Economic growth in 2015 was the slowest of the past 6 years

  • Real household incomes and sales by companies in the domestic market have increased rapidly, but goods exports declined further
  • The fall in corporate profits over several years indicates that the economy will have to adjust through faster productivity growth or slower wage growth
  • The monetary policy decisions of the European Central Bank are keeping financing conditions for investment favourable

Economic growth in Estonia slowed in 2015 and was the slowest of the past six years, remaining below the long-term potential of the country. Growth slowed mainly because of weaknesses in the economies of neighbouring countries and this restricted opportunities for exports, though sales in the domestic market grew rapidly as household incomes and purchasing power increased. Income growth has been spurred by a rise in the minimum wage, wage agreements in education and health, and more generally by the decline in the working age population and in available labour resources.

Estonian exports of goods have dropped in the past two years and Estonian exports lost market share in target markets in 2015. The latest foreign trade data indicate that exports continued to fall at the start of this year. As the fall in exports has been accompanied by a reduction in company profits and a rise in wage costs, the issue of competitiveness in the economy has been to the fore. Possible problems in competitiveness and the risk that the economy is out of balance were also highlighted last year by the European Commission.

Faster Estonian growth will depend a lot on the performance of target markets. In the first months of this year the economic figures in the euro area have proven weaker than expected and the March forecast of the European Central Bank concluded that growth in 2016 will be lower than was earlier forecast. The spluttering recovery in growth in the euro area means that the stimulus to growth in the Estonian economy provided by external demand will be modest.

Energy prices have been falling for several years by now, and this has significantly reduced inflation. Consumer prices have been falling in Estonia for about two years now, and in February inflation in the euro area turned negative again. For this reason the Governing Council of the European Central Bank decided at its meeting in March to ease monetary policy even further, which means that financing conditions will continue to be very favourable in Estonia and in the euro area.

Source: Bank of Estonia

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Prices have declined because energy is cheaper

  • Prices are mainly lower than a year earlier because energy is cheaper
  • Inflation for manufactured goods remains low because prices for raw inputs and levels of economic activity are both low
  • Rises in food prices reflect the rise in alcohol excise
  • Surveys show two-year expectations for Estonian inflation have remained relatively stable

Data from Statistics Estonia show the annual change in consumer prices to have been negative again, and prices were 0.2% lower than in the previous March. However, the price level was 0.8% higher in March than in February, and 0.7% higher in February than in January.

Energy costs for households came down further in the first months of the year as prices fell for heating and for natural gas. Energy prices were 8% lower in March than a year before, though motor fuels have gone up by around 6% from February because the excise rate was raised. A small contribution to inflation was made by the monthly rise in the global oil price.

Food prices were 1.7% higher in March than a year earlier, and they were also affected by higher excise rates. Alcohol should become 8% more expensive because of the rise in excise, and most of this rise had already been passed on into prices in March. Without the effect of alcohol excise, food prices rose in March by 0.5%, mainly because of fruit and vegetable prices.

Estonian core inflation, which is inflation without energy and food, was 1.1% in March. Rises in prices for services were somewhat more modest in March than in the fourth quarter of last year. Slower rises in prices for transport services have been helped by the indirect effects of the earlier fall in the price of oil, which were seen in the prices of road and maritime transport services. At the same time, rents and prices for leisure services have risen consistently by 4-5%, which is normal for Estonia and is a consequence of rising wages. Furthermore, the prices of air tickets have risen in recent months despite the fall in fuel prices.

Inflation for manufactured goods remained low at 0.1% in March because prices for raw inputs and levels of economic activity are both low. No sign of increasing price pressures has yet been seen, as producer prices of consumption goods fell by an average of 1.8% in the first two months of this year. However, the low exchange rate for the euro since the start of last year has raised the import prices of consumption goods. The euro fell by more than 10% against the dollar in 2015, but in the first months of this year it has been strengthening against the dollar again.

Surveys show two-year expectations for Estonian and euro area inflation have remained relatively stable at close to 2%. Analysts have still corrected their inflation forecasts for 2016 slightly downwards though.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

 

Estonian current account was in deficit in February

The flash estimate1 put the Estonian current account at 42 million euros in deficit in February 2016. This was mainly because the deficit on the goods account was larger than in February 2015. Although exports of goods were some 2.5% up on a year earlier, imports were up 5.6% over the same period. The small increase in the surplus on the services account was not enough to offset the deficit on the goods account. Total spending by Estonian residents on foreign travel in February was more than spending by non-residents visiting Estonia, meaning that the balance on the travel services account was negative. Flows of transport services declined further, while exports of all other services increased and imports fell. The positive balance on the capital account meant that the total of the current and capital accounts was positive, which was not the case in January.

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 2016 on 9 June 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.

Source: Bank of Estonia (see graph here)

Price changes in March

According to Statistics Estonia, the change of the consumer price index in March 2016 was 0.8% compared to February 2016 and -0.2% compared to March of the previous year.

