Estonian inflation 3 pct in the first half of the year

Inflation accelerated to around 3% in the first half of the year in Estonia. The contribution of food and non-alcoholic beverages increased substantially in recent months. Food and non-alcoholic beverages amount to a quarter of household expenditure, on average. In June, the prices of food and non-alcoholic beverages jumped by 6.6% as dairy products, fruits and confectionery became more expensive. Higher excise taxes pushed up the prices of alcohol and tobacco.

At the same time, the contribution of energy prices has declined in recent months. In June, motor fuels were 8.5% more expensive than last year. Although the average oil price in euros was 5% cheaper than in June last year, excise taxes on fuels have increased.

The purchasing power of wage earners will grow much less this year than in the past. In 2017, the growth of the average wage in real terms is expected to slow to around 3% (the 2013-2016 average was 6.4% per year), as nominal growth of wages will be somewhat slower and prices will rise (by around 3% in 2017). The real growth of the average net wage rose by only 2.6% in the first quarter of this year. This, in turn, will limit households’ consumption. The annual growth of retail trade volumes decelerated to 1.8% during the first five months of 2017. Economic sentiment among consumers remains very strong, however. The financial situation of households is perceived as the strongest in 20 years, for example.

Source: Swedbank

The size of the economy exceeded its potential

  • Growth accelerated in the first quarter in many countries
  • GDP growth was boosted by a recovery in output in the oil shale sector
  • Investments increased substantially

The Estonian economy grew by 4.4% over the year in the first quarter, and by 0.8% over the quarter. The size of the economy exceeded its potential output volume rather than remaining below it. This indicates that companies are using their production capacity more than usually, and it is hard to find the new employees needed for activities to expand. Further growth in the economy requires increased investment and productivity growth. The danger has increased though that the balance of the economy may worsen.

Growth accelerated in the first quarter of the year in many countries, including Estonia’s neighbours. The economies in Latvia, Lithuania and Finland grew by some 1.5% in the quarter. Quarterly growth in Estonia was a little lower, as it had accelerated in the fourth quarter of last year because of the stocking up of goods subject to excise. This meant that the contribution of net product taxes to GDP growth was smaller in the first quarter. Without the negative effect of net product taxes, the Estonian economy would have grown by 4.8%.

One reason for the faster growth in the economy was that oil-producing states have exited their recession, meaning that demand stopped falling in those countries. One country this applies to is Russia. The higher oil price is reflected in the Estonian economy primarily by the oil shale sector, and mining and energy made a large contribution to economic growth in the first quarter. More detailed data show that the financial results for oil shale oil producers were notably better than a year earlier. Equally though, the rise in the oil price has given a lift to inflation, restraining growth in private consumption. Private consumption at adjusted prices was only 0.6% more in the first quarter than a year previously.

The demand component of GDP that saw the biggest growth in the first quarter was investment, which was up 16.5%. This was also reflected by indicators for the construction sector, which have strengthened steadily since the start of the year. A recovery in investment is needed to shore up the supply side of the economy. Private sector investment has declined in recent years as corporate profits have shrunk, and this has reduced the potential for growth in the economy. This means it is now not possible for the Estonian economy to attain the levels of growth seen before the crisis, and the problem of imbalance in the economy may already arise at lower GDP growth rates.

The danger of increased imbalance is indicated by estimates that companies give of labour shortages, and also by the rapid increase in the use of production capacity. In recent years, some of those indicators have been above the average of the business cycle, and some have been below, but in the past few months these statistics have pointed to the economy outstripping its potential.

In such circumstances the government needs to be careful about stimulating the economy. As there are few available resources in the economy, an additional stimulation could lead to higher prices, which would make it harder for companies to invest. Widening a positive output gap through the budget would increase imbalance and so amplify the economic cycle, possibly ending in the economy crashing. Furthermore, it is wise to build up buffers in good times against possible rainy times in the future.

Survey data from companies looking to the months ahead indicate somewhat slower growth in the industrial sector, though expectations for output are still strong and show no sign of falling. Estimates of orders for the construction sector, which is focused on the domestic market, were above the average of the first quarter in April and May.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Inflation picked up a little in May

  • The immediate impact of the higher oil price on consumer prices has eased
  • Faster GDP growth will encourage inflation this year in Estonia and in the other countries of the euro area
  • Inflation will remain high until the end of the year

The rise in the consumer price index accelerated in the figures from Statistics Estonia to 3.3% in May 2017. Energy prices were up 5.3% over the year, and food prices, including alcohol and tobacco, were up 6.2%. Core inflation slowed to 1.2% though.

The structure of inflation has changed somewhat in recent months as energy prices are not rising as fast, but the broad-based inflation for food products continued in May. Estonia is something of an exception among euro area countries for the rapid rise in prices of food products. Inflation in May also saw some individual large changes in services prices, with prices for accommodation services standing 11% higher than they were a year earlier, possibly because of the Estonian Presidency of the European Union. Among residential services it was rent and waste disposal that drove inflation, but this was offset by cheaper communications services.

The immediate impact on consumer prices of the rise in the oil price that started in early 2016 has now eased. In January the global oil price was still 80% higher than it had been a year earlier, but by the end of May the difference over the year had dropped almost to zero. Prices of motor fuels were up 11% in May in Estonia, some 5 percentage points of which was due to the rise in excise on fuel in February. The indirect consequence of the higher oil price is transmitted into a second wave of inflation in prices for natural gas and heating energy. The prices of food and industrial commodities have fallen moderately on the global market in recent months. Commodities prices are being pushed down by uncertain demand in Asian countries.

The Estonian economy has improved noticeably since the second half of last year, and that has boosted the rise in consumer prices. Corporate profits increased in the first quarter by more than labour costs did for the first time since 2014, and they were helped in this by rapidly growing domestic demand and a revival in external demand. Corporate revenues rose because of increased export volumes and higher export prices, while on the cost side, the growth in wages slowed. The improved economic circumstances allowed companies to increase their profit margins and that will lead core inflation to rise in the second half of the year.

Inflation in Estonia is likely to remain high until the end of this year, because of both demand-side and supply-side (or cost-side) inflation factors. The coming months will see additional inflation caused by a rise in excise on alcohol. The key to long-term developments in prices is the price of oil on the global market, because oil has been relatively cheap for several years now. Eesti Pank will publish a new inflation forecast on 14 June 2017.

Inflation in Estonia and euro area

See better graph on Bank of Estonia website here

Author: Sulev Pert, Economist at Eesti Pank

Estonia’s GDP increased by 4.4 pct in 1Q 2017

According to Statistics Estonia, the gross domestic product (GDP) of Estonia increased 4.4% in the 1st quarter of 2017 compared to the 1st quarter of the previous year.

In the 1st quarter, the GDP at current prices was 5.2 billion euros. The seasonally and working-day adjusted GDP grew by 0.8% compared to the 4th quarter of 2016 and by 4.0% compared to the 1st quarter of 2016.

In the 1st quarter of 2017, the GDP was driven the most by manufacturing. The main contributors to the growth of manufacturing were the increased manufacture of fabricated metal products, motor vehicles, and food products and beverages. Also trade and construction activities contributed significantly to the economic growth. In the 1st quarter, the growth in trade was encouraged by wholesale trade.

Although net taxes on products increased at currents prices, the GDP growth was slowed down by the net taxes on products at real prices. The VAT receipts increased but excise tax receipts declined compared to the same period of the previous year.

The GDP grew faster than the number of persons employed, while the growth rate remained below the change in the number of hours worked. The number of persons employed increased by 2.2% and the number of hours worked by 4.4% (productivity has been calculated on the basis of seasonally and working-day adjusted figures). Therefore, labour productivity per employee increased 1.8% but decreased 0.4% per hour worked. In the 1st quarter of 2017, unit labour costs increased 2.7% compared to the same quarter of the previous year, indicating that compensation per employee has grown faster than productivity.

The real exports of goods and services increased for the fifth quarter in a row, being affected the most by an increase in the exports of transport equipment, mineral products (incl. petrol, diesel, fuel oils, gas) and products of wood.

The imports of goods and services increased, which was mainly due to the growth in the imports of transport equipment and basic metals. Exports of goods and services continued to be higher than imports. Net export (i.e. the difference between export and import) was positive in the 1st quarter of 2017, amounting to 2.3% of the GDP.

Estonia’s economy was positively influenced by domestic demand, which increased 3.6% at real prices, mainly due to a surge in investments. Also, final consumption expenditures grew.

The gross fixed capital formation increased 16.5% at real prices, mainly due to increased investments in transport equipment and machinery and equipment by non-financial enterprises. Also, investments in buildings and structures by the government and the non-financial enterprises sectors increased substantially.

The growth in household final consumption expenditures slowed down. In the 1st quarter of 2017, the household final consumption expenditures grew 0.6% compared to the 1st quarter of 2016.

Although domestic demand grew slower than the GDP, the final consumption expenditures and gross capital formation together were larger than the GDP.Contribution to the GDP growth, 1st quarter 2017

On 31 August 2017, Statistics Estonia will release the regular revision for 2013–2016 based on supply and use tables and annual business reports. The updated data for the 1st quarter of 2017 will be published on the same date.

Source: Statistics Estonia

GDP growth in Estonia – the fastest in 5 years

  • Accelerated export growth and robust recovery of investments contributed to the GDP growth
  • On the output side, manufacturing, construction and domestic trade contributed the most
  • We expect that GDP growth remains robust in 2017, but decelerates compared to the 1st quarter
  • We expect that the gap between the growth of labour costs and productivity will narrow

In the first quarter, the GDP growth accelerated to 4.4% in real terms and 7.6% in nominal terms. Seasonally and working days adjusted, the real growth was 4.0 yoy and 0.8% qoq. 

Acceleration of export growth (12%) and robust recovery of investments (17%) contributed the most to the GDP growth. At the same time, households’ consumption growth slowed to only 0.6%.

