The value of car leases taken is up one fifth on a year ago

Demand remains strong for loans. One fifth more car loans were taken out in August than a year earlier. The same number of new housing loans was taken as a year ago, though a little fewer than in the preceding months. The average interest rate on housing loans continued to rise in August. Companies have taken 16% more in new loans and leases this year than a year previously. The activity in borrowing has been accompanied by rapid growth in deposits too.

The demand from households for loans is supported by the rapid rise in incomes. New loans of 107 million euros in value were taken out, which was about the same amount as in August last year, but less than in May, June and July. The stock of housing loans has grown by 6.8% over the year. The value of new car lease contracts signed was more than one fifth higher than last year and the growth in the total volume of car leases over the year has been about the same. The portfolio of other loans increased by 4.5%.

The value of new corporate loans and leases issued this year is up 16% on a year earlier, with long-term loans up 20%. New loans were issued to almost all sectors. Some of the new loans taken have been used to refinance old loans, and so the yearly growth in the stock of corporate loans and leases picked up a little to nearly 7% in August, if a one-off sharp reduction in the loan stock in autumn 2017 is disregarded [1].

A lively real estate market with strong demand for loans has seen the average interest rate on new housing loans rise in 2018, and the growth rate reached 2.6% in August. Interest rates for corporate loans have not changed though. The average interest rate on new long-term corporate loans was 2.7% in August, as it was in July.

Growth in corporate and household deposits remained fast. The total volume of corporate deposits in banks operating in Estonia increased by 12% over the year. Household deposits were up 10% on the year, meaning they have grown at about the same rate throughout 2018. Non-resident deposits fell by 25% over the year however, and at the end of August they were equal to 7.5% of the stock of corporate and household deposits.

Source: Bank of Estonia

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Author: Mari Tamm, Economist at Eesti Pank

Life expectancy is increasing in Estonia

According to Statistics Estonia, in 2017, life expectancy at birth was 73.7 years for males and 82.3 years for females. In the last ten years, male life expectancy has risen by 6 and female life expectancy by 3.5 years. As a result, the difference in male and female life expectancy has decreased.

The lowest life expectancy since Estonia regained its independence was at the beginning of the 1990s: in 1994, male life expectancy was 60.2 and female life expectancy was 72.8 years. Since then, people’s health has improved, youth mortality related to accidents has decreased and life expectancy has increased.

The difference between male and female life expectancy is decreasing: in 1994, the difference was 12 years, ten years ago, it was over 10 years, and by 2017, it was 8.6 years.

Compared to the average life expectancy in the European Union, people in Estonia live on average 3 years less, but this difference has diminished over the years. Compared to the European Union average, the female life expectancy in Estonia is 1.4 years shorter and the male life expectancy is 5 years shorter. According to 2016 data, in the European Union, the longest life expectancy for males was in Italy (81.0 years) and for females in Spain (86.3 years). Estonia ranks 23rd in the European Union in terms of male life expectancy; it is shorter in Lithuania and Latvia. As for female life expectancy, Estonia has a higher 19th ranking, ahead of all the former Eastern Bloc countries. Bulgaria and Romania have the lowest female life expectancy indicators. On average, in the European Union, the difference between male and female life expectancy is 5.4 years. The difference is smallest in the Netherlands (3.2 years) and greatest in Lithuania (10.6), Latvia (9.8) and Estonia (8.6). In Europe, such greater differences can only be found in the other former Soviet Union countries.

Life expectancy depends on many factors, the most important of these being the environment, accessibility of healthcare services, living standard and health consciousness. The somewhat shorter male life expectancy is not surprising as men are more prone to risk-taking. The greater share of physically demanding jobs or those posing more risk to health is a likely factor. In Estonia, more people on average have blue-collar jobs and there are more blue-collar workers among men. This could be one explanation for the greater difference in male and female life expectancy.

Statistics Estonia calculates life expectancy separately for urban and rural population, population of counties, by nationality and, as of 2017, by education, as a new indicator. Life expectancy is greater in urban areas, among people of Estonian nationality and people with higher education. The difference between male and female life expectancy is also decreasing in these groups. Life expectancy of males and females with higher education differs by 7.7 years, while in the case of basic education, the difference is 10.1 years. The difference in the life expectancy between females with higher education and males with basic education is 17 years.

