2014 budget turned a surplus

According to the Ministry of Finance, the state raked in 7.82 billion euros and spent 7.77 billion in 2014, which means the planned deficit turned into a surplus.

Revenues were up by 206 million euros compared to the previous years, while spending only grew by 36 million. The state expected 8.02 billion in revenues and 8.18 billion in spending.

The growth was led by tax takings, which were up by 8.2 percent, reaching 6.64 billion euros. The shortfall came in the non-tax revenues, with the state only collecting 83.6 percent of the budgeted non-tax revenue.

The state took in 330.8 million euros less in outside support compared to 2013 as many projects were pre-paid in 2013 and the EU’s budget period changed.

Financial profits more than doubled to 184.9 million euros, but still did not reach the level expected in the 2014 budget.

In the spending department, the state spent 100 percent what it promised on staff and running of the state apparatus, but made significant cuts in the investment department, spending 438.6 million euros, or only 64 percent, of what was initially planned. The total amount of investments decreased by 36.6 percent, mainly due to the EU switching over from the 2007-2013 budget period to the 2014-2020 period. Estonia did not fully benefit from the new period, while struggling to spend the balance from the previous budget period.

Source: ERR News via Estonian Review

Estonian economy grew 2.7 pct in 4Q

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 2.7% in the 4th quarter of 2014 compared to the 4th quarter of 2013. The annual GDP growth in 2014 was 1.8% compared to the previous year.

In the 4th quarter, the main contributor to the GDP was manufacturing, which is the largest economic activity in Estonia. The manufacture of electronics and wood accounted for the largest positive contribution to the increase in manufacturing.

In addition to manufacturing, the greatest contributors to the Estonian economy in the last quarter of 2014 were energy and trade activities. The growth in trade was mainly driven by retail trade due to strong domestic demand. External demand also grew in the 4th quarter. The real export of goods increased 8.0% in the 4th quarter of 2014. The growth in the import of goods accelerated to 6.6% in real terms.

In the 4th quarter, the Estonian economy was slowed down the most by the decrease in the value added in transport and construction.

According to preliminary estimates, the GDP growth was also significantly influenced by the increased receipts of value added tax, which is a part of net taxes on products. One reason was the changed declaring procedure for value added tax implemented on 1 November 2014. Net taxes on products were also significantly influenced by the increased receipts of excise taxes.

In the 4th quarter of 2014, the seasonally and working-day adjusted GDP increased by 1.1% compared to the previous quarter and by 2.6% compared to the 4th quarter of 2013.Diagram: GDP, growth of the export and import of goods

The revised GDP estimates for the 4th quarter of 2014 will be published by Statistics Estonia on 11 March.

Source: Statistics Estonia

Final months of the year saw an acceleration in GDP growth

Estonia’s gross domestic product grew by 2.7 per cent in the fourth quarter of 2014 year-on-year, according to the flash estimate of Statistics Estonia. Similarly to the third quarter, private consumption and net exports in some industries aimed at foreign markets supported growth from the side of demand. Full-year GDP grew by 1.8 per cent, which is below the country’s growth potential.
Faster economic growth is still hindered by the weakness of industry and the lack of demand in construction which has deepened in the last two years. However, manufacturing made a positive contribution to economic growth in the fourth quarter. The electronics industry demonstrated rapid growth, but this was largely the result of weak figures in the previous year. The production of heating oil and timber also grew fast, but production volumes continued to decrease in a third of industries. The positive actual contribution of the energy sector was primarily a result of the decrease in prices. GDP growth was slowed by logistics and construction.
Private consumption helped buoy domestic demand, although the growth rates of both wages and retail sales both slowed somewhat in the fourth quarter. Households are increasingly positive about the potential for improvement in their own economic situation, although uncertainly about the economic development of Estonia is increasing due to alarming foreign news. The increase in the purchasing power of the population in the last two quarters of the year was supported by a significant decrease in the price of motor fuel and a small decrease in the price of food. Statistics about property transactions indicate that the rise in housing investments was very rapid at the end of the year.
Net taxes on products also contributed significantly to GDP in the fourth quarter. This is related to the rapid increase in VAT receipts due to companies’ obligation to declare invoices of at least 1000 euros to the Tax and Customs Board, introduced in November 2014. This basically means that the black economy component of the economy has been reduced and the share of legal activities in GDP has increased. This rise should continue and improve tax receipts without increasing tax rates.
Source: Estonian Ministry of Finance
Author: Madis Aben, analyst at the Fiscal Policy Department, Ministry of Finance 

The sharp fall in energy prices deepened deflation

Energy prices fell even further in January, with the result that the total price level in Estonia was 0.4% down on the previous month. Data from Statistics Estonia show that prices fell by 1.3% over the year, which is the largest fall in the past five years.

Global oil prices were around 25% lower in January than in December and some 55% lower than in the previous January. Prices for motor fuels fell by 20.7% over the year in Estonia as a result, bringing inflation down by 1.1 percentage points. While manufactured goods fell in price by 0.4%, inflation in prices for services rose to 1.4%. This rise was partly a consequence of prices for communications falling steadily more slowly since the start of 2014.