Export growth was supported by the improvement of import demand of Estonia’s trade partners, but considerable contribution to the growth came from the compensating record in exports due to the import of Tallink ship that was not recorded in Estonia.

Non-financial corporations’ and government investments contributed to the total investments growth. Government increased its investments primarily in building and structures, while corporations increased its investment to transport vehicles and machinery and equipment, the most. However, corporations’ investment growth was not broad-based, as around half of it came from wood industry.

We expect that private consumption growth decelerates in this year. However, such a rapid slowdown of the growth was unexpected. Households’ confidence, including the perception of their financial situation and intention to make major purchases during the next 12 months, has improved in Estonia. Therefore, the private consumption growth rate can possibly be somewhat underestimated.

On the output side, manufacturing, construction and domestic trade contributed the most to the GDP growth. Value added in manufacturing has grown together with the robust growth of exports, strong demand for housing and government sector investments in structures has supported construction sector and growth of domestic trade comes primarily from wholesale trade.

Although real growth of productivity per employed increased only by 2% (productivity per hour decreased), the growth has gradually recovered since the second half of 2016. We expect that the gap between the growth of labour costs and productivity will narrow in this and next year, which has positive effect on their price competitiveness. At the same time, the procyclical fiscal policy with the major increase in government investments can accelerate wage growth and worsen the situation.

We expect that GDP growth will remain robust during the rest of 2017, but will decelerate compared to the first quarter. In April we forecasted that GDP will grow 2.2% in 2017, but we will likely revise it up in our next Swedbank Economic Outlook.

Source: Swedbank

Inflation in Estonia this year is due to energy prices and rises in excise

  • Inflation passed 3% in April
  • Prices for commodities have shown signs of rising more slowly on world markets in recent months

Consumer price growth accelerated to 3.2% in April in the data from Statistics Estonia. Energy prices rose 6.8% over the year, food products including alcohol and tobacco were up 4.8%, and core inflation1 reached 1.4%.

Prices for commodities have shown some signs of rising more slowly on world markets in recent months. The price of a barrel of crude oil remained close to 53 dollars in March and April, but it started to fall at the end of April. This was because of increased oil production in the USA and weak demand in Asian countries. The oil producing countries of OPEC are considering a cut in their output of oil, and will probably not let prices fall very low. Data from the Food and Agriculture Organization (FAO) of the United Nations showed lower prices for food commodities on world markets for the second month in a row. Prices fell by quite a long way in March and April, down 4.3% in total. Current food prices will have a notable effect on inflation numbers next year, as consumer prices reflect changes with a time lag.

Inflation in Estonia this year is mainly being affected by energy prices and rises in excise. In July, alcohol excise will rise again, with excise on beer rising by 70%. Rises in excise will add around 0.2-0.3 percentage point to inflation. Core inflation, which is the rise in prices of services and manufactured goods, will continue to rise gradually in the second half of the year. Core inflation is affected by both import prices and faster economic growth.

The December economic forecast last year expected inflation to rise to close to 3% in 2017, and so far it has been in line with that forecast. Eesti Pank will publish a new inflation forecast in June.

1 Core inflation covers manufactured goods and services and excludes the volatile prices of energy and food, and it covers 57% of the consumer basket.

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

In March petrol was 18.5 pct more expensive than last year

According to Statistics Estonia, the change of the consumer price index in March 2017 was 0.3% compared to February 2017 and 2.8% compared to March of the previous year.

Compared to March 2016, goods were 3.2% and services 2.1% more expensive. Regulated prices of goods and services have risen by 5.9% and non-regulated prices by 2.0% compared to March of the previous year.

Compared to March 2016, the consumer price index was affected the most by the price increase of motor fuel. Compared to March of the previous year, diesel was 19% and petrol 18.5% more expensive. Almost an equal impact on the index was caused by the 4% increase in the prices of food and non-alcoholic beverages, of which 2/7 were contributed by milk, dairy products and eggs, 1/7 by sugar and confectionery, and another 1/7 by fish and fish products. Of food products, the biggest price increases were seen for potatoes (25%), fresh fish (24%) and sugar (20%).

In March, compared to February, the consumer price index was affected the most by a 1% increase in the prices of food and non-alcoholic beverages, of which more than half were contributed by 3.4% more expensive vegetables and 3.3% more expensive fruit. The end of winter sales of clothing and footwear and the 3.8% price decrease of electricity that arrived at homes also had a significant impact on the index.

Change of the consumer price index by commodity groups, March 2017
Commodity group March 2016 – March 2017, % February 2017 – March 2017, %
TOTAL 2.8 0.3
Food and non-alcoholic beverages 4.0 1.0
Alcoholic beverages and tobacco 6.3 0.8
Clothing and footwear 3.2 3.3
Housing 1.1 -0.9
Household goods 0.1 -0.4
Health 1.3 -0.6
Transport 6.6 0.0
Communications -2.2 -0.3
Recreation and culture -0.4 0.9
Education 2.8 0.0
Hotels, cafés and restaurants 4.7 0.4
Miscellaneous goods and services 1.3 -1.4

Source: Statistics Estonia