Life expectancy at birth is the average number of years that a new-born is expected to live if mortality indicators specific to the time period do not change.

Source: Statistics Estonia

Households continued to borrow enthusiastically in July

  • Demand remained strong for both housing loans and consumption loans
  • Businesses increased their short-term borrowing in July
  • The average interest rate on new housing loans continued to rise and climbed a little above 2.5%

Households were again active in taking out new loans and leases in July. The 111 million euros of new housing loans was 7% more than was issued in the same month a year earlier. The yearly growth in the portfolio was around 7%, as in previous months. The volume of new car leases was 28% more than a year earlier and the portfolio as a whole increased by 21% over the year. Yearly growth in other loans to households remained fast at 8%.

Businesses increased their short-term borrowing above all in July. Around one third more was taken in short-term loans from domestic banks and lease companies than in the previous July, but long-term borrowing tailed off a little as the same amount was taken as a year earlier. The corporate loan and lease portfolio shrank a little during the month[1]. Borrowing by companies was restrained by their modest levels of investment and quite large reserves offunds.

The average interest rate on new housing loans rose a little in the first half of the year and in July too. With demand from households for loans strong, the average interest rate on housing loans rose to slightly above 2.5%. The average interest rate for long-term loans taken by companies reached 2.7%.

The rapid growth in the economy and in incomes saw strong growth in bank deposits. Corporate deposits decreased in June and July, but were still up 11% on a year earlier. Household deposits were up 9% over the year in July, meaning they grew at about the same rate as in the first half of the year.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

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Slower growth in wages may prove temporary

  • Wage growth was slowed by the effect of the tax reform, which changed how holiday pay is paid out and raised the average net wage
  • Upwards pressure on wages remains high
  • Wage inequality and poverty wages have declined in Estonia in recent years

Data from Statistics Estonia show that the average gross monthly wage was up 6.4% over the year in the second quarter of 2018, which is a slower rate of growth than the 7.7% in the previous quarter. The shortage of available labour kept upwards pressure on wages high, and the slower wage growth can be at least partly explained by the impact of the tax reform, which changed how holiday pay is paid out and so allowed employers to restrain the growth in gross wages a little as employees received more in their pay packets.

The new tax system made it less favourable for employees to receive holiday pay during the month in advance of their holiday, as the temporary rise in their pay would lower their tax-free allowance. The data indicate that employers agreed more frequently than last year to make all monthly payments the same size. This change had a particularly notable impact in the slower wage growth in education. Wage growth may be faster than expected in the next quarter though, as people receive more in wages during the holiday months than they did last year.

Wage inequality and in-work poverty have declined in Estonia in recent years. This has been helped by the rapid rise in the minimum wage over several years and by rises in family benefits. The risk of falling into poverty is substantially smaller for those in work than it is for the non-working. The risk of poverty is higher for single parents and those with low work intensity, and it declines with higher levels of education.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank


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Using the budget to stimulate the economy was a mistake

  • Living standards in Estonia are at almost 80% of the European Union average
  • Further growth in the economy will be restrained by the fall in investment by companies and the slow growth in productivity
  • The economy continues to grow faster than its long-term sustainable rate
  • Labour shortages would have been less of a problem if the government had not given the economy a boost

Statistics Estonia estimates that GDP was up over the year by 3.7% in the second quarter and by 1.4% over the first quarter, adjusted seasonally and for the calendar. Data from earlier years were adjusted and showed that living standards in Estonia have reached almost 80% of the European Union average. The problem for the economy though is the fall in investment by companies and the slow growth in productivity.

The upward adjustment of GDP for 2016 and 2017 by almost 3% supports the opinion that the Estonian economy has been running at a high rate for some time now. This means it was a mistake to use additional fiscal measures to stimulate the economy in 2017. As the public and private sectors are competing for the same resources, the state giving the economy an additional boost during good times can squeeze out private sector projects. It is probable that labour shortages would have been less of a problem for businesses had the government not stimulated the economy.

