Production increased in the energy sector, mining and quarrying

According to Statistics Estonia, in March 2017, the production of industrial enterprises increased 15% compared to March of the previous year. Production increased in the energy sector, mining and quarrying as well as manufacturing.

In March, manufacturing production was 10% higher compared to the corresponding month of 2016. Production growth was broad-based – in March, production surpassed the volume of March 2016 in more than two-thirds of the branches of industry. The growth in production was mostly due to an increase in the manufacture of wood products, metal products and electrical equipment. Production increased also in the manufacture of food products, motor vehicles and building materials. Among the branches of industry with larger shares, production fell only in the manufacture of electronic products.

In March, 69% of the total production of manufacturing was sold to the external market. According to unadjusted data, the sales of manufacturing production for export increased 11% and sales to the domestic market rose 12% compared to March 2016.

In March 2017 compared to the previous month, the seasonally adjusted total industrial production increased 2%; production in manufacturing rose by 1%.

Compared to March 2016, the production of electricity increased 54% and the production of heat 1%.

Volume index of production in manufacturing and its trend, January 2008 – March 2017

Read more from Statistics Estonia

The turnover of retail trade enterprises increased 6 pct in March

According to Statistics Estonia, in March 2017, compared to March 2016, the turnover of retail trade enterprises increased 6% at constant prices. While in February the turnover increased 1% compared to the same month of the previous year, in March the growth accelerated.

In March 2017, the turnover of retail trade enterprises was 545.7 million euros.

The turnover growth of stores selling manufactured goods accelerated in March. While in February the turnover of these stores increased 3% compared to the same month of the previous year, in March the growth was 11%. The turnover increased in five and decreased in two economic activities. Turnover increased the most in stores selling via mail order or the Internet, with sales increasing 33% in a year. Turnover increased also in stores selling household goods and appliances, hardware and building materials (16% growth), in stores selling second-hand goods and in non-store retail sale (stalls, markets, direct sale) (15% growth), in non-specialised stores selling predominantly manufactured goods (e.g. department stores) (12% growth) and in other specialised stores, such as stores selling computers and their accessories, books, sports equipment, games and toys, etc. (12% growth). The turnover of stores selling pharmaceutical goods and cosmetics and in stores selling textiles, clothing and footwear decreased compared to March of the previous year.

The turnover of grocery stores, which showed a small fall in the previous months, resumed growth in March and increased 2% compared to March of the previous year.
The turnover of enterprises engaging in the retail sales of automotive fuel increased 4% compared to March of the previous year.

Compared to the previous month, in March, the turnover of retail trade enterprises increased 16%. According to the seasonally and working-day adjusted data, the growth was 2%. In the three months of 2017 (January–March), the turnover of retail trade enterprises increased 3% compared to the corresponding period of the previous year.Turnover volume index of retail trade enterprises and its trend, January 2007 – March 2017

The statistics are based on the VAT declaration data of the Estonian Tax and Customs Board. Statistics Estonia published the monthly summary in five working days. For the statistical activity “Economic indicators of trade enterprises”, the main representative of public interest is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia performs this statistical activity.

Source: Statistics Estonia

Immigration exceeded emigration for the second year in a row

According to the revised data of Statistics Estonia, 1,315,635 persons lived in Estonia on 1 January 2017, which is 309 persons less than at the same time a year earlier. The population figure decreased by 1,339 persons due to negative natural increase, but increased by 1,030 persons as a result of positive net migration.

In 2016, net migration was positive for the second year in a row – immigration exceeded emigration. 14,822 persons took up residence in Estonia and 13,792 persons left Estonia in 2016. As external migration is often left unregistered by the residents of Estonia, as of 2015, Statistics Estonia also takes into account unregistered migration in addition to registered migration and as a result, the migration flows since 2015 have been larger compared to previous years.

