Recovery of economic growth depends on improvement in export capacit

Initial figures released by the Statistical Office indicate that gross domestic product (GDP) grew in Estonia in the second quarter by -1.4% compared to the same quarter last year. The negative real growth of GDP is largely explained by the drop in domestic demand, the decrease in exports and the accelerated rise in prices.


The negative economic growth in the second quarter was expected and we are forecasting improvement in the general economic situation at the start of next year. Recovery of economic growth depends on improvements in export capacity and more active real estate sector. Estonia is not yet facing recession, a term which can only be applied according to its broadly accepted definition when economic growth has been negative for at least two successive quarters.

Positive aspects of the slowdown in economic growth are the slower growth of external debt and the lowering of the current account deficit brought about by the reduction in domestic demand. Better availability of unoccupied labour is allowing companies to select their employees and is reducing the rise in salaries, which to date has been much more rapid than the rise in productivity. The development of the Estonian economy has become more balanced and is gradually adapting to the changed conditions.
Private consumption made a significant contribution to the negative economic growth, that was influenced by the considerable decrease in the growth of the amount of money at people’s disposal. Growth in salaries is gradually levelling out and the number of workers has clearly fallen. Moreover, people’s expectations of the future are growing ever more pessimistic, which is having a negative impact on their willingness to borrow, consume and invest. The rise in pensions in April will not be able to compensate for decreasing volumes of debt and the 11 percent rate of inflation will significantly reduce the real growth of income. As such, the negative growth of GDP in the second quarter has also partly been caused by the rise in prices.
Apart from domestic demand, another reason for the negative economic growth is the reduction in exports. The rapid rise in the cost of production input and a low level of productivity have harmed sectors offering limited added value, such as the timber and textiles industries. The restructuring of companies to offer new and more complex products and services will take time.

The level of company and household investment probably also fell in the second quarter. A weak economic conjuncture, the reduction in companies’ profitability and the lethargic real estate sector have not favoured capital investment. The key terms in the turn of the economic cycle are the contribution of investments to raise efficiency and offer greater added value, which in turn will enable export potential to increase. However, these changes will take time, as so far capital investments serving domestic demand have been dominant.

Negative economic growth is expected to continue in the coming quarters. The pessimism of people,, reflected in the sentiment indexes that continued to fall in July, is retarding consumption and investment.
In calculating economic growth the Statistical Office has adopted a new chaining method, as a result of which the figures for the second quarter are not directly comparable to those of previous periods. The new method enables what is happening in the economy to be more accurately measured and ensures better international comparability of data. The Statistical Office had been planning the implementation of the new method for several years, since it is used in the calculation of GDP by the majority of European Union countries and Estonia was obliged to adopt it in accordance with the EU legislation.

Source: Estonian Ministry of Finance

Olympic Games on mobile screen for 1 EUR


Tele2 clients can watch Beijing Olympic Games through their mobile phones for EEK 15 a day ( 15,565 EEK= 1 EUR). Tele2 marketing manager Reilika Ilp said that they are offering people who do not have the digital ETV2 sport channel an opportunity to see the Olympic Games live through mobile phones, writes.

Those clients who have bought the M-ticket for one day pay only EEK 15, independant of the time spent watching the games. Other have to pay based on the package they have chosen.

Source: BBN

Centre Party refuses to call Russia an aggressor

Estonia’s main opposition party Centre Party opposed a declaration proposed by MPs of other parties that criticised Russia for invading Georgia.

Postimees writes that, officially, Centre Party MPs refused to support the petition proposed by 37 MPs since the parliamentary foreign affairs committee had refused to change the wording of the draft petition.

Enn Eesmaa from the Centre Party said that already the title of the petition “On Russia’s military aggression against Georgia” was such that Russian politicians would not even read it through. “I am not even speaking about the level of accusations and demands made in the text,” said Eesmaa.

Read more: BBN

Estonia may postpone implementing new tax legislation

The state is likely to postpone key legislation about advance taxation of dividends and may collect an extra EEK 1.4 billion into the budget next year.
Today’s Äripäev writes that the government will on its session next Thursday discuss whether to go forward with income tax amendments.

The country already amended its tax legislation this spring to harmonize it with the EU law on taxing parent companies and subsidiaries. Prime Minister Andrus Ansip says now that since new case law of the European Court shows that the current income tax system of Estonia fully complies with the EU law.

“We don’t want to leave businessmen unaware and attempt to make the decisions on the future as soon as possible,” assured Finance Minister Ivari Padar.

According to Padar, the state plans to collect just over EEK 4 billion in corporate income tax this year which accounts for 5.5 percent of the state’s tax revenues.

Under the new tax amendment, companies will not be paying income tax by next month’s 10th day, but it would be calculated as an estimation of the income tax paid in the last three years. Companies would pay two-third of their average income tax on their last year’s figures. If the amount is below EEK 30,000, no advance income tax would be levied.

The new law was expected to enter into force in January 2009.

Source: BBN

Gross domestic product decreased in the 2nd quarter

According to Statistics Estonia, by flash estimations, the gross domestic product (GDP) decreased by 1.4% in Estonia in the 2nd quarter of 2008 compared to the same quarter in the previous year. Statistics Estonia changed over to the chain-linking method in calculating the economic growth.

Compared to the 1st quarter, the GDP, chain-linked by the reference year 2000 and seasonally and working-day corrected, decreased by 0.9 %.

According to preliminary estimations, decrease in the GDP was most of all influenced by the decrease in the value added of manufacturing, wholesale and retail trade, transport and storage, energy and real estate activities. Decrease in the value added of manufacturing was caused by a small domestic demand and by virtue of that, the decrease in orders. Decrease in the production of food, wood and building materials had a substantial impact. Small domestic demand was a reason for the decrease in the value added of wholesale and retail trade activity as well. Sale of motor vehicles has decreased fast. Decrease in the value added of energy sector has been conditioned by a partial replacement of own production with the imports of electricity.

Fast deceleration in the growth of the value added of financial intermediation, which had started in the 1st quarter, continued. Real growth of the value added decelerated due to the deceleration in the growth of financial and interest income, fees and commissions’ income, as well as due to the increase in interest rates on loans.

Preliminary estimation of the GDP growth has been calculated according to the new methodology. Whereas, Statistics Estonia previously calculated the GDP growth at the constant prices of fixed year 2000, henceforth the growth is calculated by chain-linking method in which the year preceding the accounting period is applied as a base year. The new methodology enables to measure the economic activity more accurately and ensures better international comparability of data. The majority of EU Member States use the chain-linking method in calculating the GDP growth, and the requirement to apply this method proceeds from the EU legislation.

In general, the GDP growth calculated by the chain-linking method since 2001 is somewhat lower than the GDP growth calculated at the prices of fixed base year. Discrepancies between the GDP quarterly growth rates calculated by the two methods remain between -1.6 and +0.2 percentage points. In addition to the changeover to the chain-linking method, the GDP growth correction includes the regular GDP revision for 2004–2007 according to the Supply and Use Tables and Structural Business Survey.

The revised GDP for the 2nd quarter of 2008 calculated by the uniform methodology will be published by Statistics Estonia on 8 September 2008. The GDP components since 2000 and the respective growth rates calculated by chain-linking method will be published on the same date. Calculations by chain-linking method for 1995–1999 will be published by Statistics Estonia in December.

Additional information on the chain-linking method is displayed on the web site of Statistics Estonia: Statistics > Subject areas > Economy > National Accounts.

Source: Statistics Estonia