The current account reflects a large trade deficit

  • The current account indicates more investment activity than earlier
  • The key economic indicators are distorted by large individual transactions
  • There were no major changes in the funding of the economy from abroad

The current account deficit in the first quarter was 35 million euros, or 0.6% of GDP, which is not unusual. The causes of the current account deficit in the first quarter were mainly seasonal. The foreign trade surplus for services is usually smaller at the start of the year as exports of travel and transport services are lower, and the net outflow[1] of income is the largest of the year because of the large payments made to the budget of the European Union. Exports of transport services did grow quite quickly in the first quarter of this year, but the deficit on the goods account was almost twice what it was a year earlier. Increasing growth in imports of goods is a typical sign of higher levels of activity in investment. Excluding the very large one-off import transactions in the transport sector at the start of last year, foreign trade statistics show that imports of capital goods were almost 8% larger in first quarter of this year than a year earlier. Recently published statistics for economic growth indicate a fall of 8% in investment in the first quarter, though they also reveal that that figure was severely impacted by one-off transactions, without which investment would have grown by around 3%. Though investment activity has increased of late, the general level of investment remains low in historical terms and in comparison with other European countries.

Investment in Estonia was somewhat larger than investment abroad from Estonia. The net inflow of investment was mainly due to the banking system and foreign aid from the European Union to the general government. Direct investment in Estonia fell for the second consecutive quarter, though the changes were quite small. Equity investment was down, while dividend payments by credit institutions meant that reinvested income in Estonia also fell, which is quite unusual. The reduction in equity was offset by the direct investment in debt, though not fully.

Source: Bank of Estonia

Author: Kristo Aab, Economist at Eesti Pank

The price level rose by almost one per cent in a month

  • Prices of energy and services rose by most over the month
  • The electricity bill for a household with average electricity consumption may be 4-8 euros higher in the winter months
  • Prices for services rose because of rapid growth in wages

Data from Statistics Estonia show the consumer basket was 4% higher in price in June than a year earlier. The price level was 0.9% higher than in May because prices rose for energy and services. Energy prices increased mainly because of higher oil prices on the world market, while services prices were up because of strong growth in wages.

Energy prices have been lifted in recent months by higher prices for solid fuels and motor fuels. On top of this came a rise of 9% in the price of electricity in June, which raised the price of the consumer basket by 0.3%. Futures prices for electricity on the Nordic electricity exchanges indicate that the current high price of €50/MWh will be maintained until the start of next year. The electricity bill for a household with average electricity consumption could be 4-8 euros higher in the winter months in consequence. While the price of electricity is higher in the consumer basket, prices of other groups of goods will also rise as production costs are pushed up by the electricity price. This indirect effect will raise the price level only a little, as electricity is only a small part of the expenditures of businesses. Markets expect that the electricity price on the exchanges will fall in spring next year towards its average of the past decade of €35/MWh.

Inflation is expected to slow in Estonia in the second half of the year as the high reference base effect will be felt in inflation. The price level will rise for the year as a whole by around 3%.

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

Estonian current account at 58 mEUR in surplus in May

The flash estimate1 put the Estonian current account at 58 million euros in surplus in May 2018.

The surplus on the goods and services account increased from a year earlier to 96 million euros. Goods exports and imports were both up by 9%, meaning the deficit on the goods account was 8 million euros more than in May 2017 at 114 million euros. Services exports were up by 8% and imports by 2%, meaning the surplus on the goods account widened by 37 million euros to 210 million euros. The net outflow of investment income and current transfers, or the primary and secondary income accounts, was the same as a year earlier at 40 million euros.

The current and capital accounts were in surplus by a total of 84 million euros, meaning that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more financial assets abroad than it received from there.

1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much of the data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly. For more on the principles used in compiling the flash estimate, see

Source: Bank of Estonia

Low level of investment in businesses

  • Annual growth in corporate debt increased to 3.2%
  • Household savings continue to grow faster than their loans
  • Private sector debt growth accelerated, but remained slower than nominal GDP growth

The growth in the debt of Estonian companies remains moderate. Although the annual growth of total corporate debt accelerated to 3.2% in the first quarter after a three-year standstill, it was still modest considering the favourable economic situation. This is due to the low level of investment that holds back a more prominent increase of long-term debt liabilities first and foremost. At the same time, the decrease in short-term loans taken from foreign associated undertakings has stopped, and if economic activity stays the same, it can be assumed that the growth in total corporate debt may pick up somewhat going forward.

Households are still active borrowers. Demand for loans remained high in the first months of the year, backed by quick income growth, high confidence levels and low interest rates. Households’ debt liabilities increased by about 7% compared to last year, and most of the growth came from housing loans given out by banks, as well as car leases. Loans from other loan providers grew much more slowly than the consumer loans taken out from banks.

The income and savings of households have increased faster than their debt liabilities, which somewhat helps to alleviate the risks associated with fast loan growth. In the first quarter, the outstanding debt liabilities of households were 12% larger than the total volume of their cash and deposits, but the spread has narrowed considerably over the past years. However, the stock of households’ other liquid financial assets (bonds, shares listed on the stock exchange, and investment fund units) remains relatively modest.

The annual growth of the Estonian private sector (companies and households) debt accelerated to 4.3%. Loan growth was therefore smaller than nominal GDP growth. The private sector indebtedness or the debt-to-GDP ratio stood at 118%, the same as the end of last year.

Read more on Bank of Estonia website

Author: Jana Kask, Economist at Eesti Pank

Bank profits decreased somewhat in the second quarter

  • Borrowing by households remained large in June
  • The average interest rate for new housing loans has risen slowly
  • Household and corporate deposits continued to grow strongly

Households continued to borrow actively in June, and the demand for car leases remained especially large. The value of new car leases signed in June was 30% more than a year earlier, and the annual growth of the car lease portfolio reached 20%. The annual growth of other consumer loans was also rapid at almost 9%. The fast increase of consumer loans reflects both the current favourable economic environment and increased supply. Consumer loans and leases make up around one fifth of the total loan and leasing portfolio of households.

The stock of housing loans grew in June at around the same rate as it had in previous months. 117 million euros’ worth of new housing loans were taken out, which was 12% more than a year earlier. The growth stems from higher-priced real estate and larger average loan sums, but also from the fact that more transactions were made. The annual growth of the housing loan portfolio has been close to 7% over the past six months.

Corporate loan growth has been more moderate than household loan growth due to low investment activity. However, companies’ loans from banks operating in Estonia did increase in the second quarter. The stock of new loans grew in all major sectors compared to the year before, and the increase of the loan portfolio has been relatively homogeneous.[1]

The average interest rate for new housing loans has risen somewhat since the start of the year, reaching 2.5% in June. Despite being the highest level of the past four years, it can still be considered low long-term. The average interest rate of new corporate loans largely depends on the kind of companies that sign loan contracts over a specific period and the kind of projects they undertake, and it can therefore fluctuate quite a lot. In July, it was down to 2%.

The deposits of Estonian households and companies grew rapidly alongside active borrowing. The stock of deposits held by banks increased by almost 12% or 13.8 million euros in a year.

The net profit of the banking sector fell a bit in the second quarter of 2018. The net profit of the quarter was 82.5 million euros in total, which was 3% less than in the previous year. At the same time, net interest income rose by almost 3% year-on-year, mostly thanks to smaller interest expenses. Service fee income increased, as did wage costs and administrative costs. One-off factors boosting profit were the reversal of previous provisions, and dividends from subsidiaries. As a result of the new income tax rules that took effect at the start of the year, banks calculated around 8 million euros for income tax expenses in the second quarter.


Read more on Bank of Estonia website
Author: Taavi Raudsaar, Economist at Eesti Pank

The average card purchase made in Estonia is 15.5 euros

In the second quarter of 2018, an average Estonian aged 15 or over made 24 card payments a month, 22 of which were made in Estonia and two abroad. Finland accounted for a quarter of all card payments made abroad with Latvia coming second in this statistics. On average, every second Estonian resident made one card payment in Finland per month and every fifth resident did so in Latvia. All in all, Estonians made card purchases in 185 countries.

Latvian figures are particularly noteworthy in the card payment statistics –  compared to three years ago, the number of card payments made by Estonians in Latvia has increased nearly threefold and card spending has leapt by over four times.

While the average card purchase made in Estonia was 15.5 euros, the average value of card transactions abroad amounted to 25.6 euros. Latvia stands out again with an average purchase value of 30 euros, compared to 19 euros in Finland, 21 euros in Russia, 18 euros in Sweden and 12 euros in the Netherlands.

An average consumer spent 396 euros on card purchases per month, of which 348 euros was spent in Estonia and 48 euros abroad. Most of the card payments were made at points of sale. An average Estonian used a bank card for one online purchase a month.

Payment orders were used on average for just over seven transactions a month. Bank transfers via Internet banking were used 3.5 times a month, standing orders for e-invoices and bank link payments 1.5 times each. Other modes of payment (standing orders, payment orders on paper) were used less frequently. In most cases, the payee’s account was also in Estonia, transfers to clients of foreign credit institutions accounted for less than one per cent of all payment orders.

Read more on Bank of Estonia website
Author: Tiina Soosalu, Payment and Settlement Systems