Prices have been falling for eight months, which benefits consumers, and this can be seen in growth of more than 6% in retail sales across the whole of the year. The rise in real wages has meant that household assessments of their financial situation have improved consistently and households are now less reticent about using loans to finance purchases than before. Falling prices have started to have an effect on inflation expectations among consumers, which turned negative in January for the first time since 2010. If these expectations remain low for a long time, consumers may start to delay purchases of durable goods, and this will in turn put a brake on growth in retail sales.

Initial estimates indicate that prices fell further in the euro area as a whole, with prices in January down 0.6% on the year, having been down 0.2% a month earlier. Prices also fell in the euro area mainly because of cheaper energy prices, but there was also slower growth in prices for services and manufactured goods. In order to slow the fall in prices and help it reach its inflation target, the European Central Bank recently announced a new asset purchase programme. Increasing economic activity in the euro area will also help inflation to accelerate: growth in retail sales and in job creation has been increasing recently, and corporate expectations for growth became more optimistic in January. The oil price rose appreciably in the first few days of February, and prices for future transactions indicate that it will rise further. A rise in the oil price would slow the fall in prices in the coming months in both the euro area and Estonia.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

Consumer prices down by 1.3 pct in January

• Deflation bigger than expected
• Cheaper motor fuels and food behind the drop in prices
• Inflation expectations are declining, but 53% of consumers still expect prices to go up in the future

In January, consumer prices decreased by 1.3% compared with the previous year and 0.4% compared with December. In January, prices were pushed down the most by cheaper motor fuels, which dropped by 20.7%, year-on-year, and 8.3%, month-on-month. In addition to transportation, the prices of food (mostly vegetables), housing and education declined.

Most of the consumers do not feel the decline in prices. Price expectations have decreased, but 53% of consumers still expect prices to grow and only 5% of respondents expect prices to decline during the next 12 months.

Prices, especially energy and food prices, will start to increase gradually during the second half of 2015. The price of crude oil is forecast to decline by around half in US dollars and by around one-third in euros in 2015, compared with 2014. However, the prices of motor fuels in Estonia are expected to decline much less, as taxes amount to half of the retail price of gasoline.

As Estonia’s economy is relatively energy intensive, most of the sectors’ competitiveness should improve. At the same time, a few sectors will lose out, i.e., the shale oil industry (around 2% of Estonia’s GDP).

Food prices are currently weak globally due to abundant supply and slower growth of demand in some leading importers, like China and Russia. Food prices are expected to increase in the second half of this year, when food demand will strengthen. The prices of imports will rise somewhat during the course of the year due to cheaper euro against the USD (-15%, year-on-year, in January).

Source: Swedbank

Cheapening oil accelerated the fall in CPI

According to Statistics Estonia, January witnessed a drop of the consumer price index (CPI) of 0.4 per cent as compared to December. Year-on-year, the fall in consumer prices accelerated to 1.3 per cent.
The continued fall in energy prices also accelerated the fall in consumer prices also in the rest of the eurozone. According to the flash estimate, the eurozone CPI dropped by 0.6 per cent.
Similarly to earlier months, the principal factor that affected the price level continued to be the cheapening of oil. Oil prices reached their lowest level in six years in January. During December and January, oil prices dropped as much as 40 per cent, and this has caused a fall in consumer prices in most European countries. The fast decline of oil prices is caused by record oil production in the United States, the decision by OPEC not to cut production, and a slower-than-expected growth in the consumption of oil products.
The exchange rate of the euro against the US dollar slid by as much as 6 per cent in January, dampening the fall in fuel prices somewhat. Nevertheless, the fall in fuel prices accelerated in Estonia to nearly 20 per cent in January. This constituted the lion’s share of the decline in the consumer price index (-1.1 percentage points of the total -1.3 per cent). Other energy products that also dropped in price in January included gas and electricity. While gas prices dropped due to the cheapening of oil, average electricity prices dropped due to the imports of cheaper electricity from the Nordic countries into Estonia.
As global food prices have dropped, food in Estonia is, on average, nearly 2 per cent cheaper than a year ago. The fall in prices is broad-based, with the largest part coming from the prices of vegetables. The rise in alcohol prices is due to the end of discounts as well as the rise of the excise duty rate at the beginning of the year. Due to stocks accumulated at the end of last year and sold in the first months of the year the increased rate of excise duty has yet to show its full effect on prices.
Consumer prices will continue to fall in Estonia due to exceedingly low oil prices. The CPI is expected to rise again in the second half of the year.
Source: Kristjan Pungas, analyst at the Fiscal Policy Department, Ministry of Finance 

New Nordic Country – Reform Party’s idea for Estonia’s new vision

Estonia must become a New Nordic Country, ie a world leader in terms of personal and economic freedoms, a country with a Nordic standard of living and level of safety, while being socially and technologically more dynamic and flexible than the “old” Nordic countries, Prime Minister Taavi Roivas said at the Reform Party convention on Saturday.

“Our vision of Estonia – a New Nordic Country – is a state well protected, economically successful, ensuring equal opportunities, valuing the family and championing European values. New Nordic Country is the big narrative for Estonia – a better protected, richer and growing nation,” Roivas said.

“We have quite good prerequisites to make it – already now Estonia is in the absolute top globally in many areas,” Roivas said, naming good education levels of the population, good business climate and low public debt as prerequisites for economic growth.

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