Stable growth in retail sales

According to Statistics Estonia, in September 2015 compared to September of the previous year, the retail sales of goods of retail trade enterprises increased 9% at constant prices. In the last four months, retail sales have been increasing steadily by 8–9% compared to the same month of the previous year.

In September 2015, the retail sales of goods of retail trade enterprises were 422.4 million euros, which was 322 euros per inhabitant.

The retail sales of stores selling manufactured goods increased 17% compared to September 2014. Sales increased in all economic activities. The retail sales of other specialised stores, such as stores selling computers and their accessories, stationery, books, sports equipment, games and toys, flowers, plants etc., increased the most (42% growth). A higher than average increase in retail sales occurred also in stores selling second-hand goods and in non-store retail sale (stalls, markets, direct sale) (38% growth), and in retail sales via mail order or the Internet (37% growth).

In grocery stores, the retail sales growth continued to accelerate. While in July the retail sales of those stores increased by 2% compared to the same month of the previous year and in August by 3%, then in September the growth amounted to 4%.

The retail sales of automotive fuel increased 6% at constant prices compared to September 2014.

Compared to the previous month, in September, the retail sales of retail trade enterprises decreased 7% at constant prices. According to the seasonally and working-day adjusted data, however, retail sales increased 1% compared to the previous month. During the nine months (January–September) of 2015, the retail sales of retail trade enterprises increased 8% at constant prices compared to the corresponding period of the previous year.

In September, the turnover of retail trade enterprises was 498.3 million euros, out of which the retail sales of goods accounted for 85%. Compared to September 2014, the turnover increased by 4% at constant prices. Compared to the previous month, this indicator decreased 6%.

Diagram: Retail sales volume index of retail trade enterprises and its trend

The statistics are based on the questionnaire “Turnover”, the deadline of which was 15.10.2015, and on the VAT declaration data from the Estonian Tax and Customs Board. Statistics Estonia published the monthly summary in 10 working days.

Source: Statistics Estonia

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The volume of industrial production decreased

According to Statistics Estonia, in September 2015, the production of industrial enterprises decreased 4% compared to September of the previous year. Production decreased in manufacturing, energy and mining.

While in the beginning of 2015, manufacturing production grew compared to the same month of the previous year, in the second half-year, the growth turned into decline. In both July and August, production fell 2% and in September 4% compared to the corresponding month of the previous year. In September, the decline in production volume was caused primarily by a decrease in the manufacture of electronic products, chemicals, and machinery and equipment. The 7% decrease in the manufacture of electronic products was caused by the high reference base of September 2014. In September, more than half of the branches of industry did not surpass the volume of the previous year. Although in some of the branches of industry that hold larger shares (the manufacture of wood and metal products, and electrical equipment) production rose, it did not compensate for the fall in other branches.

70% of the whole production of manufacturing was sold on the external market in September. Compared to September 2014, the export sales of manufacturing production decreased 10% and domestic sales decreased 3%, according to unadjusted data.

In September 2015 compared to August 2015, the seasonally adjusted total industrial production as well as the volume of manufacturing production fell by 1% compared to the previous month.

Compared to September 2014, the production of electricity decreased by 9% and the production of heat increased by 2%.

Diagram: Volume index and trend of production in manufacturing

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The risks to financial stability in Estonia have increased slightly

  • The risks to financial stability in Estonia have increased slightly, though they remain small
  • Weak external demand and rapidly rising labour costs are hurting the ability of companies to repay loans
  • The credit and real estate boom in Sweden and Norway is increasing the risks to banks operating in Estonia
  • Steps have been taken in the Nordic countries to contain the boom, but they have not been sufficient in Sweden
  • Rapid growth in incomes and low interest rates on loans are boosting the rise in property prices
  • The countercyclical capital buffer will probably be 0% for the next half year

International financial markets have been affected by the continuation of very accommodative monetary policy and by the increased risks in emerging markets. Bond yields continued to fall at the start of the year and stock markets to climb. In the spring there was uncertainty because of Greece, as negotiations about the debt programme dragged on, and because of the expectation for further US monetary policy decisions. On top of this came the impact of the correction that started at the end of summer in the Chinese stock market. Falling prices spread to other large stock markets and also affected the price of shares listed on the Tallinn stock exchange.

Estonian economic growth slowed a little in the first half of 2015, to 2% over the year in the second quarter. The growth was largely based on rising private consumption, which was driven by increased employment and rapid wage rises. Higher incomes and low base interest rates back up the ability of households to pay their loans. Estonian exports were smaller in the first eight months of this year than at the same time last year, and the outlook for growth in Estonia’s main export partners has deteriorated. Labour costs have continued to rise for Estonian companies relatively rapidly, and this has reduced the profitability of those companies. The risk has increased that the profitability of Estonian companies will be reduced even further by weak foreign demand and rapidly rising labour costs. This could weaken the ability of companies to pay their loans and thus worsen the loan quality of banks.

Increased credit volumes and continuing rises in real estate prices in Sweden and Norway have increased the risks to financial stability for the whole economy. The Swedish banking groups that make up a large part of banking in Estonia get the majority of their funds using market-based financing. This makes them vulnerable to changes in the risk sentiment of financial markets. If financial markets were to reassess the risks to the Nordic economies and banks, it would increase the financing and liquidity risks of the banks operating in Estonia. If interest rates were to rise and loan servicing costs increase, or real estate prices to fall, the high indebtedness of Nordic households could lead them to consume less, and this would then affect the revenues of Nordic companies and their ability to repay their loans. As the Nordic countries are an important export market for Estonian companies, this would have an impact on growth in Estonia. To reduce such risks, it is important that macroprudential measures be taken, some having already been taken with a view to strengthening the banks. Sweden still needs to do more, particularly to contain the rise in property prices and indebtedness.

Rising incomes and low interest rates have increased the risk of the rise in Estonian real estate prices accelerating, and lending becoming concentrated in the real estate sector. Average prices for apartments have risen relatively fast, but the share of borrowing in financing for residential property purchases has not risen at the same time. There has been more activity in real estate development for both residential and commercial space, and the growth in loans to developers has become faster. For the sake of financial stability it is important that lenders and borrowers remember that the extremely low interest rates could rise and the cost of servicing loans could increase.

Low base interest rates and bond purchases by central banks have led bond yields to fall. This has made investors more interested in alternative assets. Increased appetite for risk has led asset prices to rise and has increased the risk that they may fall sharply. Low interest rates also affect the ability of financial institutions to earn income. This is reflected in a slight reduction in the net interest income earned by the banks operating in Estonia. More vulnerable to interest rates remaining low are life insurance companies, whose liabilities largely consist of insurance contracts with guaranteed interest rates. As life insurance is only a small part of the Estonian financial sector, and the insurers have sufficient buffers, the risk to Estonian financial stability from this vulnerability is modest.

As the macroprudential supervisor, Eesti Pank monitors and analyses the risks to the functioning of the financial system and where necessary takes measures to reduce such risks. One way Eesti Pank can reduce the risks from loan growth is by introducing a countercyclical capital buffer requirement. As loan growth is set to be in line with general economic developments for now and for the near term, the countercyclical capital buffer will probably be 0% for the next half year.

Source: Bank of Estonia

The use of bank cards increased by 6.5 pct over the year

Bank cards issued in Estonia are being used more and more, and in the third quarter an average of around 740,000 card payments were made each day at a total value of 12.6 million euros. The number of card payments made was 6.5% larger than in the same quarter of 2014, and the total value was up 8%. Wider use of bank cards in Estonia is encouraged by merchants making it ever easier to pay for purchases with cards. At the end of September 2015 there were 30,424 points of sale in Estonia that accepted cards, which is 2100 more than a year earlier.

The number of card payments made per person is large in Estonia, but the amount of the average payment is small. Estonia stands out in comparison to other European countries for its high number of card payments. Data for 2014 show that the most card payments per person were made in Sweden, where 270 payments per person per year were made, and Denmark where there were 269, followed by Finland on 244 and Estonia on 188. The average card payment in Estonia was the smallest in Europe at 17 euros, which indicates that bank cards are preferred in Estonia for small purchases. The average card payment was largest in Germany at 77 euros and in Luxembourg at 72 euros.

There was an increase in the value of cash transactions at ATMs in the third quarter, as an average of around 111,000 withdrawals were made each day for a total value of 11.2 million euros, making the average withdrawal 101 euros. Cash was paid in on average around 14,900 times a day for a total value of 5.9 million euros, and the average amount paid in was 396 euros. The sums paid in and withdrawn were both around 4% larger than a year earlier.

There were 810 ATMs in Estonia at the end of September, of which 552 were able to handle cash transactions and also allow payments to be made. Of those 810 ATMs, 97% can be used with cards of different banks, but only for withdrawals. In the past six years the number of ATMs has been reduced by 207, but the number of ATMs which can only accept cash transactions has increased. In the third quarter alone, 31 ATMs were added where cash can be paid into accounts, and at the end of September there were a total of 169 such machines.

There were 642 ATMs per million residents of Estonia at the end of 2014, which is close to the average for the European Union. The largest number of ATMs per million residents in the European Union is in France, where there are 1736, and Portugal, where there are 1516. The lowest numbers are in Sweden, where there are 333 ATMs per million residents, and Finland with 405. The number of ATMs has fallen in recent years in most countries.

Author: Teet Puusepp, Eesti Pank Payment and Settlement Systems Department

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The loan and lease portfolio grows stably

The loan and lease portfolio to Estonian companies and households was 3.7% larger at the end of September than a year earlier, having grown at about the same rate as in recent months. The total volume of loans and leases increased during the month by 66 million euros to 15.9 billion euros.

The portfolio of loans and leases to companies grew by 3.4% over the year. The fastest growth was in loans and leases to companies in trade, electrical energy and water supply, and industry. In contrast, the portfolio of loans to companies in agriculture and transport and storage was smaller than it was a year before.

An active market for residential property saw the portfolio of housing loans increase by 3.9% over the year, which is a similar rate to that of recent months. Around 81 million euros of new housing loans were issued, which is about the same amount as in previous months. The annual growth in car leases to households increased to 13.5%, though the volume of car leases to companies has declined. The total value of car leases issued to companies and households in September was 5% higher than at the same time a year ago.

The share of loans in the portfolio that were long-term overdue fell to 1.6% in September. This share had increased slightly in the preceding months, but in September it started to come back down. Part of the reduction was due to write-offs of problem loans.

Large demand in the residential property market allowed the banks to raise their interest margins on housing loans. The average interest margin on corporate loans is more volatile than that on housing loans, but in recent months it has generally been falling. The average interest rate for housing loans granted in September was 2.3%, and the average rate for long-term corporate loans was 2.4%.

Corporate and household deposits continued to grow rapidly in September, and were 8.9% larger than a year previously. Deposits grew by 68 million euros over the month to 10.4 billion euros, with 58 million euros of the monthly growth coming from increased corporate deposits.

The net profit earned by the banks during the quarter was at a similar level to that earned in previous quarters. The banks earned 77.6 million euros in net profit in the third quarter of 2015, which is 3% less than in the third quarter of last year. Profits fell in the third quarter as loans were written down, and net profit would have been 5% more than a year before without that effect.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

Construction prices increased as a result of wage pressures

According to Statistics Estonia, in the 3rd quarter of 2015, the construction price index increased 0.2% compared to the 2nd quarter of 2015, and 0.6% compared to the 3rd quarter of 2014.

In the 3rd quarter, compared to the same quarter of the previous year, the construction price index was influenced the most by the increasing cost of labor which accounted for over three-quarters of the total increase of the index.

Compared to the previous quarter, labor costs increased 1.7%. Spending  on  machinery  and  construction  materials fell by  0.8% and  0.6%, respectively.

The repair and reconstruction work price index increased by 0.2% in the 3rd quarter of 2015 compared to the 2nd quarter, and fell by 0.1% compared to the 3rd quarter of 2014.

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.

Change in the construction price index,

3rd quarter 2015

2nd Q 2015 – 3rd Q 2015, % 3rd Q 2014 – 3rd Q 2015, %
TOTAL 0.2 0.6
labour force 1.7 3.4
building machines -0.8 -2.1
building materials -0.6 -0.7
Index of detached houses 0.2 0.3
Index of blocks of flats -0.4 -0.8
Index of industrial buildings 0.3 1.5
Index of office buildings 0.2 0.7

 

Change in the repair and reconstruction work price index, 3rd quarter 2015
2nd Q 2015 – 3rd Q 2015, % 3rd Q 2014 – 3rd Q 2015, %
TOTAL 0.2 -0.1
labour force 1.7 2.6
building machines -2.0 -4.3
building materials -0.7 1.5

Source: Statistics Estonia

The producer price index decreased in September

According to Statistics Estonia, in September 2015, the producer price index of industrial output changed by -0.2% compared to August 2015 and by -2.8% compared to September 2014.

In September, compared to the previous month, the producer price index was more than average influenced by a decrease in prices in electricity, gas, steam and air conditioning supply, in the manufacture of chemicals and chemical products and in the manufacture of wood, but also by an increase in prices in the manufacture of electronic products and beverages.

Compared to September 2014, the producer price index was more than average influenced by a decrease in prices in electricity, gas, steam and air conditioning supply and in the manufacture of fuel oils, food products and electronic products, but also by an increase in prices in mining and quarrying.

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