14,053 persons were born and 15,392 persons died in 2016. The number of births increased compared to the previous three years. The number of women in childbearing age (15–44-year-olds) has decreased in ten years by more than 36,000 women, but the number of women in active childbearing age (25–34-year-olds) has remained relatively stable and is beginning to decrease only now that the small generations of the 1990s are reaching that age. The fact that the number of births remains at the level of 2012 means that the number of children born per woman has increased. The number of deaths has been stable in the past seven years and has remained between 15,000 and 16,000.Change in population figure, 2007–2016

When looking at demographic processes by sex, it appears that in a year, the number of men in the population has increased by 830 persons and the number of women has decreased by 1,139 persons. In 2016, almost 700 more boys were born than girls and as the share of women in the older age groups is bigger, there are more deaths among women than among men. Net migration was positive for both sexes (immigration exceeded migration), but the number of men grew by almost 600 more persons than the number of women due to net migration.

With regard to counties, it appears that in 2016, the population number increased in Harju and Tartu counties, but decreased in all other counties. The biggest decline was recorded for Ida-Viru county.

Source: Statistics Estonia

Financial stability could be threatened by rising prices

Estonian economic growth in 2016 was slow, but it picked up in the second half of the year. Value added increased in most parts of the economy, including oil shale and energy, where it had earlier fallen. Signs of faster GDP growth were also apparent in the first quarter of 2017. Growth picked up a little in the sales revenue of companies in the fourth quarter of 2016 and the rise in labour costs slowed. The profitability of the corporate sector remains nonetheless low and wage pressures remain high. A further fall in profits could threaten the ability of companies to service their loans.

The recovery in economic growth is endangered by investment remaining at a low level. Investment by companies has declined constantly for four years. Investment activity depends on confidence about the future, which in turn is based on credibility in economic policy, including tax policy. Frequent changes in the tax system with short notice increase uncertainty. When the labour market is rather overheated and there have been no major obstacles to growth for companies focusing on the domestic market, additional spending funded by a government budget deficit would do more harm than good. The government should support economic growth by making the business environment as stable as possible.

The planned taxation of financial services could have negative side effects for financial stability in Estonia and could impede the financing of the economy. For this reason the possible impact of such a tax needs to be analysed carefully before it is introduced. If the tax is introduced it would be sensible to apply it not only to commercial banks but to a wider group of financial institutions in order to reduce market distortions having negative effects on financial stability. Given the free movement of services and capital around the European Union and the integration of the Estonian financial sector, an asset-based tax could also lead to a reduction of the liquidity and capital buffers in Estonia that are important for maintaining financial stability.

Prices in the Estonian real estate market started to rise faster in the last quarter of 2016, but the growth rate is still in line with the growth of income. More transactions were made in the real estate market than a year earlier and the average price of transactions rose rapidly in the fourth quarter of 2016 and at the start of 2017. Real estate developers brought more new residential property to the market than before though, so a larger share of transactions were for new and more expensive residential space, which affected the average price of transactions. If the structure of the transactions had been the same as a year earlier in terms of the location and quality of the apartments, the average transaction price would have increased by an estimated 5-6% in the second half of 2016.

The rapid growth in the loan portfolio of the banks operating in Estonia continued in the first months of 2017. Corporate loans increased in most sectors. Although the growth was fastest in the stock of loans to the retail sector, the biggest contribution to the growth in the corporate loan portfolio came from the real estate and construction sector. Loans have mainly been made to the real estate and construction sector for development of commercial real estate, meaning that the credit risk faced by the banks is related more and more to the development of the commercial real estate market. However, the profitability of the banks remained at a similar level to that of the previous year and the capitalisation remained high.

Lending standards and conditions are currently appropriate, and Eesti Pank does not consider it necessary to change the requirements for issuing housing loans. At a time of rapid growth in wages and real estate prices and low interest rates, there is a danger that both lenders and borrowers may overestimate the ability of borrowers to pay their loans in the future, and may let their debt burden rise to unreasonable levels. Although there is no urgent need to change the housing loan requirements for the banks in the current credit environment, Eesti Pank monitors changes in leverage and the ability to repay loans in the housing market, and is ready to make the requirements stricter if necessary.

