Estonian Economy and Monetary Policy 3/2016

The Estonian Economy and Monetary Policy is an Eesti Pank review released four times a year that summarises the main recent events in the global and Estonian economies. Twice a year, in June and December, the review also contains the forecast for the Estonian economy for the current year and the next two calendar years. Here is a short summery of the report.

The economy of the European Union and that of the euro area have been moving in the direction of more certain growth in recent years, though growth in the second quarter was again slower than in previous quarters and uncertainty about the future was increased by the referendum in the United Kingdom in June, in which the voters chose to leave the European Union.

Revised data put growth in the Estonian economy at 0.8% in the second quarter, leaving it below its long-term potential.

Although the unit labour cost based real effective exchange rate of the euro has appreciated for Estonia, exporting companies consider their competitiveness in the European Union market and further afield to be stronger than in the beginning of the year

Having fallen for more than two years, prices rose in August and took consumer price inflation back into positive territory.

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.

The main development in commodities markets in the second quarter was the drop in the oil price. It remains higher than it was at the end of last year though.

The euro area economy grew in the second quarter by 0.3% and by 1.6% over the year.

Increasing employment and low energy prices boosted purchasing power and so private consumption, which was again the main factor driving economic growth in the first quarter.

The contribution of investment to economic growth remained positive in the first half of this year, but growth in investment slowed in the second quarter.

Inflation remained close to zero in the euro area in the first half of the year.

Read more from Bank of Estonia website

Taxes raised the price level in September

  • Inflation is low in Estonia, but still amongst the highest in the euro area
  • Without tax rises, prices would have remained at close to the same level as last year
  • Inflation will rise further in the coming months

The rate of increase in consumer price inflation (CPI) in Estonia climbed in September to 1% from 0.3% a month ago. Prices in Estonia were 0.2% higher than in August. The harmonised index of consumer prices (HICP), which also includes purchases made in Estonia by tourists 1, rose by 1.1% in August according to the latest available statistics, this being notably higher than the euro area average and the second highest behind only Belgium. The average inflation rate in the euro area has ranged between 0.2% and 0.4% in recent months. Prices continued to fall in eight euro area countries, or about half of them, in August.

Inflation rose in Estonia for three main reasons, which were rises in excise, state regulated prices, and the low reference base of a year ago for energy prices. Most of the growth in the consumer price index in September over the previous year came from higher excise rates for fuel, alcohol and tobacco, and the rise in those rates added 0.8 percentage point to inflation. The influence of the introduction of free services has also passed out of the calculation by now, having started in 2013 with the change to make public transport in Tallinn free of charge. The effect from the introduction of free higher education passed out this September after three years, having offset the higher inflation caused by tax rises until now. Service price inflation accelerated substantially in September 2014 from 0.2% to 1.9%.

The inflation figure is affected not only by the price changes that occur during the month, but also by the changes in the prices of goods and services 12 months earlier, which is known as the reference base effect. In the second half of last year prices for both oil and food commodities fell very quickly on global markets, but commodities have probably passed the bottom of their fall by now. The reference base effect for prices of motor fuels alone lifted inflation in Estonia by around 0.3 percentage point in August and September, and the effect will increase until the start of the new year. This means inflation will continue to rise even though the global oil price has stabilised in recent months.

1 The main difference between the HICP and the CPI is that the HICP also takes in purchases by tourists within the territory of the country. The HICP is also used as the reference value for price stability in the euro area, and allows a better comparison of changes in the price levels in different countries.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

The surplus on the current account in August was the largest this year

The flash estimate1 put the Estonian current account at 98 million euros in surplus in August 2016. The surplus on the goods and services account was 139 million euros, which was 36 million euros more than at the same time a year earlier. The growth of 12% in goods exports was faster than the 9% in imports, and this reduced the deficit on the goods account to 33 million euros. One factor that raised activity levels in the external economy was that there were more working days in August 2016 than there were in the previous August. Both exports and imports of services were up 8% and the surplus on the services account widened to 172 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 net outflow on the primary and secondary income accounts totalled 41 million euros, which was 5 million euros more than at the same time a year earlier.

The sum total of the current and capital accounts was 110 million euros in August. 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.

 

See a better graph here

Source: Bank of Estonia / Eesti Pank Statistics Department