Economic growth is still strong despite weakened foreign demand

In the second quarter of 2019, Estonian GDP growth slowed to 3.6% y/y in real terms and to 7.9% y/y in nominal terms. In the first half of this year, GDP growth was 4.2% in real terms. Although, the growth moderated from the last year’s heights, it was still strong despite weakened foreign demand. Seasonally and working day adjusted GDP grew by 0.4% q/q.

Statistics Estonia revised the national accounts time series for 1995–2019Q1. According to the revised data, in the first quarter of this year, real GDP growth was 0.5 pp higher – 5.0%. As a result of the revision, GDP for 2017 was revised up by 0.9 pp to 5.7% and for 2018 – by 0.9 pp to 4.8%.

Economic growth was dominated by ICT sector

In the second quarter of 2019, the main contribution to GDP growth came from ICT – almost half of the growth came from this sector. Higher contribution came also from professional and technical activities, wholesale and retail trade, and manufacturing. Manufacturing, which was the main contributor in the first quarter, contributed less in the second quarter. However, slower growth of manufacturing sector was expected due to weakened foreign demand and faltering industrial confidence. Construction sector, that was the main contributor to the economic growth in previous years, did not contribute in the first half of this year. Negative impact to the growth came mainly from energy sector.

Domestic demand is still strong

In the second quarter, the growth of domestic demand decelerated somewhat, but was still very strong – 6%. The main contribution came from investments, which increased by 25%. Investments of business sector and households’ increased, while government investments decreased. The growth of private consumption has slowed and was 1% in the second quarter, which was affected by last year’s base effect. However, private consumption should be supported by strong wage growth, low interest rates, moderate inflation and high consumer confidence going forward.

The growth of foreign demand has slid from the peak. However, in the first half of the year, the growth of export of goods was still strong – 7%. Total export growth was 4% in the first half of the year. We expect that weakened foreign demand should offer less export opportunities in the second half of the year.

Economic growth in Estonia is expected to slow

According to our latest Swedbank Economic Outlook published in August, economic growth in Estonia is expected to decelerate in the second half of this year, primarily due to unfavourable foreign demand. We also expect slower economic growth in the next two years. As our August forecast was made before the revision of the GDP time series, we shall revise our forecast in our next economic outlook in autumn.

Source: Swedbank

Wage pressures expected to ease a bit next year

Wage growth is rapid and broad-based. The average gross wage amounted to EUR 1,419, up by 7.4%, over the year, in the second quarter. Wage growth was broad-based, in terms of sectors and levels. Tax Authority’s wage data show that the average gross wage increased among all wage deciles, by around 8%, over the year, in the first half of 2019.

Wage growth in the public sector has exceeded wage growth in the private sector in the past year. Private sector, exposed to global competition, has found it harder lifting its labour costs as rapidly.

As export demand and Estonia’s economy are expected to grow at a slower pace next year, demand for labour should ease, at least in the exporting industry. So, wage growth should moderate, from very high levels (from 8.1% in 2019 to 6.5% in 2020 and 5.5% in 2021). Wages in the public sector are also expected to grow at a slower pace, due to fiscal constraints in the budget.

Source: Swedbank

Employment of 50–74 year olds the highest in 10 years

According to Statistics Estonia, the employment of 50–74 year olds keeps growing. The number of employed people of that age group is the highest in 10 years.

According to Statistics Estonia, in the 2nd quarter of 2019, the unemployment rate was 5.1%, the labour force participation rate 71.7% and the employment rate 68.1%. According to estimates, 667,700 persons were employed and 35,700 were unemployed. The labour market indicators did not change very much compared to the same quarter of 2018.

The number of 5074-year-old employed people (232,500) has continued to increase: by 9,600 compared to last year. In the second quarter of 2019, the employment rate of 5074-year-old population was 59.2% and the unemployment rate 4.7%. The number of unemployed persons decreased by 2,100 compared to the same quarter of 2018. 127,700 of the employed were women and 104,800 men. Compared to the previous year, the number of employed women has increased by 3,400 and employed men by 6,200.

The employment rate for persons aged 25-49 was 83.3% and their unemployment rate was 4%. Compared to the last year, these indicators have not changed very much. The employment rate of 1524-year-old persons was 39.5% and the unemployment rate 14.1%. The high unemployment rate of young people can be explained by the summer season when young people start looking for work and are available to start work within two weeks.

