Estonian economy is becoming more labour-focused

At the Äriplaan 2017 conference on Wednesday, Governor of Eesti Pank Ardo Hansson spoke of the increased share of labour-dependent sectors in the Estonian economy, which is also illustrated by the growth in wages in recent years. This means that the market is moving ever more decisively away from business models based on cheap labour.

“In the wake of economic growth comes a change in the structure of the economy, as the share of those sectors that are based on labour has increased, and the rises in wages of recent years have been in line with changes that make the economy more focused on labour. Our working age population has been shrinking at the same time. Taken together, this means that upwards pressure on wages will remain for the time being. Business models that are built on cheap labour cannot survive for long in such circumstances, and they will be squeezed out of the market over time. It can already be seen that the lower the wage is in any sector, the harder it is for employers there to find staff”, Mr Hansson explained. He added that it is equally possible that market pressure and overly optimistic expectations have pushed companies to raise wages to a level that could lead to a reaction at some point.

The assessments by exporting companies of their own competitiveness have deteriorated in recent years as labour costs have risen, but there has been some small improvement this year. Corporate investment activity increased in the first half of the year, which gives hope that growth may pick up in the economy. “Investment alone is not enough to guarantee faster growth. Some other countries have seen their economies grow as fast as the Estonian economy with lower levels of investment. We still have room to make more efficient use of investment”, added Mr Hansson.

He emphasised that faster economic growth depends primarily on the competitiveness of companies in foreign markets, and so it is necessary to continue developing targeted products for export. “Corporate competitiveness and production potential need support from economic policy not just in Estonia but throughout Europe. Reform of labour and product markets and the business environment would help to ensure this, but such reforms are stalled in Europe. The central banks of the euro area can use monetary policy to support the economy, but this alone will not create sustainable growth”.

There will be minor gains for the global and European economic climates next year, but forecasts indicate the increase in economic activity in Estonia’s neighbourhood will be small.

Source: Bank of Estonia

Estonian gross debt level was 10 pct of GDP in 2015

According to the adjusted data of Statistics Estonia, in 2015, the Estonian general government surplus was 0.1% and the gross debt level was 10.1% of the gross domestic product.

At the end of 2015, the total revenues of the general government exceeded the expenditures by 27.2 million euros, accounted as the Maastricht deficit criteria. After a methodological change in the recognition of the contributions to the new public enterprises, the deficit of the central government sub-sector was 52.1 million euros by the end of 2015. The consolidated budget of the local government sector was 55.9 million euros in surplus. The budget surplus of social security funds was 23.4 million euros.

The consolidated debt of the general government (Maastricht debt) amounted to 2 billion euros by the end of 2015. Compared to the preliminary estimate published in March, the central government’s debt compilation was adjusted. From 2012 onwards, the statistical recording of the monetary resources on the Treasury’s group accounts were changed. As a result of this adjustment the central government’s total debt rose to 2.2 billion euros by the end of 2015, caused by the added liabilities towards other subsectors of the general government. This change in accounting of monetary resources of subsectors did not affect the consolidated debt of the general government.

Also, a change was introduced in the statistical recording of the Estonian euro coins, giving rise to the debt level of both the central government subsector as well as the general government  sector by 41.4 million euros at the end of 2015.

The local governments’ debt remained unchanged and accounted for 0.7 billion euros. Social security funds did not contribute to the debt of the general government sector. Changes in accounting were made according to the instructions of Eurostat.Diagram: Surplus/deficit of the general government in Estonia by sub-sectors, 2011–2015

In Estonia, the general government sector comprises three sub-sectors: 1) central government (state budget units and extra-budgetary funds, foundations, legal persons in public law); 2) local governments (city and rural municipality governments with their subsidiary units, foundations); 3) social security funds (Estonian Health Insurance Fund, Estonian Unemployment Insurance Fund).

Source: Statistics Estonia

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Use of Internet in Estonia

According to Statistics Estonia, in the 1st quarter of 2016, 86% of households in Estonia had Internet access at home. There has been an increase in the share of people having used e-commerce services more than five times in the last three months.

A fixed broadband connection (wired or wireless) continues to be the most popular type of Internet connection, as it was used in 90% of the households with Internet access. 88% of households without children and 92% of households with children had a fixed broadband Internet connection (wired or wireless). There has been a significant increase in the use of mobile Internet. While in the 1st quarter of 2015 slightly more than a half (56%) of households had mobile Internet, then according to data from the 1st quarter of 2016 there was mobile Internet in a little more than three quarters (78%) of households. The use of fixed broadband connection (either wired or wireless) is more popular among households living in urban settlements, while mobile Internet is more popular among households living in rural settlements. Households without an Internet connection at home cited lack of interest as the main reason for not having one.

