Research: consumption sensitivities in Estonia

The Permanent Income Hypothesis (PIH) entails that consumption reacts more strongly to persistent than to temporary income shocks.

This prediction is tested using data from the Estonian Household Budget Surveys for 2002-2007. The dataset contains questions which make it possible to distinguish between persistent and temporary income shocks based on the households’ own assessment. The estimations confirm that the marginal propensities to consume out of the two income shocks differ, households are forward-looking and seek to smooth consumption. Moreover, the estimated propensities of persistent shocks are of reasonable magnitudes, consistent with the PIH.

Further analysis reveals, however, features that are in breach of the PIH. The consumption estimations are affected by lagged temporary income shocks. When income shocks are decomposed into positive and negative values, there is evidence of excess sensitivity to positive temporary shocks.


1. Introduction

2. Consumption response to income shocks: a brief literature overview

3. Theoretical framework

4. Dataset and identification of income shocks

4.1. The Estonian Household Budget Survey

4.2. Identification of income shocks in the Estonian HBS

5. Consumption estimations

5.1 PIH estimations

5.2 Sensitivity to lagged temporary income shock

5.3 The rule-of-thumb consumption among Estonian households

5.4 Consumption response to positive and negative income shocks

6. Final comments

 „Estonia experienced very rapid economic development during the sample years 2002–2007; incomes grew at a fast rate and financing possibilities developed rapidly. In spite of the extraordinary economic changes experienced in Estonia, households appear to have formed expectations and made consumption decisions in ways comparable to experiences from countries with a more stable economic environment. As data are not available from the deep recession experienced by Estonia in 2008–2009, it is not readily examined whether the same pattern continued during the downturn or whether the findings reflect factors that are unique for the upturn.“

The working paper of the bank of Estonia written by Merike Kukk, Dmitry Kulikov, Karsten Staehr

“Consumption Sensitivities in Estonia: Income Shocks of Different Persistence”

Read more from Bank of Estonia website

Interest margins on housing loans grew

Corporate lending amounted to 577 million euros in the first month of the year. This is 19% more than at the same time a year ago. The notable growth in new loans has been increasingly affected by the borrowing behaviour of the trade sector – in January, the trade sector’s loans accounted for almost half of new corporate loans, with this sector’s enterprises borrowing 39% more than in January 2011. The borrowing of industry and the logistics sector was, on the other hand, lower than a year ago, referring to smaller external demand.

Households, too, took out less loans than in January 2011. Borrowing was mostly reduced on account of consumption, with consumer credit turnover a fifth smaller than a year ago. New housing loans grew 19% in January, year-on-year. This was partly due to the low reference base at the start of 2011, since the adoption of the euro triggered people to buy more real estate at end-2010.

Loan repayments continued to exceed the volume of new loans and the real sector’s loan and leasing portfolio contracted by 40 million euros (0.3%) in January. The corporate loan and leasing stock even increased as a result of more active borrowing, but households’ loan portfolio shrinkage was nevertheless larger. The real sector’s loan and leasing stock has declined by 3.9%, year-on-year, accounting for 14.4 billion euros by the end of January.

The interest rate margins on housing loans increased for the third consecutive month, to 1.9% by the end of January. However, since tensions in money markets eased somewhat, the 6-month EURIBOR decreased by a total of 0.2 pp in January. As a result, the average interest rate on housing loans remained unchanged at 3.4%. The more volatile interest margin on long-term corporate loans declined slightly, to 4.0%.

After notable improvements in the loan portfolio quality in December 2011, there occurred no major changes in January. The share of loans overdue by more than 60 days in real-sector loans remained at 4.8%.

Household deposits increased by 22 million euros in January. Compared to the same time a year ago, households’ deposits have increased 10%, to 4.3 billion euros. Corporate deposits decreased, due to seasonal factors, by 49 million euros, but were nevertheless 2.8% larger than in January 2011. By the end of January, households and companies had a total of 7.9 billion euros in their bank accounts.

