Increased investment indicates that economic growth may accelerate

  • Certain individual sectors were the cause of slower growth in the economy in the second quarter
  • Increased investment activity of companies in the first half of the year indicates that economic growth may pick up
  • The share of labour-intensive sectors in the economy is increasing, and upwards pressure on labour costs remains strong
  • Consumer prices were at the same level in August as at the start of 2013, but inflation will rise in the months ahead

Yearly growth in the Estonian economy remained slow in the second quarter. Growth was weakened by a fall in value added in the energy and mining sectors and in real estate activities, but it was broad-based across the other sectors. Growth was led by more labour-intensive sectors and that explains at least partially why the number of people in employment and the average wage have increased even as overall figures for economic growth have been low. The increase in unfilled positions also shows that the upwards pressure on domestic wages caused by labour shortages has probably not yet faded.

Exporting companies considered their own competitiveness in both the European Union market and elsewhere to be better than in the beginning of the year. This is in line with a revitalisation of Estonian trade in the second quarter. Investments in fixed assets also increased in the second quarter. Investments by households in housing increased, and so did corporate investment, making it more likely that the persistent gap of recent years between economic growth and wage growth will be closed through increased labour productivity rather than through a sharp braking of wage growth.

Having fallen for more than two years, prices rose in August and took consumer price inflation back into positive territory. However, the price level has been rising steadily on a monthly basis since the start of the year, and in a little over half a year consumer prices have climbed by around 2%. Price pressures have remained weak despite rapidly rising wage costs and increasing demand. This is partly because profit margins have been slimmed, and partly because the oil price has been low and prices have risen only slowly for imported commodities. The impact on inflation of cheaper energy is fading out, and that will boost inflation in the near future.

The consequence of the fall in prices in the meantime was that consumer prices were at a similar level in August this year to where they were at the start of 2013. During this time the average gross wage increased by 20% however, meaning that the average purchasing power of residents increased by about one fifth in three years, which has resulted in fast growth in retail sales and in private consumption.

Strong growth in wage income and consumption has boosted tax revenues. Tax revenues have also been raised by higher excise rates for alcohol, tobacco and fuels. In the first half of the year, general government income exceeded expenditure and for the year as a whole the budget should remain in surplus. Growth in general government spending has been seriously limited by a reduction in investment, but the cut in the numbers employed by government institutions in an effort to keep the size of the public sector the same relative to a shrinking population has also had an impact.

Source: Bank of Estonia

Estonia’s balance of payments for 2015

The euro area economy as a whole grew faster in 2015 than in the preceding years, and by the end of the year total output had reached about the same level as before the crisis. Economic growth in Estonia unfortunately slowed and was the slowest of the past six years, remaining below the long-term potential of the country. The slowdown was mainly due to the weak economic climate in several neighbouring countries and the restricted ability to export that followed from that. This left growth largely based on increased domestic consumption while both exports and corporate investment declined.

Read more from Bank of Estonia website

In August, the volume of industrial production increased

According to Statistics Estonia, in August 2016, the production of industrial enterprises increased 1% compared to August of the previous year. Production increased in the energy sector, but decreased in manufacturing and in mining and quarrying.

Compared to August 2015, the production of electricity increased 49% and the production of heat 9%. More than one-third of the produced electricity was exported.

In August, manufacturing production fell 1% compared to August 2015. Production did not surpass the volume of the previous year in half of the branches of industry. The decline in production was mostly due to a decrease in the manufacture of electronic, food and metal products. Production rose in the manufacture of wood products, electrical equipment and furniture.

In August, 69% of the whole production of manufacturing was sold on the external market. According to unadjusted data, the export sales of manufacturing production rose 8% and domestic sales 4% compared to August 2015. In August 2016, there were three working days more than last year.

In August 2016 compared to the previous month, the seasonally adjusted total industrial production fell 1%, with production in manufacturing having decreased 3%.

Diagram: Volume index of production in manufacturing and its trend

Read more from Statistics Estonia

The turnover growth of retail trade enterprises accelerated to some extent

According to Statistics Estonia, in August 2016 compared to August 2015, the turnover of retail trade enterprises increased 5% at constant prices. While in July, the turnover increased 2% compared to the same month of the previous year, then in August the growth accelerated to some extent.

