Inflation was at its fastest for four years in July

  • The rise in the excise on beer increased the price level by 0.4 percentage points in July
  • Inflation stood at 3.6% in July according to Statistics Estonia and half of it was due to a 6.4% rise in food prices.

Core inflation, which shows price changes for manufactured goods and services, accelerated in July to 1.8%, mainly because of higher services prices.

The rise of food commodities prices on global markets, which started in mid-2016, has been passed into Estonian consumer prices to a significant extent. Prices for dairy products have risen especially fast, as the producer prices of butter continue to set new records on the EU market. Other food prices, especially those for fruit and vegetables, have however stabilised over the past months, as commodities prices are growing somewhat more slowly. Higher excise taxes caused a 21% price increase for the beer sold in shops, which affected the consumer price index in July by 0.4 percentage points.

The inflation in most euro area countries remained low in July at 1.3%. Rapid economic growth has not started to impact prices yet, as some euro area countries are underutilising their production capacity and inflation is also being held back by the appreciation of the euro. Since April, the euro has risen 8.5% against the US dollar. The strengthening of the euro has not caused fuel prices at filling stations to change much, although the price of a barrel of crude oil on global markets has risen from 46 US dollars to 52 in two months. The rise in the exchange rate of the euro is encouraging the prices of imported manufactured goods to fall, but it also slows down the growth of euro area exports.

Eesti Pank forecasts that inflation will continue to move at a fast pace until the end of the year. Prices should increase more slowly in the first half of next year, but still faster than the euro area average.

Inflation in the euro area remains low and rapid economic growth has yet to affect prices

Inflation in Estonia and euro area
Author: Sulev Pert, Economist at Eesti Pank

Spending by inbound visitors up by 20 mEUR in Q2

There were close to 1.8 m visitors from abroad, an increase of 7% when compared with Q2 of 2016.  While the number of visitors from Finland remained stable, accounting for one-third of the total, the trips made by residents of other EU Member States increased by one-tenth.

Residents of Russia made 210 000 visits to Estonia, representing a 3% rise over the past year. The number of tourists from the US increased by a quarter and there were more visitors from Spain (a 40% rise), Latvia (15%) and the UK (27%). Trips from Poland and Belarus have, by contrast, fallen.

The number of visitors staying overnight was up 5%, compared with Q2 of 2016. The average length of stay was the same as a year earlier at 4 days. Same-day visitors accounted for around a half (49%) of the total inbound visitors and their number increased by 9% compared to a year ago.

Visitors from abroad spent an estimated total of 415,000,000 euros, which was 20,000,000 euros more than a year ago.

In the second quarter of 2017, residents of Estonia made around 1,000,000 visits to foreign countries, which was 13% more than a year earlier1.80% of the visits were made to other EU Member States. There was a notable increase in the number of visits to Belgium and Greece. The number of trips to CIS countries increased by one-fifth: there were 75% more visits to Ukraine compared to a year ago. As usual, Finland was the top destination, with 170,000 visits, which, however, represented a 8% decline from a year ago. Trips to Norway also fell by 11%.

Outbound overnight visits increased by 13%, while their average length remained at 3.5 days. Same-day visits accounted for 14% of the total, showing a 9% increase.

Visitors from Estonia spent an estimated total of 300,000,000 euros, which was 20,000,000 euros more than in Q2 of 2016.

The number of trips abroad and the number of visits abroad are not the same, as one trip abroad may include visits to several countries.

The movement of travellers has a noticeable effect on the exports and imports of travel services in the Estonian balance of payments. The balance of payments statistics for the second quarter of 2017 will be published on September 7.

Source: Bank of Estonia

Estonian current account at 67 mEUR in surplus in June 2017

The flash estimate1 put the Estonian current account at 67 million euros in surplus in June 2017. The surplus on the goods and services account was 104 million euros, which was 11 million euros more than a year earlier. Volumes of both goods and services increased. Goods exports were up by 8% over the year and imports by 6%, and so the deficit on the goods account narrowed by 8 million euros over the year to 81 million euros. Services exports were up by 5% and imports by 6%, and the surplus on the goods account widened by 4 million euros to 185 million euros. The net outflow of investment income and current transfers, or the primary and secondary income accounts, increased by 16 million euros to 37 million euros.

The current and capital accounts were in surplus by a total of 85 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.

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 of the 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. For more on the principles used in compiling the flash estimate, see here.

Eesti Pank publishes the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for the second quarter of 2017 on 7 September 2017.