Eesti Pank will keep the countercyclical buffer rate at 0%. The debt burden of the non-financial sector as shown by the credit-to-GDP ratio has not changed in recent years and is predicted by the Eesti Pank December forecast to remain at around the same level in the years ahead. However, low interest rates and fast wage rises contain the risk that trading activity and prices could increase further in the real estate market, leading to growth in debt levels. The corporate debt burden could also start to grow again if investment and confidence increase. For this reason Eesti Pank monitors the indicators that could show a possible build-up of risks and can, if necessary, raise the countercyclical buffer rate above 0%.

There was no major reduction in the risks related to the parent groups of the banks operating in Estonia that arise from the high levels of household indebtedness and rising real estate prices in Sweden. Real estate prices in Sweden rose a little more slowly in the first half of 2016 than before, but the rate started to pick up again at the end of the year. Population growth, the movement to towns and low interest rates are keeping demand for housing loans strong. The financial position of the parents of the banks operating in Estonia remains vulnerable with growth in housing loans rapid, as a major part of the funding of the parent banks comes from financial markets. Almost half of this is in the form of covered bonds, which are used to fund housing loans.

The biggest risks to financial stability in the European Union are of a possible fall in international bond markets. Market interest rates are at historically low levels and could rise if the outlook for economic growth improves. A rise in market interest rates and a fall in the value of bond markets would have a negative effect in Estonia primarily through the financial results of pension funds and insurance companies.

 

Source: Bank of Estonia

Private and government sector debt burdens unchanged

Growth in corporate debt has been restrained by the modest level of investment and the reduction in lending between companies.There was a rapid increase of 8% in 2016 in the stock of loans and leases taken from banks operating in Estonia. Borrowing from abroad by companies remained at about the same level throughout the whole year but lending between companies and borrowing from holding companies contracted substantially. This meant that corporate debt liabilities increased by only 0.2% during the whole of 2016.

The loan liabilities of households increased last year at the same rate as incomes, but a little more slowly than savings. Rising wages, low unemployment and low interest rates on loans all encouraged increased demand for loans from households, and their loan liabilities increased by 6%. Both housing and consumption loans from banks and loans from other lenders increased in volume. The rapid growth in incomes and the high savings rate helped the cash and deposits of households to increase by more than 8% over the year. There was also growth of more than a quarter over the year in the value of tradeable securities held by households. Despite the rapid growth, the financial savings of Estonian households are still below the European Union average in relation to incomes.

The indebtedness of households and companies in the Estonian private sector did not change substantially in 2016, and was 127% at the end of the year, which is around the average level for the European Union. The indebtedness of Estonian companies and households is relatively large compared to that in countries with a similar income level. The indebtedness of the Estonian general government, which is still the smallest of any country in the European Union, declined very little last year and was 9.7% of GDP at the end of the year.

The Estonian economy was again a net lender to the rest of the world in the fourth quarter of last year and in the year overall. Since 2009, Estonian residents have put more funds abroad than they have taken in from abroad. This is because Estonian households and companies have started to save more and investment in the Estonian economy has declined. Increased saving and the position as a net lender have led to an improvement in the figures for the external debt and the international investment position, but low investment also restricts the future capacity for growth of the economy.

Source: Bank of Estonia (read more here)

Author: Taavi Raudsaar, Economist at Eesti Pank

Growth accelerated in productivity

  • The alignment of growth in labour productivity and in wages improved in the second half of 2016 as growth accelerated in productivity and slowed a little in wages
  • Whether companies can improve their profitability as foreign demand recovers will depend on whether labour productivity grows further
  • People changed jobs more last year than they did the year before
  • Simultaneous increases in the number of vacancies and in unemployment indicate however that there is a worse match between labour and jobs

The economy perked up in the second half of 2016 and growth recovered in labour productivity. Employment declined at the same time, and so did wage growth a little, with the consequence that growth in labour costs slowed. This equally meant that the squeezing of corporate profit margins lessened. Whether companies can improve their profitability and overcome problems with inflated labour costs will depend on whether labour productivity grows further. Where companies have so far managed to preserve jobs and hold on to staff despite weak demand, improved demand will allow them to increase production and productivity without taking on additional labour costs. Productivity clearly depends on investment too, which has been reduced in recent years.

