Economy grew 2.4% in the 2nd quarter

According to the second estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 2.4% in the 2nd quarter of 2014 compared to the 2nd quarter of the previous year.

The GDP has been calculated on the basis of the methodology of the new European System of National and Regional Accounts, ESA 2010. In the 2nd quarter, the seasonally and working-day adjusted GDP increased by 1.1% compared to the 1st quarter of 2014 and 2.9% compared to the 2nd quarter of 2013.

In the 2nd quarter, the GDP at current prices was 4.9 billion euros.

In the 2nd quarter of 2014, the GDP growth was influenced the most by a rise in the value added in professional, scientific and technical activities, trade and energy. The GDP growth was also positively influenced by increased receipts of excise taxes and value added tax, which are a part of net taxes on products. The value added in construction slowed the Estonian economy down the most, mainly due to decreased construction volumes. In addition, the GDP growth was substantially decelerated by a decrease in health and transportation.

The export of goods decreased for the fourth quarter in a row, while the export of services continued to increase. The decrease in the export of goods was influenced the most by a deceleration in the export of electronic, other manufacturing and chemical products. The import of goods and services decreased at real prices by 0.7%.

Net export was positive in the 2nd quarter of 2014, amounting to 3.7% of the GDP. The previous time that net exports were on a similar level was in 2011.

The Estonian economy was continuously supported by growing domestic demand. Domestic demand increased at real prices by 4.4%, mainly due to the household final consumption expenditure and changes in inventories. The household final consumption expenditure increased by 3.6%. The expenditures on food, clothing and catering services increased the most. Inventories grew mainly due to an increase in the inventories of goods and raw materials.

The gross fixed capital formation increased by 0.7% in the 2nd quarter. The growth was mostly influenced by the investments in buildings and structures by the sector of non-financial corporations. At the same time, the investments of the general government sector and the investments of non-financial corporations in transport equipment decreased.

In the 2nd quarter, domestic demand was smaller than the GDP, accounting for 96.9% of the GDP.

Statistics Estonia revised the GDP time series data from 2000 onwards. The data have been recalculated on the basis of the European Parliament and the Council Regulation (EU) No 549/2013 on the European system of national and regional accounts in the European Union (ESA 2010). In addition to the above-mentioned revisions, the reference year of the GDP calculated with the chain-linked method was shifted from 2005 to 2010.

Additional information about the revisions is available here.

Source: Statistics Estonia

The methodology for calculating GDP changed

Statistics Estonia revised the national accounts time series from 2000 onwards. Ensuing from all the corrections, the annual gross domestic product (GDP) at current prices changed, on average, by 1% in 2000–2013.

The main purpose of this revision was to implement the new European System of National and Regional Accounts (ESA 2010). During the revision, all previous calculations were reviewed, new datasets were introduced and, in some cases, calculations were improved. As a result, the corrections in different years are not identical, ranging from -0.2% in 2002 and 2003 to +2.3% in 2010.

In 2010, which is the new base year for calculations, the main changes in the GDP level were as follows:

• Introducing ESA 2010 increased the GDP 1.3%.
• Regular data accrual and revision added 1.1%.
• Methodological improvements reduced the GDP by 0.1%.

In the time series of national accounts, the indicators that are associated with the population number adjusted according to the results of the 2011 Population and Housing Census were updated; indicators regarding dwellings and the labour market estimates associated with the GDP were recalculated as well. Also, the reference year was shifted from 2005 to 2010 when chain-linking the GDP figures.

GDP at current prices and impact of revisions, 2010–2013

	2010	2011	2012	2013
GDP before revision (million euros)	14 371.1	16 216.4	17 415.1	18 434.7
ESA 2010 changes, %	1.3	1.4	1.4	1.5
Regular revision, %	1.1	-0.1	0.3	1.0
Other revisions, %	-0.1	-0.1	-0.4	-0.9
Total impact of all revisions on GDP, %	2.3	1.2	1.3	1.6

Additional information about the revisions is available here.

Source: Statistics Estonia

Estonia’s economic growth to speed up in 2015

According to the Ministry of Finance’s forecast, the Estonian economy will grow by 0.5 percent this year and by 2.5 percent in 2015. The economic growth is mainly supported by domestic consumption. Export growth will quicken in the second half of the current year, yet imports will grow faster than exports.

An increasing growth rate of exports can be expected over the next three years but domestic demand will provide a persistent support for growth. Economic growth is expected to speed up to 3.5 percent by 2016.

The Ministry of Finance has lowered the forecast of economic growth for 2014 as compared to the spring forecast, having taken into account the first half year’s weak real growth indicators and deteriorated future outlooks. The forecast also accounts for Russia’s import ban on foodstuffs. The direct forecasted effect of those restrictions is expected to be moderate.

According to the forecast, the average salary will increase by 6 percent this year and growth will remain near that level in the next year as well. As demand improves and the nominal gross domestic product (GDP) growth of Estonia’s export partners resumes, the nominal growth of salaries could become somewhat faster in the coming years, while inflation-adjusted real salary growth will slow down somewhat. Until now, the fast real growth of wage income was supported by declining import prices. Fast growth in the future would require productivity-increasing investments. Such investments are also expected to increase in the coming year.

The increase of consumer prices is forecasted to slow down to 0.3 percent this year and hasten again to 1.9 percent in 2015 and 2.5 percent in 2016. Inflation will start to increase in the autumn due to foodstuffs becoming more expensive and the slowdown in the decrease of energy prices.

The relatively fast pace of growth in private consumption will slow down somewhat, to 3.6 percent this year. The growth rate will remain fast, regardless of the wage growth slowing down. Consumer confidence has remained high, supported by a decrease of unemployment. Slower inflation helps retain the purchasing power of incomes. In 2015, net incomes will also increase due to a lowered income tax rate and slashed unemployment insurance payments, enabling a 3.8 percent growth of private consumption.

Similar to last year, the level of investments will remain moderate this year and may even turn to a decline. Investments of companies are still held back by a low demand for their products and a decrease of government projects funded from the sales revenues of CO₂ allowances. Household investments in residential property are slowly growing and supports the construction market. The expected improvement of foreign demand should lead investments by businesses to a clear growth again in 2015.

Exports of goods and services are expected to grow by 2 percent this year, driven by a strong export of services; additionally, an increase of goods exports can be expected in the second half of the year. Foreign demand will start to recover in 2015 and growth opportunities for Estonian companies will be expanded by the slow recuperation of the Finnish economy. Export growth will pick up, reaching 3.5 percent in 2015. Due to domestic demand and also import needed for export-oriented production, the growth rate of imports of goods and services will increase in the next few years, remaining somewhat ahead of the growth of exports.

The rate of unemployment is forecasted to continue its decline, dropping to 7.5 percent this year, to 6.8 percent next year and if economic trends are favourable then to near 6 percent in subsequent years. Regardless of the decreasing working-age population (ages 15 to 74), the rate of participation in labour force and the rate of employment have both increased while recovering from the crisis. Yet based on the population census of 2011, the number of employed people could decline ever faster starting from 2016, also limiting the economic growth of Estonia.

The outlook for the state budget for 2015 has not worsened as compared to the Ministry’s spring forecast and Estonia has a strong structural fiscal position. This year, the nominal fiscal deficit of general government is forecasted to be 0.2 percent of GDP and will increase to 0.5 of GDP in 2015. In subsequent years, the fiscal position of general government is expected to improve continually, reaching a fiscal balance in 2016. The structural fiscal position will be 0.8 percent of GDP in 2015 and will remain in surplus for the entire forecasted period.

The level of tax receipts is forecasted to remain generally good, regardless of the moderate economic growth. The tax burden of 2014 is forecasted to be 33.3 percent of GDP and remain stable until 2018. Tax amendments planned for the coming years will reduce the tax burden of labour force, balanced by better collection of indirect taxes.

Estonia’s general government debt will reach 9.9 percent of GDP in 2014, exceeding reserves by approximately 1 percent of GDP. Based on cash flows, the treasury will have no direct need to involve loan funds to finance nominal budget deficits. Therefore, general government debt is expected to decrease to 8.2 percent of GDP by 2018, a quarter of that being the effect of European Financial Stability Facility (EFSF). The nominal debt burden of local governments is forecasted to increase due to the need to finance their fiscal deficits.

Read more:  Summer 2014 Macroeconomic Forecast of the Ministry of Finance of Estonia

Source: Estonian Ministry of Finance

Economic growth is faster according to the new methodology

GDP annual growth accelerated to 2.4% in 2Q from 0.3% in 1Q this year. Economic growth according to seasonally and calendar adjusted figures was even 2.9% annually and 1.1% quarter-to-quarter.

In the supply side, professional, scientific and technical activities, energy sector and retail trade, as well as increased receipts of VAT and excise taxes contributed the most to the economic growth. At the same time, GDP growth was inhibited by the decrease in value added in construction, transport, real estate sector, health care and water supply and waste management. Decrease in construction came mostly from the construction of structures, while construction volume of buildings increased. Land transport pulled down the growth of transport sector the most, while value added in water and air transport increased.

Due to the robust growth of real wages and improved consumer confidence private consumption kept growing fast (+3.6%) contributed by the fast growth of consumption of food products and alcoholic beverages. Less consumption on electricity and heating inhibited the growth of private consumption. Besides private consumption, considerable contribution to the GDP growth came from the increased stock building (change in inventories) and net export. Although export of goods has decreased already four quarters in a row, increased export of services contributed to the growth of total exports. Growth of investments has been quite volatile in recent quarters. In 2Q, corporations’ investments in buildings and structures increased the most, while corporate sector total investments grew only modestly and government sector investments decreased. Although investments grew only 0.7% annually in the second quarter, investments have increased already by 6% in 1H2014.

Second quarter has calculated according to the revised calculation principles and the new methodology. All EU member states are switching to the new methodology (ESA2010) for calculating national accounts. The revision increased nominal GDP in Estonia by 1.3% and 1.6% in 2012 and 2013, respectively. The largest impact came from the calculation of R&D in investments (previously in intermediate consumption). The revised methodologies lifted our recent GDP growth rates. If the GDP grew 0.8% in 2013 according to the old methodology, then the new methodologies increased it to 1.6%. In addition, the GDP decrease by 1.4% in 1Q this year according to the old methodology was changed to + by 0.3% according to the new methodology. Thus, economy has grown by 1.3% annually during 1H this year. Labour productivity, which decreased according to the old data, has increased well according to the new methodology. Statistics Estonia revised its deflation of net taxes on products, which changed the decreasing net taxes on products to the robust growth in recent quarters.

Economic growth in Estonia is contributed primarily by the domestic demand. Excluding 2Q of this year, contribution of net export has been negative or only moderate during the recent quarters. We expect foreign demand to weaken in the coming few quarters. We have revised downwards the economic growth rates of all of our main export partners (Sweden, Finland, Latvia, Lithuania and Russia) for this and the next year. At the same time we expect foreign demand to improve gradually next year, which should support our exports. However, geopolitical tensions have increased the risk of the deterioration of economic and political situation in coming months, whereas the economic growth in the second half of 2014 can be weaker than in 1H in Estonia.In the light of the new data we shall review our recent forecast published at the end of august (+0.8% in 2014 and 2.3% in 2015). If the risks mentioned above will not aggravate, we shall likely revise our GDP forecast upwards.

Source: Swedbank

Estonian officer abducted to Russia at gunpoint

According to the Internal Security Service (ISS), Estonia’s national agency for counterintelligence and high-profile corruption investigations, one of their officials was abducted at gunpoint at Luhamaa border checkpoint this morning where he was discharging service duties, and taken to Russia.

Correction: The deputy director of ISS said that it had been claimed to him by the Russian side that Kohver was alive and well, but no confirmation of that fact was available, or of Eston Kohver’s whereabouts.

Initially there was little indication it was necessarily more than an isolated criminal incident, but within several hours it had developed into a diplomatic row, with the Estonian and Russian intelligence agencies advancing cardinally opposite versions of the events.

Read more from ERR News

FSB, the Russian Federal Security Service, has stated a different version of events in the case of the missing counterintelligence agent, saying they stopped a Estonian Internal Security Service (ISS) operation in the Pskov Oblast near the Estonian border, and arrested an ISS operative.

Read more from ERR News

Fish industry looking towards Africa

Russia sanctions and the turmoil in Ukraine have forced Estonian fisheries to look elsewhere for export markets, with Africa showing interest.

Head of the Estonian Fishing Association, Mart Undrest, said there is Baltic herring still to be sold and it will not keep beyond the end of September.

Undrest said the Russian and Ukrainian Baltic herring and sprat markets have dropped off and they have been actively seeking new markets, already netting some results.

The first shipment of a few hundred tons was sent to Africa in June and more was ordered, Undrest said, adding that it takes a little more than a month to transport the fish to Africa, and a second path should arrive there in a few weeks.

Source: ERR News

Estonia dependent on Russian gas

A study made in the Ministry of Economic Affairs shows that if Gazprom were to stop supplying gas to Estonia, the country would have a gas supply for only five days, writes Eesti Päevaleht.

Read more from BBN

Estonian security-technology firm teams up with Ericsson

Estonian-based security-technology provider Guardtime has teamed up with Ericsson AB, the world’s biggest maker of wireless-network equipment, to improve the safety and transparency of the data transmitted over its systems, Äripäev reports.

Ericsson, whose customers include wireless carriers such as AT&T and Vodafone Group said that Guardtime’s technology enables real-time governance of networks with the ability to know who is doing what with data.

Read more from BBN

Prices fell further in August

Consumer prices fell further in August, ending up 0.7% down on a year earlier and 0.3% lower than in July according to Statistics Estonia. Consumer prices mostly fell faster because of lower energy prices, but also because food prices were down. Preliminary assessments by Eurostat show that harmonised consumer price inflation for the euro area slowed to 0.3% in August. Lower inflation in the euro area as a whole was also largely due to lower energy prices.

Energy prices for Estonian residential consumers in August were 4.7% below where they were a year previously. This was driven by motor fuels and heat energy, and above all by the electricity price. Prices for electricity on the energy exchange were low in summer, while a year ago they were held up by a shortage of capacity in the Baltic region caused by interruptions to production and a lack of access to the Scandinavian electricity market. The price of electricity on the exchange in August was 30% lower in Estonia than in Latvia or Lithuania.

Food prices on global markets have been falling since May. The forecast of harvests released by the International Grains Council in July and August for different regions of the world predicted that grain production will be close to its all-time record level, which will push grain prices to fall even further. On top of this, the decline in fruit and vegetable prices that started in the spring will continue, as prices continue to adjust downward from their peak of last year, which was the result of unfavourable weather for growing.

In the near future the impact of the Russian ban on imports of food is likely to be reflected in consumer prices, including those for meat, fish, fruit and dairy produce. The closure of the Russian market to some foodstuffs has mainly affected the wholesale price of raw milk, which has fallen. That is why it is likely that the rapid inflation seen in August in prices of milk and milk products will decelerate. To prevent prices falling too far, the European Union has decided to introduce emergency market measures, such as Private Storage Aid and interventionary wholesale purchases, allowing the market to stabilise somewhat.

Core inflation did not change much in August. Services other than communications rose by 2.2% in price, but the fall of 3.8% in the price of communications services meant that overall service price inflation was 1%. The fastest falling prices among services were seen by travel for tourism and accommodation services, while rent prices continued to rise rapidly at 13%. Prices for manufactured goods started to fall in June and have continued to do so in subsequent months. The fall has particularly affected durables in the form of cars and household electronics.

Source: Bank of Estonia

Author: Rasmus Kattai, Head of the Economic Policy and Forecasting Division, Eesti Pank

Consumer prices declined more than expected

Deflation was deeper than expected in August due to surprisingly low prices of heating and motor fuels. CPI declined by 0.7% compared with last year’s August and 0.3% compared with July.

Consumer prices were pushed down the most by cheaper prices of food, housing and transport, year-on-year. Vegetables were remarkably cheaper because of favourable weather, whereas milk products’ prices remained higher than last year despite the sanctions by Russia, at least in the middle of the month, when price data was collected.

Warm weather, better connectivity with the Nordics and lower prices of electricity network fees led to cheaper electricity and heating. The prices of transportation decreased as the prices of motor fuels fell. Fierce competition pushed down the prices of mobile communication services and public higher education reform lowered the prices of education.

Deflation is expected to continue at least in September as a decline in food and energy prices will last for another month. Global oil prices decreased at the beginning of September due to a high level of reserves, even when geopolitical tensions have increased in the Middle East as well as Ukraine. Inflation should remain at around 0.3% in Estonia in 2014 as a whole.

Source: Bank of Estonia