET2-Securities (T2S) single settlement platform for securities run by the central banks of the euro area. The Spanish and Baltic depositories join 22 other depositories from 20 countries in T2S, which was launched in 2015.

“In one direction, Estonian investors will be enabled by T2S to make transactions more cheaply in future with various European securities, as buying and selling them is currently harder, more time consuming and more expensive. In the other direction, European investors will be able to access Estonian and other Baltic securities more easily”, said Mihkel Nõmmela, head of the Payment and Settlement Systems Department of Eesti Pank.

The main aim of creating T2S is to simplify the settlement of securities across borders, harmonise the rules for settlements and increase competition between depositories. Kristi Sisa, head of the Estonian branch of Nasdaq CSD, said that merging the Estonian, Latvian and Lithuanian depositories as Nasdaq CSD is one of the first signs that the goals of T2S are being met, as the three small depositories would have found it hard to be competitive independently in the changed circumstances. The changes arising from joining T2S will not all occur overnight, but T2S creates the conditions where it will become cheaper for Estonian investors to make transactions with European securities. In essence, a Spanish investor trading with German or Italian securities will no longer be making cross-border securities transactions, as they will be settled under the same conditions as domestic securities transactions.

“As the Baltic depositories are consolidated, so the organisation of supervision will be changed. The depository in Latvia will provide services in Estonia and Lithuania through branches now, so the lead supervisory institution will be the Latvian Financial and Capital Market Commission from now on. The pension register has been separated off from the depository in Estonia, and will remain in Estonia. The pension register registers transactions with units in mandatory and voluntary pension funds”, explained Andre Nõmm, Member of the Board of the Financial Supervision Authority.

T2S is the third single European solution for payments and settlement. The first step concerned large cross-border bank payments in Europe, which could be made in Estonia from 2008. The second step was the Single Euro Payment Area (SEPA), launched in 2014, which allowed retail payments to be made across Europe. From this week the third pan-European settlement platform, T2S, will simplify and speed up the settlement of securities for Estonia.

T2S will make it easier for commercial banks to borrow from Eesti Pank, and from the central bank’s point of view, this will aid financial stability in Estonia. The commercial banks have to provide collateral to the central bank when they borrow from it, and high-quality securities can be used as such collateral. As T2S will give the commercial banks easier access to a much larger securities market, it will make it easier for those banks to provide suitable collateral to the central bank.

Securities accounts and T2S cash accounts are both on a single technical platform in T2S, and this lets account managers at the banks manage their liquidity better.


Background
On 18 September the Baltic and Spanish central banks, the Spanish depository Iberclear, and the Nasdaq CSD, which was formed by the merger of the Estonian, Latvian and Lithuanian depositories, joined T2S. T2S was first launched in 2015, but to reduce the risks arising from the large number of participants and the technical complexity, entry to the platform has been managed in waves. After the last wave, T2S had 22 depositories from 20 countries. T2S is a multi-currency platform and the Danish krona (DKK) will be added to the T2S currencies alongside the euro in 2018. Around half a million transactions are settled each day on the platform with a total turnover in excess of 700 million euros. There are an average of 400-500 transactions a day in the Estonian securities market.

Source: Bank of Estonia

The Estonian economy is sailing with a tailwind

  • The current rate of growth in the economy cannot be maintained for long
  • The growth in corporate investment and profits is a positive change
  • There is increased upwards pressure on labour costs
  • There is a danger of overheating in the construction sector, which may pass on into the rest of the economy

Growth in the Estonian economy was fast in the first half of 2017, and in the second quarter it reached almost 6%. Growth was given a boost by an improvement in the external environment which encouraged exports, but the biggest driver was still domestic demand. Such strong growth is a positive point in the economy, but various indicators show that the Estonian economy is exceeding its long-term sustainable level and growth will soon slow. Production capacity has for some time been used more intensively than usual by companies, and there is heavy pressure on labour costs to rise because of labour shortages, while a rise in the number of vacancies indicates even greater stresses in the labour market than in the beginning of the year. There has also been a noticeable rise in producer prices and consumer prices of late. All of this together indicates that the current rate of economic growth cannot be maintained for long.