The rate of growth of the average wage slowed in the second half of 2016, though only a little. Wage growth was very different in different sectors of the economy, like it was in the first half of the year. Wages in oil shale and construction rose by less than the average wage, but those in the labour-intensive services sector rose faster than the average, though not as fast as in the first half of the year. The high expectations for employment in construction and in manufacturing companies revealed in sentiment surveys by the Estonian Institute of Economic Research suggest that wage growth may be pushed up in future as there is a shortage of suitable labour.

Labour shortages are illustrated by the notable increase in 2016 in the number of vacancies. The rise in the vacancy rate can partly be explained by increased movement between jobs as the number of separations initiated by the employee was 13% higher than a year earlier. Under normal circumstances a rise in the vacancy rate is accompanied by a fall in unemployment, but in the second half of 2016 the unemployment rate actually rose. There were more unemployed in Ida-Virumaa because employment was lower and in Harjumaa because of both lower employment and increased participation in the labour force. Simultaneous increases in the number of vacancies and in output indicate however that the match between labour and jobs may have deteriorated. The number of unemployed was shown by the labour force survey to have increased sharply in Ida-Virumaa, but a lot of the new jobs were created in Harjumaa.

Over the long term the labour supply is dictated by the number of people of working age and their degree of active participation in the labour market. Increased participation in the labour market will be supported in future by reforms to social insurance. The labour participation rate in Estonia is already one of the highest in Europe though, especially for the over-50s, and this will limit the effect of the reforms. The decline in the number of people of working age has slowed much more in recent years than had been forecast. Because immigration into Estonia will probably exceed emigration from Estonia in future, the amount of labour in the economy will shrink more slowly in future than was earlier forecast.

Source: Bank of Estonia
Author: Orsolya Soosaar, Economist at Eesti Pank

The profitability of the banks similar to last year in 1stQ

  • The portfolio of corporate loans and leases grew by a rapid 7% over the year
  • There was more activity in the housing loan market than a year earlier
  • The average interest rates on new loans rose

In the first quarter of 2017 the portfolio of loans and leases to Estonian companies and households continued to grow rapidly. The total volume of loans and leases was 6.5% larger in March than a year previously. The portfolio increased by 220 million euros during the quarter to 17.3 billion euros.

The total volume of loans and leases increased quickly, though a little more slowly than in the final quarter of 2016. The portfolio of loans and leases to companies was 7% larger in March than a year previously. Companies received 584 million euros in new long-term loans in the quarter, which is about 10% less than in the same quarter of last year.

Growth accelerated in the housing loan portfolio. The total volume of housing loans was 5.9% larger in March than a year earlier and there was more activity in the housing loan market in the first quarter than a year earlier. Both the number of loans and their average value rose. The portfolio of car leases to households was 14% larger over the year in March and the volume of overdrafts and credit card loans was 3% larger.

The average interest rates on new loans rose. The average interest rate on housing loans issued during the month climbed in both February and March, and the average interest rate in March was 2.3%. The average interest rate on loans to companies also rose in March. However, the margins on loans to companies are quite variable depending on the exact timing of the particular project.

The quality of the loan portfolio of the banking sector remained good at the beginning of 2017. The stock of loans overdue for more than 60 days shrank mainly because of a decline in the long-term overdue loans of industrial companies. At the end of March, 1% of the loan portfolio of the banking sector consisted of loans overdue for more than 60 days.

The deposits of companies and households again grew faster than the loan and lease portfolio. Total deposits increased by 11% over the year in March to 12 billion euros. Corporate deposits grew a little faster and were up 14% in March on a year earlier, while those of households were up 8.1%.

The profitability of the banks remained at a similar level to last year in the first quarter. Net profit of 89 million euros was earned in the quarter, which is equivalent to 1.5% as a ratio to total assets on an annualised basis. Increased interest income and a reduction in provisions contributed to profit, with interest income itself driven by growth in the loan portfolio and a rise in the interest margin on it. The fall in net service fee income and income tax expenses had a negative impact on profit.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank