Exports from Estonia amounted to 0.9 billion euros in February

According to Statistics Estonia, in February 2015, exports of goods decreased by 7% and imports by 4% compared to February of the previous year. The decrease in exports and imports was mostly influenced by a fall in the trade of mineral products and mechanical appliances.

In February, exports from Estonia amounted to 0.9 billion euros and imports to Estonia to 1 billion euros at current prices. The trade deficit was 141 million euros and it increased by 17 million euros compared to February 2014.

The biggest share in Estonia’s exports in February was held by electrical equipment (22% of Estonia’s total exports), followed by wood and products thereof (11%) and agricultural products and food preparations (10%). The decrease in exports compared to February 2014 was due to a significant decrease in the exports of mineral products (down by 34 million euros) and mechanical appliances (down by 11 million euros). The biggest increase occurred in the exports of wood and products thereof (up by 11 million euros) and electrical equipment (up by 6 million euros).

In February, the main commodities imported were electrical equipment (21% of Estonia’s total imports), agricultural products and food preparations (10%) and mineral products (10%). The drop in imports was influenced the most by a decrease in the imports of mineral products (down by 43 million euros) and mechanical appliances (down by 11 million euros). At the same time, the imports of electrical equipment increased (up by 44 million euros).

The top destination country of Estonia’s exports in February was Sweden (19% of Estonia’s total exports), followed by Finland (15%) and Latvia (10%). Electrical equipment and wood and products thereof were the main commodities exported to Sweden; electrical equipment and metals and products thereof were the main commodities exported to Finland; mineral products (incl. electricity) and agricultural products and food preparations were the main commodities exported to Latvia. The biggest decrease occurred in exports to Russia (down by 46 million euros), to Latvia (down by 15 million euros) and to Norway (down by 14 million euros). Exports to Russia were affected by a decrease in the exports of mechanical appliances (incl. bulldozers, excavators) and agricultural products and food preparations (incl. spirits, milk and dairy products, fish). Exports to Latvia fell mainly due to a decrease in the exports of mineral products (incl. motor spirits, electricity) and transport equipment (incl. motor cars). Exports to Norway decreased due to reduced exports of mineral products (incl. aromatic hydrocarbon mixtures) and miscellaneous manufactured articles (incl. prefabricated buildings). At the same time, there was a significant increase in exports to the Netherlands (up by 17 million euros) and Iran (up by 11 million euros). In the case of the Netherlands, the exports of mineral products (incl. oil shale) increased. In the case of Iran, there was a rise in the exports of agricultural products and food preparations (incl. barley).

The main countries of consignment in February were Finland (13% of Estonia’s total imports), Germany (10%) and Latvia (9%). The main commodities imported were electrical equipment and mineral products (incl. motor spirits, electricity) from Finland; mechanical appliances and transport equipment from Germany; and electrical equipment and agricultural products and food preparations from Latvia. The biggest decrease occurred in imports from Germany (down by 29 million euros) and Finland (down by 26 million euros). There were decreased imports of mineral products (incl. heavy oils) and mechanical appliances from Germany, and decreased imports of mineral products (incl. motor spirits and electricity) and transport equipment from Finland. At the same time, there was an increase in imports from China (up by 15 million euros) and Hungary (up by 13 million euros). The increased imports from China were mainly due to the growing imports of electrical equipment and textiles and products thereof, while the imports from Hungary grew mainly due to the increased imports of electrical equipment.

Read more from Statistics Estonia

Inflation in Estonia reflects price developments on global markets

Data from Statistics Estonia show that the consumer price index was 0,6% higher in March than in February. The price level was 0.6% lower compared to March 2014 and consumer prices have been falling for ten consecutive months, year-on-year. Preliminary data indicate that the harmonised consumer price deflation for the euro area was 0.1% in March, which is the smallest price decrease over the past four months.

In the first three months of this year, consumer prices were mostly influenced by major price fluctuations on commodities markets. After a sharp price decrease at the start of 2015, the price of motor fuels went up by a total of 12% in February and March. In addition to the growth of crude oil prices on global markets, the price of motor fuels in monthly terms was pushed up by the simultaneous depreciation of the euro. Motor fuels were, however, 11% cheaper than a year earlier and this is probably the reason behind the price drop of many transport services in March.