Read more from Statistics Estonia

Labour shortages could ease somewhat next year

According to Statistics Estonia, labour market remained tight but did not improve further in the 2nd quarter. The number of the employed and the number of the unemployed stayed at last year’s level. Employment’s quarterly data are very volatile in Estonia. Employment has increased by +1.0% in the first half of the year, mostly in the services’ sector. The unemployment rate remained low, at 5.1% in the 2nd quarter, slightly above the 4.7% in the first quarter.

The number of job vacancies and the number of persons leaving on their own initiative remains high. The scarcity of labour is more pronounced in the services’ sector (around 1/3 of the companies reporting the scarcity of labour as their main concern) and less acute in manufacturing (1/4 of companies highlighting finding suitable work force as their main challenge). Without foreigners, labour market would be even tighter. There are around 20,000 foreigners working on short-term contracts in Estonia, around 80% from Ukraine.

Wage pressures could ease a bit next year
As export demand and Estonia’s economy are expected to grow at a slower pace next year, demand for labour should ease, at least in the exporting industry. So, wage growth could moderate, from very high levels. Wages in the public sector are also expected to grow at a slower pace, due to fiscal constraints in the budget.

We expect employment to remain at current levels and the unemployment rate to stay low, slightly above 5%, in 2020. The average gross wage should increase by around 8% in 2019, 6.5% in 2020, and 5.5% in 2021.

Source: Swedbank

Production increased in manufacturing

According to Statistics Estonia, in June 2019, the production of industrial enterprises decreased by 4% compared to June 2018. Production increased in manufacturing, but decreased in energy as well as in mining.

In June, the total production in manufacturing was 2% higher than in the corresponding month of 2018. Over a half of the branches of the industry didn’t exceed last year’s volume. The manufacture of food products, computers and electronic products, and other non-metallic mineral products experienced growth, while production fell in the manufacture of wood, fabricated metal products and furniture.

In June, 68% of the total production of manufacturing was sold to the external market. According to unadjusted data, compared to June 2018, the sales of manufacturing production for exports decreased by 2% and sales to the domestic market by 7%.

Compared to June 2018, the production of electricity decreased by 58% and the production of heat by 10%.

In June 2019, compared to May, the seasonally adjusted total industrial production fell by 6% and the production of manufacturing by 4%.

Read more on Statistics Estonia website

Turnover increased the most in stores selling textiles, clothing and footwear

According to Statistics Estonia, in June 2019, compared to June of the previous year, the turnover of retail trade enterprises increased 3% at constant prices and was 635 million euros.

The turnover of stores selling manufactured goods increased 4% compared to June 2018. Turnover increased in five and decreased in two economic activities. Turnover increased the most in stores selling textiles, clothing and footwear, with sales increasing 12% year on year. A higher than average increase in turnover occurred also in other specialised stores, such as stores selling predominantly computers and their accessories, books, sports equipment, games, toys, flowers, plants, etc. (7% growth) and in other non-specialised stores selling predominantly manufactured goods (i.e. department stores) (5% growth).

The turnover of grocery stores increased by 3% compared to June of the previous year.

The turnover of enterprises engaged in the retail sales of automotive fuel decreased 2% compared to June of the previous year.

Compared to the previous month, in June, the turnover of retail trade enterprises decreased by 1%. According to the seasonally and working-day adjusted data, the sales remained at the previous month’s level.

In the six months of 2019 (January–June), the turnover of retail trade enterprises increased 5% compared to the corresponding period of the previous year.

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Moderate rise in the construction price

According to Statistics Estonia, the change of the construction price index in the 2nd quarter of 2019 was 0.3% compared to the 1st quarter of 2019, and 2.0% compared to the 2nd quarter of 2018.

In the 2nd quarter of 2019, compared to the same quarter of the previous year, the construction price index was primarily affected by an increase in the cost of labour, which accounted for 62% of the total increase of the index.

Compared to the previous quarter, labour costs increased by 0.6% and costs of building materials by 0.1%. The prices of building machines increased by 0.4 %.

In the 2nd quarter of 2019, the change of the repair and reconstruction work price index was 0.4% compared to the 1st quarter of 2019, and 2.3% compared to the 2nd quarter of 2018.

The calculation of the construction price index covers four groups of buildings: detached houses, blocks of flats, industrial buildings and office buildings. The repair and reconstruction work price index covers office buildings. The construction price index expresses the change in the expenditures on construction taking into consideration the price changes of three basic inputs: labour force, building materials and building machines.

Read more from Statistics Estonia