The current account of the Estonian balance of payments was in surplus in October

The flash estimate1 put the Estonian current account at 29 million euros in surplus in October 2015. The deficit on the goods account narrowed as imports fell faster than exports. Exports and imports of services also shrank, as turnover of travel services increased slightly but the figures for transport services and all other types of services were down. Investment income was less than a year earlier, reflecting lower profits and low interest rates. Payments to the European Union budget were larger than a year ago, but investment and other support from the European Union Structural Funds increased.

Structure of the current account in the flash estimate

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for 2015 on 10 March 2016.

1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

See the graph on the Bank of Estonia website

In October foreign trade decreased

According to Statistics Estonia, in October 2015, exports of goods decreased by 12% and imports by 13% compared to October of the previous year. The decrease in exports and imports was mostly influenced by a decrease in the trade of mineral products and electrical equipment.

The biggest share in Estonia’s exports in October was held by electrical equipment (20% of Estonia’s total exports), followed by agricultural products and food preparations (12%), wood and products thereof (10%). The biggest decrease occurred in the exports of mineral products (down by 68 million euros), electrical equipment (down by 57 million euros). The mineral products exports were influenced the most by a decrease in fuel oils and motor spirits. Exports in the electrical equipment chapter were influenced the most by a decrease in the exports of data communications equipment. Compared to October 2014, the biggest increase occurred in the exports of transport equipment and miscellaneous manufactured articles (both up by 12 million euros). The exports of transport equipment were influenced by an increase in the exports of ships and the exports of miscellaneous manufactured articles were influenced by an increase in the exports of prefabricated buildings of wood, and cushions and blankets.

In October, the main commodities imported to Estonia were electrical equipment (18% of Estonia’s total imports), agricultural products and food preparations (11%), mineral products (10%) and mechanical appliances (10%). The drop in imports was influenced the most by a decrease in the imports of electrical equipment and mineral products (down by 55 and 51 million euros, respectively). The imports of electrical equipment were influenced the most by a decrease in communication equipment components. The imports of mineral products were influenced the most by a decrease in fuel and gas oils.

The top destination country of Estonia’s exports in October was Sweden (18% of Estonia’s total exports), followed by Finland (17%) and Latvia (10%). The biggest decrease occurred in exports to Russia and Sweden (down by 35 and 29 million euros, respectively). Exports to Russia decreased mainly due to a decrease in the exports of mechanical appliances and products of chemical industry. Exports to Sweden decreased mainly due to a decrease in the exports of electrical equipment. At the same time, there was a significant increase in the exports to Saudi Arabia (up by 8 million euros), mainly due to the exports of cereals.

The main countries of consignment in October were Finland (15% of Estonia’s total imports), Germany (11%) and Latvia (9%). The biggest decrease occurred in imports from the Netherlands and Sweden (down by 24 and 21 million euros, respectively). Imports from the Netherlands decreased mainly due to a decrease in the imports of raw materials and products of chemical industry; imports from Sweden decreased due to the decreased imports of electrical equipment. At the same time, the greatest increase occurred in the imports from the USA (up by 12 million euros).

Read more from Statistics Estonia

Economic growth in Estonia decelerates sharply in the 2H2015

According to the second estimate by the Statistics Estonia, the GDP growth in Estonia decelerated to 0.7% yoy in 3Q2015, while compared to the previous quarter the GDP decreased by 0.4% (seasonally and working-day adjusted).

Primarily construction, transport and manufacturing sectors were behind the deceleration of the GDP growth. Value added decreased in the construction of structures and reconstruction of buildings, while construction of new buildings increased. Value added in transport sector decreased the most in storage and activities supporting transport (warehouses, ports, logistics, etc). Decrease of the value added of manufacturing sector was relatively broad based.

Positive contribution to the total value added came predominantly from wholesale and retail trade. Domestic trade, especially retail trade is contributed by the robust real growth of net wages, as well as low fuel prices. Private consumption continued with the 4% real growth decelerating from more than 5% growth rates during the previous three quarters. Although nominal wage growth are expected to remain strong in 2016, real growth of net wages will decelerate considerably due to the less positive impact from decrease in labour taxation and gradual increase in CPI. This will start to inhibit currently relatively strong consumption. Besides domestic trade, net taxes on products (primarily better receipts of VAT) had positive contribution to the GDP growth as well.