At the same time, the euro was 4.3% lower against the dollar than in February, but compared to the peak of 2008, the euro is now approximately 30% cheaper. The depreciation of the euro should cause a pick-up in inflation, but so far, the impact on inflation has been small. The influence of exchange rate fluctuations on consumer prices is limited because of the large share of other euro area countries in Estonian foreign trade: about a fifth of the cost of imported goods are open to exchange rate changes. Capital goods and the intermediate consumption of companies are imported more often on the basis of contracts in foreign currency, and the price changes of such goods are passed into consumer prices over a longer period of time. Such transactions make up around 12% of consumer goods imports. However, the depreciation of the euro against the dollar has been offset by the appreciation of the euro against the rouble, which has made imports from Russia cheaper.

Most food prices were lower in March compared to the year before, but alcohol prices grew due to a rise in excise rates. The fall in food prices was influenced by global markets: the price index of the Food and Agriculture Organisation, which reflects prices on global markets, was about 18% lower in March than a year earlier. Food prices have been falling since early 2014, both because of an increase in inventories and good harvests. However, the impact of Russian sanctions has become greater and led to lower prices for milk and meat products on the internal market of the European Union.

Eesti Pank estimates that the cost of the consumer basket price in 2015 will remain on the same level as last year. The fall in consumer prices is likely to continue over the coming months. Price increases may still be expected in the second half of the year, as domestic inflation is growing and the fall in energy prices is decreasing.

Estonian CPI inflation

Largest contributions to CPI inflation

 

Source: Bank of Estonia

Author: Rasmus Kattai, economist at Eesti Pank

Estonian new coalition has agreed its platform

Estonian Reform Party (classical liberalism) won Parliamentary elections on 1st March and got the right to establish new government for the period in 2015-2019. The new coalition has been formed between Estonian Reform Party (ESP), Social Democratic Party (SDE, social democracy) and Pro Patria and Respublica Union (IRL, Christian Democracy, national liberalism). ESP gets 7 ministerial positions (including PM), SDE and IRL both 4 positions. President T.H. Ilves appointed the new government yesterday (on 08.04).

Yesterday, PM Rõivas said in Parliament, that the new government will not change the basic principles of economic policy in Estonia, will continue with the simple tax system with few exceptions and with conservative fiscal policy. The new government has promised to keep state budget in structural balance and require that other EU member states would fulfil the Union fiscal rules as well.

The new coalition has agreed to raise households’ income and to improve financial situation of low-paid.Minimum salary will be increased to 45% of average salary (currently 39%) in four years and income tax exemption to 205 euros/month (currently 154 euros). To be precise, the government will support the raising of minimum salary, whereas in practice, representative of employees is behind this proposal. In addition, income support for deprived families will be increased and repayment system for low-paid people will be established by 1 January 2016. Special attention will be paid to the families or single parents with children. Children allowances will be increased.

The new coalition has promised to ensure that pensions will be increased in accordance with wage growth, whereas average pension is exempt of income tax. In addition, they have planned to introduce parental pension by 2018.

Social security contributions will be reduced by 1 pp (currently 33%). Although the government moves on the right direction, this has considerable pressure on state budget, but has minor effect on enterprises. Reduction of social security contributions will be, at least partly, compensated by “consistent“ increase in excise taxes on alcohol and tobacco. The new coalition has promised not to tax investments.

Special ministerial position will be established for conducting state reform. The objective is to increase efficiency of public administration. Therefore, government sector employment will be reduced in accordance with the decrease in working-age population and public sector salaries are increased in accordance with the increase in productivity. However, salaries of several jobs, e.g. teachers, police, tax and customs officers, etc. will be increased faster. Interestingly, these jobs form substantial part of public sector employees. In order to improve labour mobility across Estonia, the program of rental housing will be developed, including development of the market for rental apartments. The new coalition has planned to finalise the protracted reform of local governments: voluntary consolidation of local governments is planned to be finalised before 2017 local elections. Last, but not least, management and ownership of state enterprises will be reviewed thoroughly.

