Construction volumes increased in 2Q

According to Statistics Estonia, in the 2nd quarter of 2017 compared to the same quarter of the previous year, the total production of Estonian construction enterprises in Estonia and foreign countries increased 18%. Taking into account only the Estonian construction market, the construction volumes increased 25%.

In the 2nd quarter of 2017, the production value of construction enterprises amounted to 627 million euros, of which the production value of building construction was 391 million euros and the production value of civil engineering was 236 million euros. Compared to the 2nd quarter of 2016, the volume of building construction increased 9% and the volume of civil engineering by more than a third.

Domestic construction market was affected the most by civil engineering, which resumed growth at the beginning of this year. Building construction also continued to grow. Compared to the same period of the previous year, construction volumes increased in new building construction as well as in repair and reconstruction work.

The construction volume of Estonian construction enterprises in foreign countries decreased nearly a half compared to the 2nd quarter of 2016, mainly on account of smaller volume of building construction. Construction volumes in foreign countries accounted for 6% of the total volume of construction in the 2nd quarter of 2017; the share in the same period a year ago was 12%.

According to the Register of Construction Works, in the 2nd quarter of 2017, the number of dwelling completions was 1, 422, which is 97 dwellings more than in the same period a year ago. Approximately a half of the completed dwellings were in blocks of flats situated in Tallinn.

There is still demand for new high-quality dwellings in a good location. In the 2nd quarter of 2017, building permits were granted for the construction of 2,066 dwellings, which is over a tenth more than in the 2nd quarter of 2016. The most popular type of building was a block of flats.

The number of completed non-residential buildings was 243 with a useful floor area of 216,000 square metres – these were primarily new storage and industrial premises. Compared to the 2nd quarter of 2016, both useful floor area and volume of completed non-residential buildings increased.

Construction volume index and its trend, 1st quarter 2003 – 2nd quarter 2017

The statistics are based on the questionnaire “Economic activity, quarter”, the submission date of which was 21 July 2017. Statistics Estonia published the quarterly summary in 26 working days. For the statistical activity “Financial statistics of enterprises (quarterly)”, the main representative of public interest is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia

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The profit of the business sector increased in 2Q

According to Statistics Estonia, in the 2nd quarter of 2017, the total profit of the business sector was 827 million euros, which was 22% more than in the same period the year before.

Compared to the 2nd quarter of 2016, total profit increased in most economic activities. The biggest contribution to the total profit of the business sector was made by transportation and storage, and manufacturing enterprises. The growth in the sector’s profit was negatively affected mainly by real estate and information and communication enterprises.

In the 2nd quarter of 2017, enterprises sold goods and services for 14.0 billion euros, which was 10% more than in the same period of the previous year. The turnover of trade enterprises, which have the biggest share in the total turnover of the business sector, increased 9%, mainly due to an increase in the turnover of wholesale trade. The growth was supported also by retail and motor trade. The turnover of manufacturing enterprises increased 4% year over year.

Compared to the same period a year before, the total expenditure of enterprises increased 10%. Personnel expenses also increased 10%. The number of persons employed increased 4% and the number of hours worked 2%. Labour productivity of the business sector on the basis of value added amounted to an average of 5,890 euros in a quarter per person employed, i.e. 9% more than in the 2nd quarter of 2016.

The investments of enterprises resumed growth at the beginning of this year. In the 2nd quarter of 2017, enterprises invested 636 million euros, which was 27% more than in the same period the year before. The investments were made mostly in machinery and equipment, transport equipment and buildings. The main investors were transportation and storage, trade, and manufacturing enterprises, accounting for more than a half of the total investments of all enterprises. Compared to the 2nd quarter of 2016, all investments increased, with the biggest increase registered in investments in transport equipment.

Total profit of the business sector, 1st quarter 2010 – 2nd quarter 2017

The statistics are based on the questionnaire “Economic activity, quarter”, the submission date of which was 21 July 2017. Statistics Estonia published the quarterly summary in 27 working days. For the statistical activity “Financial statistics of enterprises (quarterly)”, the main representative of public interest is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia

Tight labour market lifts Estonian wages

• Wage growth will remain relatively high as labour demand increases more than supply.
• Nevertheless, the gap between wage and productivity growth rates will narrow this year.

The growth of the average gross wage accelerated in the second quarter (+6.8%, over the year), partly due to a base effect. According to our estimates, economic growth remained fast and the number of employed decreased in the second quarter, so the gap between the growth rates of wages and productivity continued to narrow.

Higher sales help companies cope with growing labour costs. Enterprises’ sales increased by 10% and profits grew by 22%, over the year, in the second quarter. Profits rose in most economic activities.

The rapid growth in the average wage is supported by a lack of suitable labour and a 9.3-percent increase in the minimum wage. The labour force participation rate was the highest in 20 years in the second quarter. The number of vacancies reached the highest in 8 years in the first quarter. The lack of suitable labour is the most important factor restricting business for a quarter of manufacturing and service companies and a half of construction companies, according to a survey by the Estonian Institute of Economic Research. Nevertheless, the growth of the average gross wage in the construction sector remained around the average in the whole economy in the first half of the year.

Average wages rose in most sectors. Wage growth was faster in the energy sector where wages grew modestly in the past due to a substantial decline in energy prices. The shortage of labour pushed up wages in IT. Average wages remained unchanged in the real estate sector and grew only slightly in the primary sector. In agriculture and real estate, profits have been smaller than in the past and the rate of job vacancies lower than the average in the total economy.

In 2017, the purchasing power of employees is expected to grow slower than during previous years as inflation accelerates. The real growth of the average net wage rose by 3.7% in the first quarter of this year. This will limit households’ consumption. Retail sales volumes grew by only 2.3% in the first half of the year.

In 2018, wage-earners’ labour income will jump up again, due to a substantial increase in their nontaxable income. This change in taxes could also lower their wage expectations for next year. Wage growth will remain relatively high as labour demand increases more than labour supply. Labour productivity is expected to improve and the gap between wage and productivity growth rates to narrow in 2017-2018.

Source: Swedbank

Economic growth in 2Q was the fastest of the last 6 years

Swedbank expected continued robust GDP growth in the second quarter, but 5.7% yoy (1.3% qoq swda) was above expectations. As inflation has picked up, GDP nominal growth accelerated to 10.2% yoy.

Statistics Estonia revised up GDP levels and growth rates of the last four years (2013-2016), whereas GDP growth in 2016 was revised to 2.1% yoy (from 1.6%).

Productivity growth has improved considerably 

Fast economic growth, whereas the number of employed and worked hours hasn’t changed substantially, has accelerated growth of labour productivity. At the same time, increase of labour costs in business sector has stabilised. This combination has enabled enterprises to raise their profits (up by 20% yoy in 1H) and improved their ability to invest.

Business and public sector investment growth is very robust 

Gross fixed capital formation increased 18% in real terms, whereas non-financial sector invested 21% and government sector even 47% more than a year ago. Government sector increased its investments primarily in buildings and structures, followed by transport equipment. This has contributed strongly to the growth in construction sector, which contributed the most to the GDP growth in 2Q. We expect that government sector will use gradually more EU funds for its investments and that the contribution of its gross fixed capital formation to the economic activity will remain robust at least in 2017-2018. Industrial sector confidence has rised to the highest level of the last 6 years and capacity utilisation is already above its long-term average – therefore we expect that improved outlook for demand brings about the need to invest more.

Mobile equipment behind the deceleration of export growth 

Despite strong foreign demand, export growth decelerated to 1% yoy in real terms, whereas export of goods decreased even slightly. Mobile equipment was primarily behind it. Weak result in export of goods limited the growth of manufacturing sector’s value added. We expect that the decrease in export of mobile equipment will continue at least in the coming months and will have strongly negative impact on Estonia’s export of goods’ total picture (the share of mobile equipment is ca 10% of total export of goods). However, export orders of other products are increasing and enterprises have become even more optimistic about export outlook of their production.

Private consumption has slowed as expected

Private consumption increased 2% in real terms in 2Q, but has decelerated to only 1.5% in 1H (4.3% in 2016). The major contribution comes from less consumption of alcoholic beverages and tobacco, which has been going on for a longer time. We expect that private consumption slows this year, despite better consumer confidence as real growth of net wages decelerates. In 2018, wage-earners’ labour income will jump again, due to a substantial increase in their nontaxable income. This is expected to accelerate the growth of private consumption again.

Estonian economic outlook is good 

Improved foreign demand will contribute to the economic growth during the next few years and investment growth is expected to remain strong. After a slowdown this year, growth of private consumption is expected to accelerate again next year. As GDP has increased already 5.2% in real terms in 1H this year, we are considering to revise up our GDP forecast for 2017 (recently published 3.5%).

Source: Swedbank