Decrease in exports of goods and services deepened in the 3Q reaching to -3% yoy. Decrease in export of electronic, chemical and food products was primarily behind it. According to our estimates export volume will continue decreasing in the 4Q2015 having negative impact both on transport and manufacturing sector value added. At the same time, we expect some improvement of foreign trade in 2016, which should offer more possibilities to the Estonian exporters.

Although gross fixed capital formation fell already fifth quarter in a row, the trend decelerated in the 3Q. While business and government sector investments dropped, households’ investments remained roughly on the same level as last year. The share of gross fixed capital formation in GDP has fallen to the lowest level of the last 20 years (excluding 2009-2010), creating less potential growth in the years ahead. Business sector investments are inhibited by insufficient demand, falling prices and increasing labour costs.

In Estonia, GDP has grown by 1.3% in real terms during the first three quarters and we expect relatively weak last quarter of this year, as well. At the same time, we expect that GDP growth will accelerate to above 2% in 2016 contributed by the improvement of foreign demand.

 

Source: Swedbank

The growth in the surplus on the current account slowed in 3Q

The current account surplus stood at 159 million euros in the third quarter of this year, which was equal to around 3% of the GDP of the quarter. The surplus was 67 million euros larger than in the third quarter of last year, but the growth that has been seen in the surplus since the second quarter of 2014 slowed down. The surplus on the current account has recently been caused by low investment activity levels and a reduction in the outflow of investment income. The surplus will be hindered from growing in future by weak foreign demand and a recovery in investment that mean some reduction in the surplus can be expected in the near future.

External assets grew faster than external liabilities in the third quarter year on year, but the net international investment position, showing the difference in external assets and liabilities, did not change as a ratio to GDP and remained at -38%. The Estonian net investment position has in recent quarters moved towards -35% of GDP, which the European Union considers as indicting balance. Despite this, the European Commission noted in its latest alert mechanism report that one possible source of danger for Estonia is that the net external liabilities are too large. It should be remembered in the Estonian context that more than half of the external liabilities are direct investments in the country, which are considered as a method of financing that has a lower risk of creating imbalances. With the current account close to balance, no continuous rapid improvement in the net investment position is foreseeable.

For more on the European Commission report see the Eesti Pank website (Estonian only).

Source: Bank of Estonia

Read also: The services account in external trade was substantially in surplus in the balance of payments in the third quarter

The net outflow of capital in 3Q

The net outflow of capital shown in the financial account of the balance of payments was 214 million euros in the third quarter of 2015 because of investments by pension funds and the general government in debt securities. The general government invested 125 million euros in foreign debt securities, and pension funds invested 104 million euros.

The net inflow of direct investment recovered as reinvested income was back to its usual level after the payouts of dividends in the second quarter, and it stood at 152 million euros as Estonian direct investment equity liabilities are substantially larger than assets.

The net inflow of other investment was 76 billion euros. Previously announced dividend payouts were made at the expense of a reduction in external claims. Liabilities to offshore countries related to deposits fell by 111 million euros.

The net international investment position1 at the end of the third quarter of 2015 showed that the external liabilities of Estonian residents exceeded their external assets by 7.9 billion euros, or 39% of the GDP of the previous four quarters. During the quarter the investment position moved in the direction of net balance by 82 million euros. A large part in this was played by direct investments abroad by other financial intermediaries and by increased general government investment in securities (see the International investment position).

The Estonian external assets position was 2.6% larger than a year earlier, but was down 1.4% or 27.4 billion euros from the end of the second quarter of 2015. Three quarters of this, or 20.7 billion euros, was in debt assets, equal to 102% of the GDP of four quarters. The position of assets was reduced by 0.2 billion euros because of the net flow, and by 0.2 billion euros by changes in prices and exchange rates.

The external liabilities position was 0.6% smaller than a year earlier, and 1.3% or 35.3 billion euros smaller than at the end of the second quarter. More than half of this, or 18.9 billion euros, was in debt liabilities, equal to 93% of the GDP of four quarters. The volume of external liabilities fell by 0.5 billion euros because of external transactions, but increased by 0.1 billion euros because of changes in prices and exchange rates.

At the end of the quarter, the debt assets abroad of residents were 1.8 billion euros larger than debt liabilities owed to non-residents2. The gap between the debt positions was 345 million euros larger than in the previous quarter. The reason for this was primarily that non-financial companies had increased their deposits abroad and the general government had increased its securities investments. Debt liabilities were reduced by non-financial companies paying off trade credit and by the general government reducing its other debt liabilities (see External debt). Unlike in the previous quarter, there was no major change in the intra-group debts of direct investment groups, but debt assets shrank by 36 million euros. The debt assets of the central bank fell as credit institutions reduced their deposits at the central bank.