The new government will start with or at least support the development of several large scale infrastructure projects, e.g. Rail Baltic, multimodality transport hub in Tallinn, highways, etc,.

Estonia has been planned to reshape from (net) importer of energy to (net) exporter by 2030 (in 2013, energy dependency in Estonia was 11.9%). Estonian electricity market will be fully untied from Russia and connected it to the continental Europe by 2025. Baltic regional gas infrastructure (connection between Finland and the Baltics, including Baltic Connector) will be developed. The new coalition will analyse the possibilities, whether Estonia could be a competitive place for energy intensive industry. Unfortunately, this idea can encounter to the insufficiency of labour force.

Immigration quota for ICT employees has been planned to expand in order to promote immigration of ICT specialists and their families to Estonia. Actually, the need for imported qualified labour force is wider than only in ICT sector.

State military expenses will remain at least 2% of GDP. In addition to that Estonia finances military activities and expenses as a receiving country for NATO alliance troops. The new government will support development of national defence industry, including access of defence industry to export markets. More attention will be paid on R&D in defence industry. In addition, the objective is to raise total R&D expenditures to 3%, including in private sector to 2%, of GDP.

Coalition is on the position that EU Common Agricultural policy has to remain common and financed from common budget in order to exclude excessive and distorting state subsidies.

The new platform has clearly more social democratic influence compared to the programme of previous governments. According to the very preliminary information the cost of the promises is around 300 million euros. Unfortunately, it’s unclear yet how the government is going to finance this ambitious program as they have the objective to keep the state budget in structural balance.

 

Source: Swedbank

Eesti Energia starts synchronization of Auvere power plant

Construction of a new 300 megawatt power plant at Auvere has reached the point where the plant will be synchronized with the Estonian power grid and the first amount of electric energy provided to the grid, Eesti Energia, the state-owned power group that owns the plant, said.

“If everything goes as planned, electricity produced at the Auvere power plant will reach the grid for the first time in spring this year. Right now the plant’s principal equipment is being fine-tuned and various systems of the generating unit tested,” Eesti Energia spokesperson Eliis Vennik said, adding that given the time consuming nature of the things to be done work to launch the plant is estimated to continue until the end of the year.

The 300 megawatt power plant will run on oil shale, which can be substituted with biofuel up to a ratio of half and half. The testing period, during which output capacity will remain in the range of 0 to 270 megawatts, will last until Nov. 5.

The plant is being built by Alstom and the total cost of the project is 640 million euros.

Source: BNS via Estonian Review

Russian-language TV channels plan cooperation

Estonian Public Broadcasting (ERR) and Latvian Public Service Television (LTV) concluded a cooperative agreement on March 31 to work together towards implementing the collaborating activities to develop Russian-language TV channels in both countries.

Both channels will be independent in their program selection, with focus on local life. However, common interests will be looked for in the areas where co-operation could lead to achieving better results and help save money.

“It goes without saying that the information field that originates from Russia and is created by the Russian-language media in Estonia, Latvia and other Eastern and Central European countries, needs balancing,” said Margus Allikmaa, ERR’s chairman of the board.

“Russian-speaking population in these countries deserves quality journalism that is based on a variety of sources. They also deserve TV programs, which are more closely connected to the local life. Estonia has decided to launch its own Russian-language TV channel and Latvia now has plans to do the same. As the Estonian and Latvian public broadcasting organisations share common objectives, all kind of cooperation that would help to improve the quality of the Russian-language information field, is justified and reasoned.” he said.

The cooperative agreement offers both broadcasters an opportunity to exchange programs and films, train employees and market their channels.

“We’re pleased that we agreed on such important issues as content production and purchasing, as well as personnel training,” said Latvian Public Broadcast’s Chairman of the Board Ivars Belte, adding that the unifying factor in both channels are a common mission and values.

Latvia’s National Electronic Mass Media Council (NEPLP) only made the decision to create a third LTV channel on March 19. It will launch next year.