Compared to March 2015, goods were 0.3% and services 0.1% cheaper. Regulated prices of goods and services have fallen by 3.0% and non-regulated prices have risen by 0.7 % compared to March of the previous year.

Compared to March 2015, the consumer price index was influenced the most by motor fuel, which has become 11.6% cheaper, with petrol having become 10.7% and diesel fuel 13.5% cheaper. 11% cheaper heat energy and 6% more expensive alcoholic beverages also had a bigger impact on the index. Compared to March of the previous year, liquid fuel has become 26% more expensive and pipeline gas has become 26% cheaper.

In March compared to February, the consumer price index was yet again influenced the most by transport, which provided more than a third of the total increase, with motor fuel becoming 2.9% and plane tickets bought for March 21% more expensive. 1.2% more expensive food and non-alcoholic beverages had nearly the same impact on the index, with 4.5% more expensive vegetables providing more than a third of the impact.

The previous time that the monthly change of the consumer price index was greater than 0.8% was in March 2012 when it was 1.0%.

Change of the consumer price index by commodity groups, March 2016
Commodity group March 2015 –
March 2016, %
February 2016 –
March 2016, %
TOTAL -0.2 0.8
Food and non-alcoholic beverages 0.5 1.2
Alcoholic beverages and tobacco 5.4 0.7
Clothing and footwear 3.2 1.9
Housing -2.7 -0.1
Household goods 0.8 0.5
Health 1.7 0.2
Transport -5.6 2.1
Communications -0.3 0.5
Recreation and culture 3.5 0.8
Education -13.7 0.0
Hotels, cafés and restaurants 3.3 -0.4
Miscellaneous goods and services 1.7 -0.2

Source: Statistics Estonia

In February exports of goods increased

According to Statistics Estonia, in February 2016, exports of goods increased by 7% and imports by 5% compared to February of the previous year. One-third of the exports growth was due to an increase in the exports of goods of Estonian origin.

In February, exports from Estonia amounted to 0.9 billion euros and imports to Estonia to 1.1 billion euros at current prices. The trade deficit was 140 million euros (in February 2015, it was 151 million euros).

The top destination country of Estonia’s exports in February was Sweden (20% of Estonia’s total exports), followed by Finland (16%) and Latvia (9%). There was an increase in the exports to most of the top destination countries, with the biggest increase having occurred in exports to Sweden, Canada and Finland (up by 23 million, 20 million and 12 million euros, respectively). Exports to the Netherlands decreased the most (16 million euros).

The biggest share in Estonia’s exports in February was held by electrical equipment, followed by wood and products thereof and miscellaneous manufactured articles. In February, there was a rise in exports in almost all commodity sections. The biggest increase occurred in the exports of three commodity sections: 1) miscellaneous manufactured articles (with prefabricated buildings contributing to the growth the most), 2) transport equipment (respectively, motor cars) and electrical equipment (respectively data communication equipment). There was a decrease in the exports of mechanical appliances.

The share of goods of Estonian origin in exports was 70% in February. Exports of goods of Estonian origin increased by 3% compared to February of the previous year. Of the top ten destination countries for exports from Estonia, the share of goods of Estonian origin in exports was the biggest in exports to Denmark (94%) and the United Kingdom (89%), and the smallest in exports to Russia (20%). Goods of Estonian origin are goods produced and processed in Estonia.

The main countries of consignment in February were Finland (13% of Estonia’s total imports), Germany (11%), Latvia (9%) and Sweden (9%). The biggest increase occurred in imports from Germany, Latvia and Sweden (up by 18 million, 14 million and 13 million euros, respectively). At the same time, the greatest decrease occurred in imports from Russia (down by 19 million euros).

In February, the main commodities imported were electrical equipment, mechanical appliances, agricultural products and food preparations, and transport equipment. The biggest rise was recorded in the imports of mechanical appliances and transport equipment. At the same time, the imports of mineral products fell significantly.

In the comparison of January and February 2016, exports of goods grew 11% and imports 8%.

Diagram: Estonia’s foreign trade by month, 2013–2016

Read more from Statistics Estonia

A simplified tax operation for foreign undertakings

The Tax and Customs Board shall offer to foreign undertakings a simplified application form for registration as a person liable to value-added tax which is accessible both in English and in Russian and which makes application for a value-added tax identification number simpler.

“We will contact, when needed, the undertaking who has submitted an application in order to clarify some aspects concerning business activities. We offer consultation to undertakings as well in order to clarify the information concerning the Estonian tax system, how to find information from our web site, how to choose transaction partners not to be involved in fraud schemes and wherefrom to seek further advice,” Monika Jõesaar, the head of the service division of  the Tax and Customs Board, explained.  She encourages everyone to use advisory services so that doing business in Estonia would be simple and comprehensible already from the very beginning.

You will find the English application form for VAT identification number here and in Russian here

Source: The Tax and Customs Board