In the first three months of 2016, 87% of persons aged 16–74 had used the Internet. The share of Internet users is the largest among 16–54-year-olds (90%) and the smallest among 55–74-year-olds (65%). Among persons with basic or up to primary education, seven out of ten used the Internet, while among persons with higher education nine out of ten used the Internet.

Nine out of ten 16–74-year-old Internet users had used the Internet in the last three months for Internet banking, reading newspapers and magazines, using e-mail, and seeking information about products and services. 64% of the 16–74-year-old Internet users listened to music online and 43% watched a television programme (including live and catch-up programmes).

A little bit more than a half (56%) of 16–74-year-olds has bought products or services online in the last 12 months. Compared to males, the share of e-commerce users is 6 percentage points higher among females. Items that were bought online the most included travel and accommodation services (59% of the users of e-commerce), tickets for concerts, cinema, theatre and other events (55%), insurance policies (including those offered as a package), and clothes, shoes or sports equipment (51%).

In the 1st quarter, slightly less than three quarters (73%) of the users of e-commerce bought goods or services online up to five times. Younger e-commerce users (aged 16–24) made online purchases more often (3–5 times) than older e-commerce users (aged 65–74), who did it less frequently (1–2 times). In 43% of the cases, the price of goods bought online (excl. expenditure on shares and other financial services) remained between 100–499 euros. There were more males than females among persons having made online purchases for over 500 euros. Compared to the 1st quarter of 2015, the share of those who made online purchases more often than five times increased by 3 percentage points and the share of persons having spent more than 500 euros grew by 2 percentage points.

In the business sector, the use of cloud services designed to share resources via the web – software, hardware, or combinations thereof – has become increasingly more widespread. More than a fifth of Estonian enterprises have bought paid cloud services. The most popular cloud services include financial and operational software, office software, file storage and recording services and e-mail services. The main users of paid cloud services are enterprises of the information and communications sector (54%), who are providers of cloud services themselves, too.

The use of big data is spreading rapidly as a new trend. Big data are produced in the implementation of digital technology and are forwarded automatically from machine to machine. Such data are generated, for example, with the help of production process sensors, by logging various transactions, but also as a result of various social media activities. 13% of Estonian enterprises have analysed big data, with the employees of the enterprises themselves having performed the analyses. Big data are analysed the most by enterprises of the information and communications sector (29%), followed by water supply, sewerage, waste management and waste management enterprises (28%), and financial and insurance enterprises (21%).

The use of information technology among persons aged 16–74 and in households and enterprises is studied based on a harmonised methodology in all European Union Member States. Statistics Estonia studies the use of information technology in households and among inhabitants aged 16–74 as an independent survey since 2014 (from 2005 to 2013 it was part of the Labour Force Survey). The survey is carried out in the 2nd quarter, with the 1st quarter being the reference period. A household is a group of persons who live at the same address and share joint financial resources and whose members consider themselves to be members of one household, while a family is based on family relationships or kinship.

Statistics Estonia has surveyed the use of information technology in enterprises since 2001. In 2016, approximately 3,400 enterprises participated in the survey. The survey involves enterprises with 10 or more persons employed.

Source: Statistics Estonia

Estonia has received more direct investment than many other newer members of the EU

  • Estonia’s foreign direct investment position* at the end of 2015 put it behind only Hungary in volume among the newer European members from Central and Eastern Europe
  • The Estonian current account in 2015 posted its largest surplus since independence was regained
  • Both exports and imports of goods and services were down last year, but imports by more
  • The current account was affected by large dividends paid out by the banking sector

Adjusted data show that the current account of the Estonian balance of payments had a surplus of 447 million euros in 2015, the largest since independence was regained. This does not reflect the strength of Estonian exports however, so much as a general decline in the trade of goods. Although both exports and imports of goods and services were down, it was the faster decline in imports that led the surplus in goods and services to grow. The surplus on the current account increased because the outflow of investment income slowed as large-scale extraordinary dividends were paid out by the banking sector in the middle of the year, and the income tax paid on these dividends to the Estonian state principally slowed the outflow. A little more was received from the European Union Structural Funds for infrastructure development than in 2014. The outflow of capital from the financial account was one billion euros larger than the inflow and the main channel for the outflow was portfolio and other investment.

Estonia was behind only Hungary for the foreign direct investment position among the newer European members from Central and Eastern Europe, and at the end of 2015 the direct investment position in Estonia was almost the same as the GDP of the year.

* Direct investment data for Estonia cover the period 1993-2015.

Figure. Direct investment position in Central and Eastern European countries at the end of 2015 as % of GDP
Direct investment position in Central and Eastern European countries at the end of 2015 as % of GDP

Sources: Eurostat, Eesti Pank

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The current account surplus was smaller in July than a year ago

The flash estimate1 put the Estonian current account at 45 million euros in surplus in July 2016. The surplus on the goods and services account was 86 million euros, which was 14 million euros less than at the same time a year earlier. The decline of 4.5% in goods exports was faster than the 2.4% in imports, and this increased the deficit on the goods account to 124 million euros. The surplus on the services account is usually at its peak for the year in July because of the tourism season, and the surplus in services was high this year too at 210 million euros. Exports of services were brought down by transport services and boosted by travel services and other services, while imports of all the main types of services increased. The inflows of investment income and other income declined while outflows increased. The net outflow on the primary and secondary income accounts totalled 41 million euros, which was 20 million euros more than at the same time a year earlier.

The sum total of the current and capital accounts was 57 million euros in July. This means that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more resources abroad than it received from there.

Eesti Pank publishes the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for the third quarter of 2016 on 9 December 2016.

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In July, trade decreased

According to Statistics Estonia, in July 2016, the exports of goods decreased by 6% and imports by 4% compared to July of the previous year. The fall in the exports and imports of goods was influenced the most by the trade with European Union countries.

In July, exports from Estonia amounted to 0.9 billion euros and imports to Estonia to 1.1 billion euros at current prices. There was a significant fall in trade with EU Member States: exports dropped by 8% and imports by 7% compared to July 2015. The trade deficit was 165 million euros (in July 2015, it was 156 million euros).

The top destination country of Estonia’s exports in July was Finland (16% of Estonia’s total exports), followed Sweden by (16%) and Latvia (10%). There was a fall in exports to all neighbouring countries, with the biggest fall having occurred in exports to Sweden and Latvia.  Compared to July 2015, there were decreased exports of electrical equipment and prefabricated buildings of wood to Sweden, and decreased exports of motor spirits and transport equipment to Latvia. The biggest increase occurred in exports to Nigeria and Mexico.

The biggest share in Estonia’s exports in July was held by electrical equipment, followed by mineral products, wood and articles of wood, agricultural products and food preparations, and mechanical appliances. The drop in exports was greatly influenced by a fall in the exports of mineral products (incl. motor spirits) and raw materials and products of the chemical industry (down by 22 million and 10 million euros, respectively).

The main countries of consignment in July were Finland (13% of Estonia’s total imports), Germany (12%) and Lithuania (10%). The biggest drop occurred in imports from Finland and Latvia. Compared to July 2015, there was a fall in the imports of optical appliances from Finland and of electrical equipment from Latvia. The greatest increase occurred in imports from China.

In July, the main commodities imported were electrical equipment, agricultural products and food preparations, mechanical appliances, transport equipment and mineral products. The fall in imports was influenced the most by decreased imports of mineral products (down by 25 million euros).

In July compared to June, the exports of goods decreased by 10% and imports by 7%.

The share of goods of Estonian origin in total exports was 69% in July, being the lowest level this year. The fall in the exports of goods of Estonian origin compared to June 2016 was influenced the most by a drop in the exports of electrical equipment, furniture, base metals and articles of base metal, and wood and articles of wood. Compared to June, the biggest increase has occurred in the exports of mineral products (inc. light fuel oil and electrical energy). By country, the exports of goods of Estonian origin decreased the most in terms of exports to Sweden, Mexico, Finland, Germany and Belgium.Diagram: Estonia’s foreign trade by month, 2014–2016

Source: Statistics Estonia
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There were 9,500 job vacancies in Estonia in Q2

According to Statistics Estonia, there were about 9,500 job vacancies in the enterprises, institutions and organisations of Estonia in the 2nd quarter of 2016. The previous time when the number job vacancies exceeded 9,000 was in 2008. The number of job vacancies increased by 15% compared to the previous quarter and by 13% compared to the 2nd quarter of 2015.

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.7% in the 2nd quarter of 2016, being 0.2 percentage points bigger than in the previous quarter and in the 2nd quarter of 2015.

The rate of job vacancies was the highest in accommodation and food service activities (3.7%), administrative and support service activities (3.5%) and information and communication (3.3%); and the lowest in agriculture, forestry and fishing (0.3%), water supply (0.7%), construction (0.8%) and real estate activities (0.8%).

The total number of posts and the number of vacant posts continued to be the highest in manufacturing and wholesale and retail trade. Compared to the 2nd quarter of 2015, the number of job vacancies grew the most in real estate activities, accommodation and food service activities and in electricity, gas, stream and air conditioning supply. Year-over-year, the number of job vacancies dropped the most in agriculture, forestry and fishing, mining and quarrying and other service activities.

70% of the vacant posts were in Harju county (including Tallinn), followed by Tartu county (9%) and Ida-Viru county (5%). The rate of job vacancies was still the highest in Harju county (2.1%) and the lowest in Viljandi (0.7%), Hiiu (0.8%) and Rapla counties (0.8%).

7,200 job vacancies (76%) were in the private sector and 2,300 (24%) in the public sector. In the 2nd quarter of 2016, the rate of job vacancies was the highest in foreign private sector institutions (2.5%) and state institutions (2.1%) and the lowest in Estonian private sector organisations (1.5%) and local governments (1.1%).Diagram: Rate of job vacancies by economic activity, 2nd quarter, 2015–2016

The movement of labour is characterised by labour turnover (the total of engaged employees and those who have left), which amounted to 73,000 in the 1st quarter of 2016, denoting an 8% increase compared to the previous quarter and a 19% increase compared to the 1st quarter of 2015. Compared to the 1st quarter of 2015, the largest increase in labour turnover occurred in mining and quarrying, water supply, agriculture, forestry and fishing, and information and communication.

The data are based on the job vacancies and labour turnover survey conducted by Statistics Estonia since 2005. In 2016, the sample includes 12,603 enterprises, institutions and organisations; the data of randomly selected units are imputed to the total population separately in each stratum. As of the 2nd quarter of 2016, Statistics Estonia uses the data of the Employment Register of the Estonian Tax and Customs Board to pre-fill the survey questionnaires.

The number of job vacancies is the total number of job vacancies on the 15th day of the second month of a 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
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Estonian economy grew in the 2nd quarter

According to the second estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 0.8% in the 2nd quarter of 2016 compared to the 2nd quarter of the previous year.

In the 2nd quarter, the GDP at current prices was 5.3 billion euros. The seasonally and working-day adjusted GDP increased by 0.5% compared to the 1st quarter of 2016 and by 0.6% compared to the 2nd quarter of 2015.

According to the second estimates, GDP growth was inhibited the most by a decrease in value added in the energy sector, mining and quarrying and real estate activities. In the energy sector, production of all types of energy fell. The decrease in the value added of mining and quarrying was caused by a fall in the extraction of oil-shale. Although the value added of real estate activities increased at current prices, the increase in prices in this economic activity resulted in a decrease in the value added at constant prices.

In the 2nd quarter of 2016, GDP growth was influenced the most by information and communication, the value added of which rose mainly due to the rapid growth in the value added of computer programming and information service activities. I addition, the biggest contributor to GDP growth were agriculture, forestry and fishing, and trade. Among trade activities, retail trade contributed the most to GDP growth and the value added of wholesale increased as well.

Also, the value added of manufacturing (the biggest economic activity in Estonian economy) contributed to the increase of GDP. In the 2nd quarter, value added increased in more than half of manufacturing activities. The main contributors to the growth of manufacturing were the manufacture of electrical equipment, textiles and wearing apparel. At the same time, the manufacture of fabricated metal products, electronic products and mineral products decreased.

The export of goods and services rose by 4.1% at real prices, mainly due to an increase in the import of electronic products, electrical equipment and wood and articles of wood. Total import increased by 8.8% at real prices compared to the 2nd quarter of the previous year. This is the biggest growth of the last 14 quarters. Import of goods and services was increased the most by a growth in the import of electronic products, motor vehicles and base metals.

In the 2nd quarter of 2016, net export amounted 3.8% of the GDP.

Real GDP grew slower than the number of persons employed and hours worked (respectively 2.0% and 2.9%), meaning that there was a fall in the productivity of the total economy per person employed as well as per hour. Compensation per employee grew faster than productivity and unit labour costs increased 6.4% compared to the same quarter of the previous year.

Domestic demand rose. At real prices, all components of domestic demand increased, except for the final consumption expenditures of government sector. Households’ final consumption expenditure increased by 3.0%. The expenditures on transport, food and recreation increased the most.

In the 2nd quarter of 2016, after having declined in the last 8 quarters, gross fixed capital formation increased by 5.4% at real prices. Households’ investments in dwellings as well as the gross fixed capital formation of non-financial enterprises in buildings and structures and machinery and equipment increased the most. At the same time, gross fixed capital formation of the government sector decreased.

Diagram: Contribution of economic activity to GDP growth, 2nd quarter 2016

As part of a regular revision, Statistics Estonia revised the national accounts data for 2012–2015 based on the supply and use tables and annual reports of enterprises. In conjunction with the publication of the estimates for the 2nd quarter of 2016, the estimates for the 1st quarter of 2016 were also revised. Additionally, data for 2010 were revised.

Source: Statistics Estonia
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Long-awaited investment growth is starting to take off

Statistics Estonia revised second-quarter annual GDP growth 0.2 percentage points up to 0.8%. Regular revision of last four years was also published and led to changes in real growth rates of previous years. 2012-2014 GDP growth was revised down 0.9 to 0.1 percentage points whereas last year’s GDP growth was revised up by 0.4 percentage points to 1.4%.

Private consumption still contributed the most to GDP growth in the second quarter, although at a decelerating pace. Investments, which have had a negative influence on growth for the past two years, have started to improve. The recovery originates from private households, who invest into dwellings, as well as non-financial enterprises. The growth of non-financial enterprises’ investments has accelerated from 0.7% in the first to 5.5% in the second quarter. Compared to the second quarter of 2015, non-financial enterprises’ investments into transportation equipment have doubled. On the other hand, investments into machinery and equipment, the key to future growth, are still lagging.

Export and import growth of goods and services gained momentum in the second quarter. The growth of these has been very broad based with goods and services having almost equal growth rates. Import growth exceeded export growth and therefore the negative contribution from net exports to GDP increased.

ITC and agriculture sector had the largest positive and energy production the largest negative contribution to GDP growth in the second quarter of 2016. It is noticeable that the value added of transportation and storage activities has started to increase after being in a decline for three years. Also the value added in manufacturing sector has started to grow. As manufacturing sector makes up the largest piece of value added in the Estonian economy, it is assuring that the growth there is broad-based and more than half of the economic activities of manufacturing had positive growth rates.

According to our estimates, investments will continue to support GDP growth while the influence of private consumption will decrease. We expect the economy to grow 1.5% this year and 2.5% in 2017 due to increasing support from investments and export.

 

Source: Swedbank

Estonia has been an attractive tourist destination

Tourism: can the success be sustained?

• Estonia has been an attractive tourist destination
• Growth despite fewer visitors from Russia and Finland
• Challenges and opportunities in 2017

Estonia has been an attractive tourist destination
Estonia has been rather successful in attracting tourists. The number of tourists per person has been higher than in Latvia, Lithuania, Finland, or Sweden, or the European Union (EU) average. Estonia’s net occupancy rates are also above the European average. Local tourism has been more active in Estonia than in other Baltic countries, but more sluggish than in Finland or Sweden or the EU average, where higher living standards enable higher expenditure on leisure and entertainment, and longer distances mean greater need for accommodation services.

Growth despite fewer visitors from Russia and Finland
The number of domestic tourists (40% of clients) has increased substantially in recent years, offsetting smaller flows from Russia and Finland. During the first six months of 2016, the number of tourists from Russia stabilised, while the number of tourists from Finland started to grow again. The sector’s economic indicators also improved: turnover was 17% and profits 10% higher during the first six months of 2016 compared with the same period in 2015.

Challenges and opportunities in 2017
Next year will bring some challenges and opportunities for Estonia’s tourism sector. Estonia will raise the value-added-tax (VAT) on accommodation services, thereby accelerating the convergence of average prices with Western Europe. The recovery of the Finnish and Russian economies, the expected strengthening of the Russian rouble against the euro, and the EU presidency should support tourism flows next year. The number of nights spent by Estonian tourists could grow less quickly in 2017 as the Estonians’ purchasing power is forecast to grow more slowly than in 2016.

Source: Swedbank

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