Author:  Viljar Vald, Financial Sector Policy Division of Eesti Pank, Specialist in Charge

Read more from the Bank of Estonia website

Estonians make 5.19 euros per hour

According to Statistics Estonia, in the 4th quarter of 2011, the average monthly gross wages and salaries were 865 euros and the average hourly gross wages and salaries were 5.19 euros. Compared to the 4th quarter of 2010, the average monthly gross wages and salaries grew 6.3% and the average hourly gross wages and salaries by 7.4%.


The real wages which took into account the influence of the change in the consumer price index and which shows the purchasing power of wages and salaries, increased 2.1% in the 4th quarter of 2011. Compared to the same quarter of the previous year, the real wages increased for the second quarter in succession. Before that the real wages had been in decline for eleven quarters.The average monthly gross wages and salaries without irregular bonuses and premiums increased 6.1%. Compared to the 4th quarter of 2010, the irregular bonuses and premiums per employee grew 11.6% and influenced the growth of the average monthly gross wages and salaries by 0.2 percentage points.

According to the Wages and Salaries Statistics Survey, the number of employees increased by 1.7% compared to the same period of 2010.

Compared to the 4th quarter of 2010, the average monthly gross wages and salaries increased the most in wholesale and retail trade (11.8%), and decreased only in other service activities (4.5%).

Compared to the 4th quarter of 2010, the average hourly gross wages and salaries increased the most in real estate activities (15.5%), and decreased only in other service activities (9.0%).

The average gross wages and salaries were 813 euros in October, 868 euros in November and 918 euros in December.

In the 4th quarter of 2011, the employer’s average monthly labour costs per employee were 1,175 euros and the average hourly labour costs were 7.54 euros. Compared to the 4th quarter of 2010, the average monthly labour costs per employee increased by 6.3% and the average hourly labour costs by 7.0%.

Compared to the 4th quarter of 2010, the average monthly labour costs per employee increased the most in wholesale and retail trade (12.1%) and decreased only in other service activities (4.7%).

Compared to the 4th quarter of 2010, the average hourly labour costs increased the most in real estate activities (14.3%) and decreased the most in other service activities (6.2%).

Statistics Estonia conducts the survey of wages and salaries statistics on the basis of international methodology since 1992. In 2011, the sample includes 11,277 enterprises, institutions and organisations. The average monthly gross wages and salaries have been given in full time units to enable a comparison of different wages and salaries, irrespective of the length of working time. Calculations of the monthly gross wages and salaries are based on payments for actually worked time and remuneration for time not worked. The hourly gross wages and salaries do not include remuneration for time not worked (holiday leave pay, benefits, etc.). In short term statistics, the average gross wages and salaries are measured as a component of labour costs. Labour costs include gross wages and salaries, employer’s contributions and employer’s imputed social contributions to employees.

Average monthly gross wages and salaries, 1st quarter 2007 – 4th quarter 2011 (euros)
  Year 1st quarter 2nd quarter 3rd quarter 4th quarter
2007 724 660 738 697 784
2008 825 788 850 800 838
2009 784 776 813 752 783
2010 792 758 822 759 814
2011   792 857 809 865

Average monthly gross wages and salaries and monthly labour costs per employee, 4th quarter 2011

Diagram: Average monthly gross wages and salaries and monthly labour costs per employee, 4th quarter 2011

Average hourly gross wages and salaries and hourly labour costs, 4th quarter 2011

Average hourly gross wages and salaries and hourly labour costs, 4th quarter 2011

Source: Statistics Estonia

570 Estonian defence personnel served on missions abroad in 2011

Overall 570 members of the Estonian Defence Forces served on missions abroad during 2011, of them 528 in Afghanistan. Of the remaining personnel, 30 served on a mission based in Djibouti, six in Iraq, four in Kosovo, and two in Bosnia and Herzegovina, military spokespeople told BNS. The personnel based in Djibouti serve on the EU’s anti-piracy mission Atalanta.

In the course of 2011 the Estonian infantry company ESTCOY-11 and the national support element NSE-10, the infantry company ESTCOY-12 and the national support element NSE-11, and the infantry company ESTCOY-13 and the national support element NSE-12 served in Afghanistan, deployed respectively in November 2010, May 2011 and November 2011. In addition to these units, a close protection team and staff officers serve in Afghanistan as part of the Estonian contingent.

In Iraq Estonian military personnel served on the NATO Training Mission.

Source: Estonian Review

Government endorses Greek bailout deal

At its extraordinary meeting on Wednesday, the Estonian government gave its nod to the new rescue package for Greece, the sole item on the session’s agenda, and forwarded the corresponding bill to parliament. Parliamentary approval of the memorandum of understanding to be concluded between the European Commission and Greece is required before the government can agree to provide financial aid to Greece through the European Financial Stability Facility (EFSF).

Representatives of euro zone countries have agreed in principle to the terms and conditions of the next bailout program for Greece for the period 2012-2014, which includes Estonia’s contribution via the EFSF.

Greece has agreed to implement austerity measures with the aim of reaching a primary surplus in 2014. It is also carrying out a privatisation plan that should bring at least 4.5 billion euros into the state coffers this year, 7.5 billion euros by 2013, and 15 billion euros by 2015. Other measures pledged by Greece as part of the deal include a tax reform and implementing structural reforms to promote economic growth, as well as better financial sector regulation.

Estonia did not take part in the first bailout put together for Greece in May 2010, out of which 73 billion dollars has been lent to the country by now.

Source: Estonian Review

Global uncertainty affects also Estonian economy

According to the preliminary data, the economic growth in Estonia was 4% in the fourth quarter of 2011, in yearly comparison, and annual growth amounted to 7.5%. GDP decreased 0.8% compared to the third quarter. Quarterly decrease can be explained by general increase in uncertainty in Europe as well as by individual factors in the small economy of Estonia.

The uncertainty of consumers and manufacturers has been increasing since the end of summer, which has affected also the exporting industry of Estonia. As to the value added, there was an increase in most of the fields of activity, in yearly comparison, income of the salaried employees increased and a sudden fall in security of consumers was no accompanied by a setback in consumer behaviour. The time of rapid growth will be over for some period.

Output of industry and especially of the manufacturing sector slowed down significantly in the fourth quarter. The growth was slowed down mostly by a sharp decrease in production targeted at the export of communications equipment and in power engineering. A year ago, production of communications equipment rose rapidly to the highest level of all times. Therefore, a sudden decrease in the production output in the fourth quarter had a hard and negative effect. Decrease in production in the field of power engineering was related to warm weather conditions at the end of the year and smaller demand in industrial sector. These caused a fall both in domestic consumption and in export. Economic activity was active in the field of trade and construction at the end of the year.

The growth in export slowed down in the fourth quarter, in yearly comparison, and it remained approximately at the same level as in previous quarter. This resulted from large export volume, which had increased already a year ago, and from the cooling economy of the trading partners. Weakening export is partly compensated by the demand in domestic market, as a result of which import growth exceeded export growth.

The employment income of the employees increased slightly more slowly in the fourth quarter than in the third one but the increase in consumer price index was also smaller at the end of the year, and thus actual employment income increased. Financial behaviour of the people was still very conservative regardless of the increased income, which resulted in decrease in loan balance and low level of loan turnover. In yearly comparison, a slight upturn has occurred in the market of housing loans but financing consumption with loans was executed less in the last quarter than a year ago. Regardless of that, private consumption stayed at relatively high level at the end of the year, which can be concluded from a steady growth rate of retail business and good receipt of consumption taxes.

Compared to the last year and a half, the figures related to increase are expected to remain quite modest within the coming quarters but a rapid slowdown in GDP growth rate should not be reflected equivalently in the income of the employees. The spring economic forecast will be published by the Ministry of Finance at the beginning of April.

Source: Estonian Ministry of Finance

A. Le Coq to bring organic beer to market

This week A. Le Coq will bring to the market its first Organic Beer (which is also the official name of the product); it is made of malt and hops grown in organic farming. CEO of A. Le Coq, Tarmo Noop, said that the malt and hops used in the production of Organic Beer had been grown in accordance of standards in effect in organic farming and the production of the organic beer was precisely regulated.

The company has a respective certificate for the production of organic beer and a certificate that meets regulations of the European Union.

For the production of organic beer, the company buys organic malt from Finland and organic hops from Germany. Special yeast is used in the production of the beer that has not earlier been in contact with other beers being made.

A. Le Coq Organic Beer will come on sale in 0.5-liter glass bottles and the average sale price of the beer in stores is 0.95-0.99 euros per bottle.

Source: Estonian Review

State budget revenue 7.9 pct of target in January

The Estonian Finance Ministry said that 492.3 million euros of revenues, 7.9% of the annual target, flew into the state budget in January; the expenditures totalled 484.2 million euros, 7.2% of the target. The annual revenues target for 2012 is 6.2 billion euros and that of the expenditures 6.8 billion euros, including means transferred from last year.

Of the revenues paid into the state budget in January, 447.3 were tax revenues and 67.4 million euros non-tax revenues. The tax revenues paid into the budget account for 9.6% and the non-tax revenues 4.3% of the annual target.

The biggest categories of taxes collected in January were social tax, 171.9 million euros or 8.9% of the target, and 140.9 million euros value-added tax, or 9.8% of the target.

Compared with last January 9% less was paid into the state budget. This was due to the lower foreign subsidies compared with last year. In addition, no revenue from the sale of carbon dioxide quota sales were paid into the budget.

Of the main expenditures made in January, 218.9 million euros of social subsidies were paid out in January. For investments 47.2 million euros was channelled in January. Payments for investment in the first month of the year were significantly lower than last year, as no transactions at the expense of the sale of emissions quota have taken place so far.

Source: Estonian Review

Estonian Air to add flights on Tallinn-Paris route

Starting from 16 March, Estonian Air will start to serve the Tallinn-Paris route with three weekly flights. During the peak season, starting from 4 June until 31 August, the airline serves the route with six weekly flights, by adding to the existing flight schedule Monday, Wednesday and Friday flights.

“We decided to offer enhanced flight schedule to even more successfully implement our strategy – to offer the best possible choice of destinations and at the same time to increase connecting flight opportunities via Tallinn by connecting different destinations in Estonian Air network. In addition, by adding flights, we wish to meet the peak-season demand,” said Rauno Parras, the CCO of Estonian Air.

One-way fares from Tallinn to Paris start from 59.90 EUR if purchased from, including all fees and taxes, subject to availability.

Flight schedule on Tallinn-Paris route from 4 June 2012:

160 electric car charging points announced

On Thursday Estonia’s Kredex made public the locations of 160 electric cars charging points; of these 60 will be located at highways and 100 in inhabited areas. Mirja Adler, the Kredex electric cars project leader, said at the presentation of the charging points that 60 charging stations would come to all the main highways and side roads suitable for the network.

The remaining charging points will be located in inhabited areas of more than 5 000 residents and in cities, for example in tourist settlements such as Otepää and in settlements on highways.

Charging stations will also be built at the Tallinn, Rohuküla, Heltermaa, Virtsu, and Kuivastu ports. “We picked the locations depending on traffic density and convenient use in order to ensure a sense of security for the users,” Adler said.

At the moment surveying of the locations is underway and the grid company will build the charging infrastructure up to the accession point. After that Kredex will carry out a public procurement tender for building the charging points.

AS ABB, which made a 6.6 million euro bid to the respective procurement tender, will start building the rapid charging stations in the summer.

Source: Estonian Review