Statistical releases are published by Eesti Pank together with statistical data. The release is independent of economic policy releases and is presented separately from them.

Source: Bank of Estonia

Demand for labour remained strong in 2Q

  • The labour market indicators remained good in the second quarter
  • The employment expectations of companies improved and they felt labour shortages more sharply
  • The unemployment rate rose to 7%,
  • Growth in productivity accelerated

The Labour Force Survey shows a fall of 0.5% in the number of people employed in Estonia in the second quarter of 2017 and a rise of 0.5 percentage point in the unemployment rate to 7%. The change is not large compared to typical statistical variation, suggesting that conditions remained good in the labour market in the second quarter.

The share of people of working age who were in employment was 66.9%, and most data sources show strong demand for labour. Registry data from the Tax and Customs Board show an increase of 0.9% in the number of people declared as receiving a wage in the second quarter, driven by the private sector. The confidence survey of the Estonian Institute of Economic Research shows that companies have improved their employment expectations, and the share of the companies questioned considering labour shortages to be a factor limiting production increased. Employment expectations have particularly increased in the construction sector, where the restriction of labour shortages is also particularly felt. Households also became more optimistic and fears of increased unemployment have declined sharply during 2017.

Statistics Estonia puts the unemployment rate at 7%, which is 0.5 percentage point higher than in the second quarter of last year. Although health is keeping about the same number of people out of the labour market as a year ago, the rise in the unemployment rate probably reflects the effect of the work ability reform. Data from Eesti Töötukassa, the Estonian unemployment insurance fund, show that the number of registered unemployed with reduced ability to work approached 10,000 and a further rise in this number is expected. The data indicate that some 7% of people with reduced ability to work found work each month in 2017. The rate of finding jobs was, as expected, somewhat lower than the rate of 12% for those with full ability to work. Unfortunately around 7% of those registered with Töötukassa leave the register of their own volition or because they cannot meet its conditions. As this also means losing work ability benefit, the reasons behind this and how people are subsequently able to cope need to be analysed.

Labour productivity has now been growing for a year and the increase picked up even further in the second quarter according to data on industrial output and exports. More efficient organisation of work allows companies to improve their profitability even if wages continue to rise as quickly as they have been doing.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Household loans are growing at an ever faster rate

  • The growth in the stock of household loans has caught up with growth in incomes
  • Interest rates on housing loans have increased slightly in 2017, but they remain low
  • The volume of deposits is growing faster than the portfolio of bank loans and leases

The stock of loans and leases issued to companies and households by banks operating in Estonia stood at 17.6 billion euros in July, which is 5.9% more than a year earlier. Growth was slightly slower than in previous months because companies were borrowing a little less. In contrast, loans to households are increasing at an ever faster rate.

The annual growth in the stock of loans and leases to companies slowed to 5.2% at the end of July. The slower growth does not necessarily mean that the growth in the total debt of companies has slowed, as there has been some slight growth in 2017 in borrowing from abroad and from parent companies, which had slowed in the past couple of years. The growth in credit has been faster than the average in agriculture and forestry and in the transport sector.

The annual growth in the stock of loans and leases to households picked up to 6.6% by the end of July. The rise in the average income has been about the same in recent quarters. Faster growth in loan liabilities would increase the risk of households being unable to repay their loans. Demand for housing loans is high, and the volume of new housing loans issued in the past three months is 16% higher than during the same months of last year. Some two thirds of this comes from increased activity in the credit market as the number of loan agreements has risen. The average amount borrowed has also increased. Rising incomes and increases in confidence have also seen the take-up of car leases and consumption loans increase.

Interest rates on housing loans have risen a little in 2017, but they remain low. Increased demand for credit has allowed banks to increase their loan margins slightly. This means that the average interest rates on loans granted is 0.3 percentage point higher than at the start of the year and is now 2.4%. The average interest rate on long-term loans granted to companies was also 2.4% in July.

The total deposits of companies and households again increased faster than the portfolio of loans and leases. The rapid growth in deposits has accompanied the continuing rapid growth in the economy and in incomes. The total volume of deposits was 11% higher in July than a year ago at 12.3 billion euros. Household deposits were 8% higher in July than a year ago but corporate deposits were up by some 15%.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

Corporate profit grew faster than wages in the second quarter

  • Growth in wages picked up and was close to the average rate of 2016
  • Real wages  grew more slowly because of inflation
  • Wage growth is being boosted by strong demand for labour

The average gross monthly wage was up 6.8% in the second quarter of 2017 on the same quarter of the previous year. The growth rate was faster than the 5.7% seen in the first quarter and was close to the average rate seen in 2016. Faster inflation has noticeably slowed the growth in real wages, meaning that the purchasing power of those earning the average wage is growing more slowly than previously.

Despite the rapid rise in wages, corporate profit also increased. Several factors have contributed to this, including increased foreign demand, a recovery in the oil shale sector affecting mainly mining and electrical energy production, and an increase in construction activities because of large investments in infrastructure. Wages are less volatile over the business cycle than profit is, and when the economy is strengthening profits increase faster than wages do to make up for earlier declines. For labour costs to approach the share of value added seen before the economic crisis or the European Union average, growth in profits would have to exceed that in wages for some time yet.

In future the growth in wages may be accelerated even further by strong demand for labour, which is normally seen when the economy is growing rapidly. Sentiment surveys by the Estonian Institute of Economic Research show that the share of companies expecting employment to increase has grown and a shortage of labour is being cited more frequently as a factor limiting production. The danger of overheating is particularly apparent in construction, where wage growth in the second quarter was still lower than the average for the economy as a whole. It has probably been restrained partly by the employment of labour from abroad.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

GDP growth was largely based on domestic demand in the second quarter

  • The output gap is positive
  • The economy does not need any additional stimulus
  • Rising export prices are helping profits to recover and are alleviating the imbalances that have built up

Estonian GDP was up by 5.7% over the year in the second quarter, and by 1.3% over the quarter. Faster growth in export prices has helped companies to recover the profits which have been reduced in recent years by rises in labour costs. This has helped to reduce the imbalances that had built up earlier.

Corporate surveys that describe the position in the economic cycle, including assessments of labour shortages and capacity utilisation, are above the average for the economic cycle, indicating a positive output gap. It may be too early to talk of a boom yet, but it is clear that there is no need for the government to provide any additional stimulus to the economy at the present time. As the economy is growing strongly, it would be more reasonable to build up reserves against more difficult years.

The rapid growth overshadows the unexpected weakness in the contribution of the exporting sector to growth in the economy, despite an improved external environment. Value added from manufacturing grew by only 1.4% and exports grew very slowly. It is true that different sources of data give different signals, and for example the output volume index for manufacturing was up by 8% at the same time. This suggests that it is not wise to read too much into the data for only one quarter. Manufacturing companies say that capacity utilisation was down across the board in the beginning of the third quarter, falling more in branches of manufacturing which are more susceptible to labour shortages. There are not currently sufficient data to allow it to be said that the manufacturing sector cannot use its equipment because it is not able to find sufficient workers.

Among the demand components it was investment that most boosted economic growth. This is in itself a good thing, because investment is needed to increase production capacity. The growth was mainly driven by investment in transport vehicles and in construction though, which probably does not add a great deal to growth in productivity. The volume of investment in machinery and equipment grew at the same rate as GDP.

It is good to note that despite the weakness of exports and the rapid growth in investment, the contribution of net exports was close to zero. This indicates that external balance has not changed very much, and economic growth is still largely being financed by domestic sources.

A return of inflation has changed matters for businesses and is now helping them to increase their profits. Estonian companies are price takers in export markets, meaning that they generally have to accept the prices that have already been set in those markets. Low inflation has meant that it has not been possible to pass the rapid wage rises of recent years on into prices and this has eaten into profits. Export prices and the GDP deflator increased in the second quarter by 4% over a year earlier, and this helped to increase profits. The profit of the corporate sector was up by one fifth over the year, while labour costs increased at half that pace.

Increased profits will help investment to recover further in the future, and thus will also support growth in potential output. Growth in the economy may be restrained in the quarters ahead by the oil shale sector. This is because the energy and oil shale sectors have played an important role in the growth in the economy in recent quarters, but this contribution should be reduced in the third quarter. Assessments of manufacturing companies for output in the months ahead were similar in July to what they were in the second quarter, and they do not foresee that growth in output will slow markedly in the coming months.

The economy grew markedly faster in the second quarter than was predicted by the most recent Eesti Pank forecast. When it released the data for the second quarter, Statistics Estonia also revised the GDP figures for earlier periods, meaning that earlier forecasts cannot be compared with the new data. Nominal GDP in the first quarter of this year was 1.3% higher with the new data.

Author: Kaspar Oja, Economist at Eesti Pank

Source: Bank of Estonia