Eesti Pank will release the statistics for the balance of payments and the external debt for the fourth quarter of 2015 and the full year 2015 together with a comment on 10 March 2016.

1 The international investment position is a consolidated balance sheet of the external assets and liabilities of all the institutional sectors of a country as at the balance sheet date at market prices.

2 Debt assets and debt liabilities are components of the international investment position that have a repayment obligation. The external debt does not include direct, portfolio or other investment in equity capital, reinvested earnings, financial derivatives, or the gold of the central bank reserves. The external debt does include the debt assets and liabilities between companies in a direct investment relationship.

 

Source: Bank of Estonia

Slower fall of prices was broad based in November

  • The fall in energy prices was smaller because the comparison base of a year ago was lower
  • Core inflation accelerated to 1.7% in November
  • Service price inflation may pick up at the start of the new year

Data from Statistics Estonia show that prices fell by 0.2% in November on a year earlier and price levels were 0.3% down on October. Initial estimates from Eurostat show that inflation in the euro area slowed to 0.1% in November. The fall in energy prices was smaller because the comparison base of a year ago was lower, but core inflation in the euro area has picked up more slowly than expected, indicating that economic activity is subdued. For this reason, the Governing Council of the European Central Bank decided last week to take additional measures to support growth.

The current falling prices in Estonia are also an indication of the weakness in the global economy, because the lower price for energy can be attributed to the earlier fall in the oil price. Data from the Food and Agriculture Organization (FAO) show that food prices also fell on the global market in November, and are down to the same level as in 2007.

Slow economic growth has not yet affected the consumption decisions of households because the strong increase in the number employed has made conditions in the Estonian labour market favourable. The purchasing power of consumers has also been raised by rapid wage growth, and some of that wage growth has been passed on by companies into prices. Wage growth and price growth are particularly interdependent in the service sector, which fills about one quarter of the consumer basket. Inflation in services ran at 3.2% in November, with higher prices for leisure activities having the biggest impact. Core inflation, covering services and industrial goods, accelerated to 1.7% in November.

Service price inflation may pick up at the start of the new year as a lot of companies usually adjust their prices then. A rise in the minimum wage may also have an effect, partly because some prices are indexed to the minimum wage and partly because it will raise labour costs. The share of workers earning the minimum wage is large in wholesale and retail and in hotels and restaurants, and it may be assumed that prices for output in those sectors will be affected most by the rise in the minimum wage. In February 2016 the excise rates for motor fuel and alcohol will rise. Given that motor fuels are currently relatively cheap, how much the tax rise will pass into prices depends more on how tight competition is, but rises in excise generally do pass into consumer prices.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

Mismatches in the Estonian economy have increased

  • Tensions in the labour market have led rapid consumption growth to diverge from slow GDP growth
  • Stimulation of domestic demand by the government would increase the imbalances that have arisen
  • Labour productivity and a reduction in the market share of exports this year may indicate problems for the competitiveness of the Estonian economy
  • Faster Estonian growth will need increased competitiveness and productivity

Growth in Estonia has not accelerated this year and has turned out slower than it was last year. Production capacity in the business sector should make the Estonian economy capable of growing by around 3% this year, but actual growth is forecast to be only 1.2%. It is mainly being held back by weak demand in trading partners, and export opportunities for companies are few and far between. In consequence, less is being invested in increasing production capacity. Economic growth will accelerate in the next two years, but quite modestly to 2.2% in 2016 and to 3.1% in 2017.

The economy has largely grown in recent years on the back of increased employment, but this will not be possible any longer. The unemployment rate has already fallen to 5.2% and the share of people active in the labour market has climbed to its highest level this century among the working-age population. This means that neither of those routes will be able in future to compensate for the shrinking of the working-age population to the same degree. Some easing will arrive when the work capacity reform comes in in 2016, although many of those entering the labour market will probably not find work immediately because they do not have the appropriate skills or knowledge.

Faster growth in the Estonian economy is dependent on a recovery in external demand and on increased competitiveness for companies in foreign markets. Unfortunately the competitiveness of the exporting sector and so the potential for growth of the economy is under more pressure than previously. Even though output is increasing very slowly, rising tensions in the labour market have led corporate labour costs to rise rapidly. Demand from trading partners for Estonian exports will increase in the years ahead but the recovery in demand will be uncertain. If the market share of Estonian exports in foreign markets has been reduced by the deterioration in price-based competitiveness, Estonian exporters might not necessarily get a full share of the increase in foreign demand in the years ahead. This would slow GDP growth and increase unemployment.

The tensions in the labour market have let private consumption grow fast, but this is not in line with the growth rate of the whole economy. Although value added in the Estonian economy is almost unchanged from a year earlier, employment has increased by 4%. Labour costs have continued to rise rapidly at the same time, allowing households to increase their consumption significantly. Falling productivity and rapidly rising wages are not together sustainable. If companies do not succeed in raising productivity, then wages will inevitably have to rise more slowly or even fall.

The faster productivity growth than in the rest of Europe has abated, but Estonia has several advantages that can aid growth. The capacity for growth is supported by prudent public finances and the low sovereign debt, the flexible labour market, lower debt levels in the private sector, and favourable borrowing conditions. Interest rates on loans will remain low throughout the forecast horizon, but there is a risk that Swedish asset prices may fall, which would harm the ability of the banks to obtain funding.

Inflation will accelerate throughout the forecast horizon. The rise in inflation will be broad-based as most commodities prices are currently low. The expected increase in these prices will pass through to consumer prices here concurrently with a rise in the prices of other imports, since trading partners will also see prices rising faster at the same time. Services prices will rise in response to higher labour costs, and around one third of the expected rise in prices will come from higher consumption taxes, as excise on fuel, alcohol and tobacco will increase. Higher inflation will mean that real purchasing power will rise more slowly than wages in future, and consumption growth will slow.

Estonian fiscal policy has been appropriate for the current economic climate, as it has considered that revenues from taxes on labour and consumption have diverged substantially from overall economic growth. Although the tax base for direct and indirect taxes is above its long-term sustainable level, it is important that growth in general government spending be restrained. A fiscal policy that stimulates growth through domestic demand will take the economy even further out of balance. Increased spending should be based on the long-term capacity for growth in the economy, and there should be a clear source of funding for each additional item of spending. The government confirmed in its last budget strategy its commitment to keeping the budget in balance in the medium term, and Eesti Pank forecasts that this can be achieved. The conservative fiscal policy should be adhered to so that fiscal policy can be used if necessary to counterbalance the economic cycle. It will become harder and harder to achieve a balanced budget, as pressure to increase spending will come from the decline in the working age population and a rise in the dependency rate.

Read more from Bank of Estonia website

8,900 job vacancies in 3Q

According to Statistics Estonia, there were almost 8,900 job vacancies in the enterprises, institutions and organisations of Estonia in the 3rd quarter of 2015. The number of job vacancies increased by 4.8% compared to the previous quarter and by 3.3% compared to the 3rd quarter of 2014.

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.6% in the 3rd quarter of 2015, remaining the same as in the 3rd quarter of 2014. The rate of job vacancies was the highest in other service activities (3.3%), which include laundries, dry cleaning, beauty services, the repair of computers and personal goods etc. However, in the case of this economic activity, the share of vacant and occupied posts in the total number of posts is 1.0%. The rate of job vacancies was the lowest in three economic activities – agriculture, forestry and fishing, mining and quarrying, and real estate activities (all 0.3%).

The highest share of both vacant and occupied posts in the total number of posts was recorded in manufacturing (19%), wholesale and retail trade (16%), and education (10%).

The rise in the number of job vacancies was the biggest in information and communication, where there were two times more vacancies compared to the 3rd quarter of 2014.

57% of the vacant and occupied posts were in Harju county (including Tallinn), followed by Tartu county (11%) and Ida-Viru county (8%). The rate of job vacancies was the highest in Harju county (including Tallinn) (2.0%) and the lowest in Põlva county (0.7%).

69% of the job vacancies were in the private sector and 31% were in the public sector. The rate of job vacancies was 1.9% in the public sector and 1.5% in the private sector. The public sector includes companies owned by the state or local governments.Diagram: Rate of job vacancies, 1st quarter 2006 – 3rd quarter 2015

The movement of labour is characterised by labour turnover (the total of engaged employees and those who have left), which amounted to 77,000 employees in the 2nd quarter of 2015, denoting a decrease of 0.2% compared to the 2nd quarter of 2014, but a 26.6% increase compared to the previous quarter. In the 2nd quarter of 2015, the largest increase in labour turnover compared to the 2nd quarter of 2014 occurred in arts, entertainment and recreation (50%), in accommodation and food service activities (47%) and in information and communication (44%).