In August 2016, the turnover of retail trade enterprises was 561.9 million euros. The turnover growth acceleration was influenced by the stores selling manufactured goods, where sales increased 15% compared to August 2015. The turnover increased in all economic activities. Turnover increased the most in stores selling pharmaceutical goods and cosmetics, with sales increasing slightly more than a fifth (21%). A higher than average increase in turnover occurred also in sales via mail order or the Internet (19%) and in stores selling household goods and appliances, hardware and building materials (17%). In August, the turnover in stores selling textiles, clothing and footwear, which showed a slight decline in July, turned to rise again and grew 14% compared to the same month of the previous year. After the decline in July, the turnover increased also in other specialized stores, such as stores selling computers and their accessories, books, sports equipment, games and toys etc. (12%) and in non-specialized stores selling predominantly industrial goods (e.g. department stores) (4%).

The turnover in grocery stores, which showed a stable 1% growth in the last two months, turned to fall in August and decreased 1% compared to August of the previous year.

In August, the turnover of enterprises engaging in the retail sales of automotive fuels also turned to fall and decreased 2% compared to same month of the previous year. The turnover decrease of these enterprises was partly influenced by the high reference base of August 2015 and deceleration in the price decrease of automotive fuel.

Compared to the previous month, in August, the turnover of retail trade enterprises decreased 1%. According to the seasonally and working-day adjusted data, the growth was also 1%. In the eight months of 2016 (January–August), the turnover in retail trade enterprises increased 5% compared to the corresponding period of the previous year.Diagram: Turnover volume index of retail trade enterprises and its trend

In 2016, to publish monthly statistics on retail trade, Statistics Estonia started to use only the VAT declaration data of the Estonian Tax and Customs Board and stopped data collection with the questionnaire “Turnover”. This will reduce the response burden of entrepreneurs and Statistics Estonia’s expenditure on data collection, and increase the use of administrative data. Due to the change in the data source, the monthly news release “Retail trade” will focus on the turnover of retail trade enterprises, instead of the retail sales of such enterprises. Statistics Estonia will continue publishing the retail sales indicator of retail trade enterprises on a quarterly and yearly basis. Statistics Estonia published the monthly summary in four working days.

Source: Statistics Estonia

Most of the crops have been harvested

According to Statistics Estonia, by 15 September, 91% of the sown area of cereals, 49% of the sown area of rape and turnip rape, and 50% of the area under potatoes had been harvested in Estonia.

By the same time last year, 78% of the sown area of cereals, 57% of the sown area of rape and turnip rape, and 54% of the area under potatoes had been harvested.

The overwintering conditions of winter crops were difficult this year, resulting in scarcity of winter crops and extensive re-sowing in the spring. The long droughts in the spring and the rain period in August also damaged crop yields. The share of winter crops that have been harvested totals 94%, while that of summer crops amounts to 89% of the sown area. Among winter crops, 95% of winter wheat and 91% of rye, among spring crops, 93% of barley, 86% of oats, and 87% of spring wheat has been harvested. Also, 89% of winter rape and winter turnip rape, and 28% of spring rape and spring turnip rape have been harvested.

According to preliminary data, in Estonia, in 2016 cereals were grown on 348,200 hectares, of which 91% has been harvested for grain. One hectare of the harvested area gave on average 3,091 kilograms of cereals, with the average yield per hectare being 3,541 kilograms for rye, 3,201 kilograms for wheat, 2,984 kilograms for barley and 2,647 kilograms for oats. Harvesting of cereals is continuing, a part of cereals sown for grain will be harvested for green fodder.

Rape and turnip rape were grown on 69,400 hectares. Most of winter rape and winter turnip rape has been harvested, while most of spring rape and spring turnip rape has not been harvested yet. One hectare of the harvested area gave on average 1,722 kilograms of rape seeds and turnip rape seeds.

Potatoes were grown on 5,600 hectares, of which 50% has been harvested. One hectare of the harvested area gave on average 22,393 kilograms of potatoes.

Source:  Statistics Estonia