Although the growth in the economy was slower last year, it continues to be faster than the long-term sustainable rate for the Estonian economy. The rapid growth has until now been supported by increased participation in the labour force and growth in employment, but growth in productivity has been slow. Labour productivity rose by only one per cent in the second quarter. As the labour force participation rate in Estonia is already quite high compared to the rates in other European countries, it is unlikely that employment can continue to increase in the same way in the longer term. If productivity does not rise faster, the economy will grow more slowly in future.

Productivity growth requires investment, but earlier data for GDP show that investment by companies has fallen. However, the good times in the economy should favour growth in investment. The fall in investment may have been partly caused by the orders from the state, though rapid growth in construction of residential property has also squeezed orders from companies out of the market. This is probably not the only cause of the fall in investment by companies though, as total investment has also fallen.

That said, it is not impossible that corporate investment has simply been underestimated. The GDP revision that raised GDP by almost 3% for 2016 and 2017 was accompanied by a substantial upwards revision in the data for corporate investment. Repeated corrections to the GDP figures in the same direction and an initial underestimation of GDP pose the risk that economic policy decisions are taken on the wrong foundations and can knock the economy out of balance. This makes it imperative that the accuracy of statistical estimates be improved and that economic policy decisions be taken following thorough analysis.


Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

2Q unemployment rate the lowest in 10 years

• Employment rose rapidly but only among the part-time workers
• The unemployment rate decreased more than expected
• The shortage of labour has reached the levels of last economic boom 

Employment rose rapidly but only among the part-time workers 
The number of the employed rose significantly, by 2.0%, or by 13,000 persons, over the year, in Estonia. Employment rose among the part-timers in the services’ sector and the manufacturing. According to the Estonian Tax and Customs Board, who has more detailed data on employment by sectors, employment increased the most in the construction sector.

The unemployment rate decreased more than expected 
Employment rose due to lower unemployment, the number of the inactive remained at last year’s level. The number of the unemployed decreased by the same amount as was the increase in the employment, 13,000 persons. Unemployment shrank among the short-term unemployed (up to 6 months). The unemployment rate (5.1% in Q2) would have been even lower without the ongoing work ability reform (that motivates people with a disability to look for a job). Around a third of the registered unemployed were people with decreased working ability in July.

The shortage of labour has reached the levels of last economic boom 
A shortage of labour was the most important factor restricting business for 30% of manufacturing, 36% of service companies and for 61% of construction companies in July. While the labour market indicators look more and more like during the last economic boom, the number of the working-age people is much smaller: -70,000 compared with 2006-2007.

The shortage of labour keeps wage growth rapid 
Employees feel more and more secure in the labour market. The number of employees who have left their jobs on their own initiative is growing and the rate of job vacancies is on the rise. Therefore, wage pressures will persist. Tax data show that gross wage growth remained strong in the second quarter, close to 6%, year-on-year.

Employment should continue growing in the second half of the year. Companies plan to increase the number of workers in the following months, according to a survey by the Estonian Institute of Economic Research. As demand for labour grows, but the supply of labour is limited, at least short-term, the number of job vacancies should grow. It seems that the negative impact of the work ability reform on the unemployment rate will be smaller than expected and the unemployment rate will be smaller in 2018 than in 2017.

Source: Swedbank

Growth in manufacture of computers and electronic products

According to Statistics Estonia, in June 2018, the production of industrial enterprises increased by 3% compared to June 2017. Production increased in manufacturing, energy as well as in mining.

In June, the total production in manufacturing was 2% higher compared to the corresponding month of 2017. In June, over a half of the branches of industry exceeded the volume of the same month of the previous year. The growth in production was mostly due to an increase in the manufacture of computers and electronic products, fabricated metal products and chemical products. There was also a slight increase in the manufacture of food products. Among the branches of industry with larger shares, production fell in the manufacture of wood and furniture.

In June, 68% of the total production of manufacturing was sold to the external market. According to unadjusted data, sales of manufacturing production for exports increased by 6% and sales to the domestic market increased by 3% compared to June 2017.

In June 2018, compared to May, the seasonally adjusted total industrial production decreased in total by 1%. Production of manufacturing fell by 2% compared to the previous month.

Compared to June 2017, the production of electricity decreased by 21%.Volume index of production in manufacturing and its trend, January 2009 – June 2018

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