Economic policy statement of Eesti Pank

Commodity price rise has no permanent effect on inflation

The Estonian economy has exited recession and started growing, mainly on the back of exports. Estonia’s economic recovery has been supported by our trading partners’ faster-than-anticipated growth in the first half of the year. However, the latter is likely to be short-lived, since the temporary post-crisis normalisation in the world trade situation is nearing its end and government expenditures are increasing. The aftermath of the crisis is exerting a strong pressure on growth outlooks in several countries, because global economic recovery largely depends on the ability of advanced economies to regain control over their general government budget and debt level. The external environment’s inflation is expected to remain subdued over the forecast horizon, although various raw materials have gone up in price and markets do not expect them to return to lower levels.

Estonia’s companies and the government have displayed considerable aptitude in increasing efficiency. Post-slump adjustments have laid the foundation for productivity-based growth, so productivity per employee is likely to reach a historical high in 2012. The volume of the economy will nevertheless remain below pre-crisis levels over the next years and the next quarters’ rapid expansion compared to 2009 is of one-off nature, since external demand growth is slowing.

Unemployment is expected to contract in the second half of 2010, but long-term unemployment will continue its growth trend well into the next year. Estonia’s labour market has been displaying clear revival signs, but high unemployment has not disappeared. Since the economy will not be able to create enough jobs even in the circumstances of faster growth, the issue of unemployment will persist in the years to come, coupled with the risks that people may lose their skills and that more and more jobless people may become discouraged. It is still too early to determine which structural changes the crisis has delivered.

The duration and extent of wage and price cuts have been smaller than the shrinkage in GDP would have given reason to suppose. The decline in wages and prices so far has helped the economy stabilise. At the same time there is the threat that the current wage and price level will not provide enough impetus for new investment and job creation. Inflation will be above the euro-area average in the next years, but mostly due to external factors and administrative measures. Headline inflation will speed up over the next months because of rising food prices. The scope and duration of the latter depends on developments in both global and neighbouring markets. However, the price hike of food is unlikely to have a permanent impact on inflation, as is also proved by euro-area inflation expectations. This, coupled with the considerable amount of underutilised production capacity and high unemployment will keep the inflation rate in Estonia at a low level in the coming years. If domestic price pressures surface, it may be a sign of either a weak competitive environment or insufficient post-crisis adjustment.

In order to restore fiscal surpluses, it is necessary to use growth-induced additional tax revenue for curbing the deficit and not for increasing expenses. The fiscal balance improvement of 2009 was an indispensable step in restoring confidence in the Estonian economy. At the same time, if growth in the external environment slows more sharply than anticipated, Estonia may have to cut costs even more. Both general government spending and tax burden have hiked in the aftermath of the crisis. Looking further ahead, it is important to determine whether or not the economy will cope with this load and if it is necessary to reduce taxes in order to support the growth potential. In addition, it is necessary to ascertain the cost structure that would contribute most to the latter.

The currently drafted Debt Restructuring Act plans to give court judges relatively free hands to decrease debts, which means banks may decide to discontinue the lowering of interest margins and to curb lending. If this risk materialises, economic growth will be weaker and shrinkage in unemployment slower than anticipated. Banks in Estonia have remained conservative and their lending activity is still subdued. Credit market activity, which has so far been more moderate than expected as regards both volumes and decreasing margins, plays a very important role in economic recovery.

Look at the graph: Economic forecast by key indicators

Source: Statistics Estonia, Eurostat, Eesti Pank


Estonian Air eyeing 30 destinations across Europe

The acquisition of new, smaller aircraft enables the Estonian carrier Estonian Air to serve a larger number of destinations profitably and the company’s strategic goal is to bring the number of direct European destinations to 30. The CEO and president of Estonian Air, Andrus Aljas, told reporters on Monday that the company’s primary focus was on flights lasting up to 2.5 hours. The number of passengers on the routes must be sufficient for twice daily operation. This means that there are plans to open new routes, but the managers speaking to reporters on Monday would not reveal more.
Aljas underscored the importance of Estonian Air’s cooperation with KLM and SAS, which allows the company to offer a large number of final destinations with a single change of aircraft.
The first two of the brand new Bombardiers to be delivered will be taken into use by Estonian Air from the beginning of next year and the third in 2012.
Estonian Air will not reveal the price of the aircraft or details of the deal’s financing arrangement. One of the financing parties is from Canada and as part of the down payment the company will use money to be received as an equity investment by the Estonian state. In connection with the arrival of the Bombardiers, Estonian Air will return the two Boeings it is currently using under a lease agreement.
The CEO emphasised that Estonian Air was buying the three aircraft under the same terms as agreed in the original agreement from 2008. If negotiations on the purchase of the planes were to be started from scratch the price definitely would be higher, he said, answering a question from a journalist. Originally the purchase was agreed as part of a larger acquisition of aircraft by the Scandinavian SAS group, which helped to bring the price lower, Aljas explained.

Source: Estonian Review

Average life expectancy of an Estonian is 75 years

Life expectancy in Estonia rose by almost one year in 2009 and was the highest ever for both the male and the female component of the population, data released by the national statistics office on Tuesday show. Average life expectancy rose by nearly one year to 75 years. The increase was slightly smaller than in 2008, when life expectancy at birth rose by 1.1 years.
It appears from data of Statistics Estonia that the gap between men’s and women’s life spans is among the widest in the European Union at 10.2 years. The difference has started to diminish in the last couple of years. As recently as two years ago men could expect to live 11.6 years less than women, which was one of the biggest disparities recorded in the last two decades, Helerin Rannala from the population statistics division said.
Last year life expectancy for men fell narrowly short of the 70 year mark at 69.8 years whereas life expectancy for women climbed over 80 years (80.1 years). A comparison of Baltic states’ statistics shows that Estonia had the highest life expectancy at birth in 2009. Rannala said life expectancy in the other Baltic states has likewise been rising in recent years in common with the general European trend.
The rise in life expectancy last year was most strongly influenced by a decline in the number of deaths. A marked decrease was recorded in deaths from cardiovascular and digestive diseases and accidental deaths. Another key indicator affecting life expectancy – infant mortality – declined by 30%.
Going by this year’s figures, it can be assumed that life expectancy may not continue rising as fast in 2010, Rannala said. There have been very many deaths by fire and by drowning.
Although life expectancy in Estonia has risen in recent years as more and more emphasis is put on the quality of life and healthy living it still remains among the lowest in Europe.

Source: Estonian Review

Estonia exports 40 pct of its milk output

Currently about 40% of the milk produced by farms in Estonia is exported and this also shows in the price of milk and dairy products, a top executive at the dairy company AS Tere said.
Ülo Kivine, deputy chairman of the management board of the Tallinn-based company, told BNS that the price of raw milk has got a boost from the vigorous opening of nearby markets and developments in world market prices alike, and the price of raw milk in Estonia now is on the average European level.
Kivine explained that unlike in other branches of the food and beverage industry, in the dairy industry there is a very direct correlation between the price of raw material and the price of the product, as a liter of milk bought from the farmer goes into a one liter package for selling in stores and nothing is added to it.
“The price of raw material has jumped during the past year, and because of the inertia effect between input and output prices the price rise now comes out bigger. Electricity and transport have become substantially more expensive too in the meantime. These costs we have previously covered using internal resources,” said Kivine.
The price of a standard one liter package of drinking milk shot up by a quarter – from 7.90 kroons to roughly 10 kroons (from 50 to 64 eurocents) – at several leading retail chains in Estonia during Tuesday.
At the same time last year retailers were in a race to offer milk cheaper than rivals, bringing the price for a standard one liter package as low as 3.70 kroons.

Source: Estonian Review

Q2 profit of Estonian IT companies climbs 6 pct to 59 mEUR

The total profit of Estonia’s information technology companies in the second quarter of 2010 rose 6% compared with the same three-month period in 2009 to 930 million kroons (EUR 59.42 mln).
The sector’s total turnover grew by 1.2 billion kroons to 7.41 billion kroons.
The total number of workers of IT companies, reduced to full working hours, declined 5% year on year to 15 703 workers. The companies’ labour costs were down by 82.4 million kroons at 1.1 billion kroons. The number of companies in the sector increased by 273 companies, or 16%, to 1 928 companies.

Source: Estonian Review

Tartu University Genome Centre receives investments of 1.28 mEUR

The Estonian Tartu University Genome Centre Monday received a new gene sequencing platform; more than 19 million kroons (EUR 1.21 mln) of its cost of 20 mln kroons was provided by the European Regional Development Fund and the Estonian government via the measure on the modernisation of scientific apparatus.
The apparatus acquired makes it possible for the Genome Centre to sequence a person’s whole genome within one week; earlier it was not possible for the Genome Centre to do such accurate work, the Ministry for Education and Research said.
Thirty projects of 11 scientific and research institutions to the sum total of 240 million kroons got the opportunity to improve the installations of their research labs in the first round of the modernisation of scientific equipment endorsed by the Education and Research Ministry under the measure. The gene sequencing platform was one of the most expensive in the framework of the project.

Source: Estonian Review

IT College to start training cyber defence specialists

A course for the training of cyber defence specialists will be set up at the Estonian Information Technology College with support by European Structural Funds; the first interested people can register themselves into study groups starting in November.
An applied cyber defence study module was first set up for administrators of local governments’ and business sector IT systems, the IT college said. The module is intended for second and third year students and people in in-service training who have experience in the administration if IT systems. “The duration of the project is five years. During that period more than 80 proficiency level students and more than 100 IT system administrators will acquire the necessary skills,” project leader of the study module Signe Ventsel said. She said that as a result of the training the cyber defence security of the IT systems of the Estonian public sector would grow, and e-services meant for the public would become more secure.
Information security specialists of the state Information Systems Development Centre have been involved in the project called into existence in co-operation with higher education schools and companies. The cyber defence study module will be regularly updated with the assistance of CERT Eesti (Computer Emergency Response Team Estonia) and of private companies, which will make it possible for specialists who have passed the syllabus two or more years ago to update their knowledge. An innovative distance lab for carrying out cyber defence studies will be created in the framework of the project.
Toomas Lepik, an information security expert of CERT Estonia, said that the biggest benefit of the project was that IT it trains specialists who already work. “In our daily work we see a need for upgrading of IT specialists who administer systems of the state and of the private sector. The systems have become more and more complicated in pace with the development of technology. IT specialists have to be in line with the most recent developments in the information security sphere in order to protect their own systems and those of their users.
The cyber defence study model relies on the cyber security strategy for the years 2008-2013 that was set up by the Defence Ministry. Students of the IT College and IT specialists of local governments and businesses can acquire knowledge in the study module created by the project.

Source: Estonian Review