The economy was more in balance in Q1 than previously

  • Retail sales volumes grew more slowly in March, but still faster than GDP
  • Seasonally adjusted exports grew fast in quarterly terms
  • Corporate investment increased
  • Growth in industrial production indicates faster GDP growth

The flash estimate from Statistics Estonia shows that the economy grew in the first quarter of 2016 by 1.7% year-on-year and was at the same level as in the fourth quarter of 2015. Economic growth was restrained by the oil shale industry, but was very positively impacted by the stocking up in January of goods subject to excise, which is reflected in increased product taxes and value added in the retail sector. Growth is slowing in consumption among components of demand, though it remains above the general indicators of economic growth against a background of increased investment.

Growth in industrial production indicates GDP growth was more positive in quarterly terms than the official estimate. Despite the problems in the oil shale sector the total output of manufacturing in the first quarter of 2016 was 1.5% more than in the fourth quarter of 2015, which is close to its historical average growth rate. Output of the total industrial sector, including energy and mining, increased by 1.3%. Slower growth in the industrial sector was due to a reduction in mining of oil shale, which is probably a consequence of the build up of stocks last year. The production of the energy industry was higher than a year earlier and than in the previous quarter. The estimate by Statistics Estonia of changes in the volume of goods exports confirms that the industrial sector is stronger than in the previous quarter. Goods exports were down only 2% over the year, which means that seasonally adjusted exports grew very fast compared to their performance in the fourth quarter. Growth in external demand, seen as growth in imports in trading partners, was probably less than this.

Consumption growth is slowing. Retail sales volumes grew more slowly in March, but still faster than GDP. The slowdown was caused by slower growth in real incomes. Growth in real household incomes last year was driven by rapid growth in wage incomes, falling prices, increased social benefits and lower taxes. These factors impact household incomes positively, but more so in 2015 than in 2016. Growth in private consumption was probably still quite strong in the first quarter because it was subject to the leap year effect, which is apparent in the turnover of companies in February. Private consumption was boosted further by the cold weather, which lifted unavoidable spending on communal utilities.

A notable positive development in the first quarter of 2016 was increased corporate investment, which is illustrated by VAT data.Growth in investment is in line with increased imports. Investment growth will be aided more and more by the use of resources from the European Union Structural Funds, which show up primarily in investment growth in the general government, and partly also in private sector projects. The need for new investment is indicated by increased use of production capacity in the industrial sector, though the use of capacity is still below the European average in a majority of branches of industry. More efficient organisation of work can also increase production even without investment. At the same time there are some areas where production capacity is being used more intensively than the European average, such as wood processing, where growth has been fast in recent years.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

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