The data are based on the job vacancies and labour turnover survey, conducted by Statistics Estonia since 2005. In 2015, the sample includes 12,376 enterprises, institutions and organisations; the data of randomly selected units are imputed to the total population separately in each stratum.

The number of job vacancies is the total number of job vacancies on the 15th day of the second month of the quarter. A job vacancy is a paid post that is newly created, unoccupied or becomes vacant when an employee leaves, and for which the employer is actively trying to find a suitable candidate from outside the enterprise, institution or organisation concerned.

Source: Statistics Estonia

Estonian economy grew in the 3rd quarter

According to the second estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 0.7% in the 3rd quarter of 2015 compared to the 3rd quarter of the previous year.

In the 3rd quarter, the seasonally and working-day adjusted GDP increased also by 0.7% compared to the 3rd quarter of 2014, but decreased by 0.4% compared to the 2nd quarter of 2015.

In the 3rd quarter, the GDP at current prices was 5.1 billion euros.

In the 3rd quarter of 2015, the GDP growth was influenced the most by a rise in the value added in trade, professional, scientific and technical activities, and real estate activities. The Estonian economy was also positively influenced by increased receipts of value added tax and decreased payments of subsidies.

According to the second estimates, in the 3rd quarter of 2015, the GDP growth was inhibited the most by a decrease in construction, also by a fall in transportation and manufacturing. The value added in construction decreased mainly due to a fall in construction volumes. In the 3rd quarter, the decline in manufacturing was broad-based – the value added decreased in more than half of manufacturing activities. At the same time, besides the value added of the manufacture of mineral products, the value added of the manufacture of wood and of products of wood was the main contributor to the growth of manufacturing. Also, the export of wood and of products of wood increased.

Both the export and import of goods and services decreased 3% at real prices. The decrease in Estonian foreign trade was influenced the most by a fall in the export and import of electronic products. Additionally, the decrease of export was influenced by a fall in the export of chemicals and beverages. In addition to the fall in the import of electronic products, the import of goods and services was greatly influenced by a decrease in the import of mineral products, wearing apparel and beverages. Net export (e.g. the difference between the export and import of goods and services) amounted to 5.0% of the GDP in the 3rd quarter of 2015.

Although the profit of the business sector increased in the 3rd quarter compared with the previous year, a similar estimate used in national accounts (operating surplus of the whole economy) was on a downtrend. The behaviour of these two indicators differs because the former does not include holding gains and other estimated components (for example, FISIM). In other words, in the business sector the profit is calculated based on output sold but in national accounts based on output produced.

Similarly to the 2nd quarter of 2015, domestic demand fell at real prices due to the change in inventories and a decrease in investments.

The gross fixed capital formation decreased for the fifth quarter in succession at real prices, but the rate of decline decelerated. The decrease was mainly influenced by a fall in the investments of enterprises in machinery and equipment. Also, there was a significant fall in the investments in buildings and structures made by the general government.

The final consumption expenditures increased 4% mainly due to an increase in household final consumption expenditure. Expenditures on recreation, miscellaneous goods and services, and clothing and footwear increased the most.

Diagram: Contribution of economic activity to GDP growth, 3rd quarter 2015

Source: Statistics Estonia

Motor fuel is 15 pct cheaper than last year

According to Statistics Estonia, the change of the consumer price index in November 2015 was -0.3% compared to October 2015 and -0.2% compared to November of the previous year.

Compared to November 2014, goods were 0.5% cheaper and services 0.4% more expensive. Regulated prices of goods and services have fallen by 3.5% and non-regulated prices risen by 0.9 % compared to November of the previous year.

Compared to November 2014, the consumer price index was influenced the most by motor fuel, which has become 14.7% cheaper. 6.2% cheaper electricity, heat energy and fuels also had a bigger impact on the index, as heat energy was 10%, gas 19.6% and the electricity that arrived at homes 2% cheaper than in the same month of the previous year. The prices of milk and dairy products have decreased 8.2%. Out of the products which became more expensive, alcoholic beverages had the biggest impact on the index, as their prices have decreased 7.2% compared to November of the previous year. Compared to November 2014, of food products, the prices of dried fruit and nuts (21%) and sugar (18%) have increased the most, whereas the prices of milk and butter have decreased the most (17% and 16%, respectively).

Compared to plane tickets that were bought for October at a very high price, the tickets bought for November were 21% cheaper. Compared to October 2015, 3.5% more expensive motor fuel as well as a decrease in the prices of electricity that arrived at homes and milk and dairy products (both -1.9%) also had a bigger impact on the index.

Read more from Statistics Estonia