There is however no reason to think at the moment that the economy is overheating on a broad basis, because the picture is quite different in different sectors. The acceleration in economic growth has partly been due to improved performance in oil shale production and in energy, sectors that were earlier facing difficulties, where it is more accurate to talk about a recovery in output volumes. Most sectors have seen some growth. The growth cycle has been very strong in the trade sector and there is a threat of overheating in construction, which is running at almost maximum capacity. Cyclical peaks are more noticeable in construction, because increased demand for construction services from companies, households and the general government all coincide.

Having been in the doldrums in the past few years, corporate investment increased in the first half of this year, giving hope that potential growth may pick up again, having earlier suffered. It is worth noting that in the second quarter companies were able to increase their profits despite the substantial rise in labour costs. This was possible partly because inflation has increased in foreign markets and it has been easier to raise the prices of products. Whether the growth in profits will continue depends, however, on how the productivity of companies increases in the near future. If investment continues to increase, it may be assumed that productivity will also increase.

Household spending on residential property and real estate investment has been boosted by rapid growth in incomes. Employee compensation was up by more than 8% in the second quarter, and the average gross monthly wage by 6.8%. Household consumption has been quite restrained though, as deposits have increased more than consumption has. As income tax reform will be introduced at the start of next year, it was possible that the expectation of the rise in net taxes would cause consumption spending to rise already, as household confidence about the future is very strong. This has not happened though. Behaviour indicating a preference for gradual increases in spending is positive to note, as it helps in keeping economic growth more stable.

The data that are already available for the third quarter do not indicate any significant slowing down of growth, meaning that the economy continues to operate beyond its sustainable capacity. In this case state fiscal policy should focus on the need for balance in the economy, because overheating in some sectors could pass on into the rest of the economy. High volatility in economic growth, for which Estonia has stood out in Europe, has high social costs, leads to capital and labour resources being inefficiently allocated, increases uncertainty for companies and households, and reduces the credibility and long-term growth capacity of the economy.

Source: Bank of Estonia

Borrowing by households increased in August

  • The growth in corporate borrowing has slowed a little in recent months
  • The number of new borrowers with housing loans has grown faster this year than previously
  • The deposits of companies and households were up 12% over the year

The loan and lease portfolio of Estonian companies and households again grew fast in August, though a little more slowly than before. The stock of loans and leases taken by companies and households from banks operating in Estonia stood at 17.7 billion euros at the end of August, which was 5.6% more than a year earlier. The growth in the loan portfolio has been smaller than before because of slower growth in corporate loans and leases, while the growth in loans to households has accelerated.

Growth in the corporate loan and lease portfolio slowed for the fourth consecutive month to 4.3% over the year in August. Corporate borrowing from abroad is also estimated to have grown relatively slowly in the first half of 2016, like it did last year. Corporate investment in real estate increased in the first half of 2017. In addition to using external funds, companies can also fund their investment from the significant financial buffers they built up earlier.

Borrowing by households increased again in August. Demand for loans from households has been supported by the continuing rapid growth in the average income of wage earners and by low interest rates. Activity increased in the real estate market and prices rose further. New housing loans worth 107 million euros were taken in August, which is one tenth more by value than a year earlier, and the housing loan portfolio increased by 6.4% over the year. The volume of new housing loans has increased this year primarily because the number of new borrowers has grown at a faster rate than before, rather than because the size of the average loan has increased. The portfolio of other loans and leases to households was increased by 29 million euros by the addition of the branch of TF Bank AB to the list of credit institutions. Without this, other household loans and leases would have increased by 8.2% in August rather than 10.7%. Demand for car leases remains strong, and in August the portfolio was some 15% larger than a year earlier. The stock of overdrafts and credit card loans was up in July and August by 4% over the year.

The average interest rate on new housing loans has risen this year. Demand for housing loans remains strong, allowing banks to raise their interest margins. The rise in interest rates may equally be due to higher credit risk for the new housing loan clients. Competition is tighter in the corporate loan market and demand weaker, and the average interest rate on new long-term corporate loans was similar in August to the average of the previous year. The average interest rate for new housing loans granted in August was 2.4%, and the average rate for long-term corporate loans was 2.3%.

As loan growth has been faster, so the deposits of companies and households have grown more and more. The deposits of companies and households were almost 12% larger in August than a year earlier at a total of 21.4 billion euros. The sales revenues of companies have risen this year, and this can be seen in the growth of deposits. Corporate deposits were up 15% on a year earlier, and those of households were up around 9%, which was due to the rapid rise in incomes.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank