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%.

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

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%.

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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

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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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Household financial assets are growing faster than debt liabilities

Corporate debt liabilities increased in the second quarter by 2.7% over the year. The growth was driven by an increase in borrowing from abroad. The share of loans taken from abroad and debt issued there increased slightly, and made up 37% of the total corporate debt liabilities by the end of the quarter.

Corporate equity shrank even further in the second quarter. Weaker foreign demand and rising labour costs meant that corporate profits continued to fall, which resulted in equity being 3% smaller than last year. The rise in debt liabilities at the same time led corporate leverage to increase. However, the capital buffers of Estonian companies remain relatively large thanks to the reinvested profits of earlier years and leverage is less than the average in the European Union.

Household financial savings have increased faster than debt liabilities in recent years. Debt liabilities increased by 4.7% over the year, which was a little faster than the growth in nominal GDP, and household debt remains at around 40% of GDP. Cash and deposits held by households increased almost twice as fast as debt liabilities, increasing by around 9% over the year. Debt liabilities are some 24% larger than deposits, but the gap has come down steadily since 2009.

Estonian residents invested more resources abroad in the second quarter than they took from there. In most of the recent quarters, the Estonian economy has been a net lender, as domestic saving has been higher than investment.

Source: Bank of Estonia

Author: Jana Kask, Head of the Financial Stability Department of Eesti Pank

The preliminary findings of IMF on Estonian economy

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

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The Estonian economy is holding up well despite a difficult external environment. Economic and institutional fundamentals are strong, supported by a broad consensus in favor of market-oriented and disciplined policy making. Growth should pick up in the coming years, but making good headway in converging with Western European living standards will be a significant challenge. Closing the gap with Western Europe will require a strong focus on raising productivity growth. Many commendable polices are already in place or planned. These should be swiftly implemented and could be further strengthened. Fiscal policy can also play a supporting role.

Near-term Economic Outlook and Risks

1. Growth should reach 2 percent this year and strengthen to just under 3 percent in 2016. The main driver for GDP growth is private consumption on the back of buoyant real wage growth, while exports are hurting and investment remains subdued reflecting the weak external environment. Private consumption should remain strong and exports are set to become less of a drag as the economic difficulties in trading partners abate. Investment should also benefit from EU funds coming on stream under the Multiannual Financial Framework (MFF) 2014-20. Signs of tightness in the labor market suggest only limited slack in the economy despite moderate growth. The remaining negative output gap of less than ½ percent of GDP should close by 2017. Inflation is projected at zero this year, reflecting import and energy price developments, along with administrative price cuts in higher education. Strong domestic wage growth, stabilizing global energy prices, and excise tax hikes should lift inflation to around 2 percent next year.
2. Risks to this outlook are mainly on the downside. Estonia is highly dependent on trade and its banking system is dominated by cross-border banking groups, meaning that its economic fortunes are closely tied to external developments. The projected growth pickup in trading partners is more likely to fall short than to exceed expectations. Volatility in global financial conditions could affect credit supply through the affiliates of foreign banks operating in Estonia. Domestic risks are more of a medium-term nature and relate to the outlook for potential growth and competitiveness.

Medium-term Prospects and Challenges

3. Maintaining strong economic growth is a challenge the world over, but the difficulty is more acute in Estonia, as well as in Central and Eastern Europe (CEE) generally. At the global level, economic growth is at risk of settling into a “new mediocre,” as investment drops off, productivity growth slows, and adverse demographics take their toll. In CEE, particularly challenging demographics and a slowdown in productivity growth that frequently occurs as middle-income levels are reached, compound these concerns.
4. The Estonian economy has made impressive strides, but growth and income convergence are slowing. Since the mid-1990s real annual GDP growth averaged some 4½ percent—one of the highest rates in CEE. But a substantial income gap with Western Europe remains and the economy has expanded at a moderate rate of only 2 percent per year since mid-2012. Cyclical effects and difficult external conditions have played a role, but potential growth has likely also slowed. The mission projects it at some 3 percent over the next five years and somewhat below that for the longer run. This implies continued income convergence with Western European levels but at only about half of the historical pace.
5. Estonia’s medium-term growth outlook is underpinned by strong fundamentals. Chief among them are macroeconomic stability, impeccable public finances, a conducive business environment, high public investment, and effective government services. In addition, a host of promising initiatives are underway or planned. These include: (i) the work capacity reform aiming to bring people with partial disabilities back into the labor force; (ii) a revamping of enterprise support toward innovation and entrepreneurship, increasingly backed by financial instruments rather than grants; (iii) adoption of a life-long-learning strategy; (iv) an understanding to reduce public employment in line with the declining working-age population; and (v) further state reforms covering the central and local governments.
6. A stronger and clearer emphasis should be put on raising productivity as the central goal of economic policy to achieve the technological transformation needed to sustain convergence. In support, a strong unit in the Prime Minister’s office could be established with the explicit mandate to foster productivity growth. It would oversee the many initiatives at the ministerial level, keep track of government expenditure geared toward raising productivity, identify gaps, and assess programs’ effectiveness toward the goal of raising economy-wide productivity.
7. In the near term, the focus should be on getting existing plans off the ground. Since many programs are tied to EU funding under the 2014-20 MFF, they are still at the pre-implementation or piloting phase. Some of them could also be scaled up, such as active labor market policy measures, life-long-learning initiatives, and the strengthening of vocational training and apprenticeship programs.
8. In the medium term, existing programs could be supplemented. More emphasis could be put on the upgrading of traditional industries as a second leg of innovation policy. A reduction in the dependence on EU funds is not only imperative from a sustainability point of view, but would also give more flexibility in setting priorities and project design. In the area of labor market policy, a further increase in the statutory retirement age should be considered, flanked by training initiatives to ensure that the effective retirement age rises commensurately. Steps to further boost female labor force participation and more reliance on foreign labor also have economic appeal.

Fiscal Policy

9. Estonia’s fiscal position is strong. Public debt is by far the smallest in the EU and more than fully covered by fiscal reserves. Second pillar pension funds have accumulated sizable assets. A fiscal surplus of 0.8 percent of GDP was recorded last year. Commendable improvements in tax administration have been achieved. The policy thrust of gradually reducing labor taxes and government employment in the years ahead goes in the right direction.
10. In the remainder of 2015, efforts should focus on executing budgeted investment. High government investment has been one of the hallmarks of Estonia’s fiscal policy. This has served the country well and—considering the still low capital stock compared with Western European economies—should be continued. The transition between financial frameworks for EU funds, which finance much of public investment, could lead to under-execution of investment that should be minimized, if needed by pre-financing “safe” projects. In the mission’s view, the fiscal surplus will likely decline to ¼ percent of GDP this year, due to labor tax cuts and increases in social benefit spending exceeding revenue gains from better tax administration and a “tax-friendly” composition of economic growth. This would usefully provide a moderate fiscal stimulus.
11. The 2016 draft budget provides for strong public investment, along with a budget-neutral combination of higher family benefits and excise taxes. While the budget will continue to post a surplus, the measures would entail a moderate fiscal stimulus because of added revenues from lumpy receipts, thus providing adequate insurance against downside risks in the growth forecast.
12. Longer-term, Estonia’s strict fiscal rule could be made more flexible to boost productive spending or accelerate labor tax cuts while preserving overall prudent fiscal policy. The current rule mandates at least structural balance. Uncertainties in budget execution and the calculation of structural balances prompt policy makers to aim for surpluses in practice. The rule is also asymmetric: deficits need to be made up by running surpluses in subsequent years, while surpluses cannot be spent later on. Moreover, it is debatable whether budget balance is even required when net public debt is already negative. Fiscal space may be better used to boost productivity-enhancing spending, front-load labor tax cuts, or compensate the eventual decline of EU funds.

External Developments and Competitiveness

13. Estonia’s external position is strong. The current account has been broadly in balance for the past five years. Gross external debt is rather high but net debt is negative and the negative net international investment position is fully covered by FDI. Despite weak exports, the current account is expected to be in a surplus position of about 2 percent of GDP this year on account of weaker investment.
14. Nevertheless, external price competitiveness will increasingly come under pressure if real wage growth continues at its current pace. Wage growth has significantly outstripped productivity growth in the last few years and company profits are declining. Export market shares, which have been rising for decades, are starting to flatten out. This underscores the need to achieve more productivity growth but also guard against excessive wage growth until it takes hold. In this context, the planned deceleration in central government wage growth is prudent. Care must be taken to ensure that the rapid minimum wage increase does not set the pace for general wage developments—annual increases of 10 percent for several consecutive years are unsustainable.

Financial Sector

15. Indicators of financial soundness are exceptionally strong in Estonia, especially in the large foreign-owned institutions. The return to moderate credit growth since mid-2014 after many years of deleveraging is a positive development. The Bank of Estonia has put in place a strong macroprudential toolkit that also covers mortgage lending by foreign bank branches. Oversight of non-bank financial institutions is also being strengthened. The Bank Recovery and Resolution Directive has been transposed.
16. Estonia’s financial sector is closely integrated with the Nordic-Baltic region. The cross-border banks that make up most of the financial sector are exposed to a range of risks, especially in property markets, although they also have strong lines of defense. Potential shocks in the region could spill over to Estonia in the form of tighter credit supply as well as through trade channels. It will therefore be important to remain vigilant and continue close cooperation with home-country authorities. In this context, regional cooperation in supervision and resolution should be reinvigorated, including through appropriate involvement of the ECB, which directly supervises the two largest Estonian banks.

Source: Bank of Estonia

The volume of industrial production decreased

According to Statistics Estonia, in August 2015, the production of industrial enterprises decreased 3% compared to August of the previous year. Production decreased in manufacturing and energy production but increased in 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% compared to the corresponding month of the previous year. In August, the decline in production volume was caused primarily by a decrease in the manufacture of electronic products, chemicals and building materials. The 12% decrease in the manufacture of electronic products was caused by the high reference base of August 2014. In August, 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 food, wood and metal products, and electrical equipment) production rose, it did not compensate for the fall in other branches.

68% of the whole production of manufacturing was sold on the external market in August. Compared to August 2014, the export sales of manufacturing production decreased 7%, domestic sales increased 4%, according to unadjusted data.

In August 2015 compared to July 2015, the seasonally adjusted total industrial production rose by 1%, while the volume of manufacturing production remained on the level of the previous month.

Compared to August 2014, the production of electricity decreased by 20% and the production of heat by 1%. The decline in electricity generation was caused by the partial replacement of own production with cheaper imports.

Read more from Statistics Estonia