The launch of ERR’s Russian-language TV channel is scheduled for the end of September.

Source: ERR News

Consumer prices down for the 10th month

• Deflation continued in March
• Cheaper motor fuels and food behind the drop in prices
• Inflation expected at around 0% in 2015 (-0.1% in 2014)

In March, consumer prices decreased by 0.6% compared with the previous year and increased by 0.6% compared with the previous month. Prices, especially energy and food prices, are expected to increase gradually during the second half of 2015. Inflation rate is expected to be around 0% in 2015 as a whole.

Volatile motor fuel prices have had the biggest impact on consumer prices recently. The prices of fuels increased by 4.6% in a month, but remained still 11.3% lower than in March last year. Global crude oil prices grew in euros compared with February due to the continued weakening of the euro exchange rate against the USD. There is abundant supply of crude on the market and recent negotiations with Iran will probably mean a gradual loosening of the current sanctions. Iran holds up to 10% of global oil stocks, while its production volumes have fluctuated between 3% and 5% of global oil supply during the last 30 years.

In addition to energy, food prices also fell in Estonia compared with last year. According to the FAO, global food prices have been on a declining path since April last year due to good crops and high stocks, but also because of stronger dollar against several leading food exporters’ currencies.

The EUR was 22% weaker against the USD in March, on average, compared with last year. According to the Central Bank of Estonia, around 1/3 of the imports of goods and services are paid in the USD in Estonia. As most of these goods and services are either raw materials or capital goods (and not consumer goods), the weaker euro is expected to lift Estonia’s inflation with a certain lag.

Source: Swedbank

The rapid rise in labour costs may restrict investment opportunities

The long-awaited acceleration in economic growth materialised in the second half of 2014, but unfortunately labour productivity grew more slowly than in the first half of the year. Growth accelerated mainly as additional labour was employed, while the contribution of capital to growth declined.

After a long period of sluggish economic growth the growth in labour costs started to slow down in the first half of the year, but accelerated again in the second half. Employment growth picked up in the second half of the year. Although the average wage grew notably more slowly in 2014 than in 2013, companies were able to recruit additional labour in the second half of the year at the cost of faster wage growth.

The shortage of labour due to long-term factors is preventing any reduction in wage pressure. Demographic processes mean that the number of working age people is falling by around 0.8% a year and in the coming years the smaller birth cohorts will be leaving higher education facilities. Although the net migration balance improved for the second consecutive year, Estonian employers are still having to compete in the labour market with foreign employers. The workers going abroad who get a relatively bigger wage boost by doing so are those who would be earning a relatively low wage in Estonia. Not only is the flow of new entrants to the labour market shrinking, but the utilisation of labour is already high: the share of the working age population that was employed climbed higher in the second half of 2014 than it was at the peak of the economic boom.

The faster rise in labour costs than in productivity raised the labour share in GDP, while profits decreased. This may threaten the competitiveness of exporting companies as it will put them under pressure to raise prices. If competition makes it impossible to raise prices, then their lower profitability may push companies to reduce employment in Estonia. Nominal unit labour costs have risen by 17.5% in the last three years, which is more than twice the 9% level where the alert mechanism of the European Commission’s assessment is triggered.

There was no increase in corporate financial difficulties in the second half of 2014 and early 2015. Redundancy payments remained at about the same level as in the previous years, as did the number receiving compensation because their employer had gone bankrupt, and the number of unemployed who had lost their job through redundancy or through their employer closing down. Companies are able for now to cover the rapid rise in labour costs from their own profit buffers, and this will probably be aided by expectations of a recovery in foreign demand and favourable financing conditions. The ability to increase labour costs at the expense of profits will inevitably be reduced in the longer term. Reduced profits also threaten the ability of companies to invest in higher productivity and in the human capital needed for more complex and higher-value work. The key question in the development of the Estonian economy is whether value added can be created with a smaller labour force than before but through increased human capital.

Source: Bank of Estonia

Authors: Orsolya Soosaar and Natalja Viilmann; Economists at Eesti Pank

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