Prices increased by 0.1 pct in 2016

Consumer price index increased by 0.1% in 2016. Higher excise taxes on alcohol, tobacco, and motor fuels contributed positively, while cheaper energy had the biggest negative impact on prices. The prices of alcoholic beverages and tobacco were around 6% higher than in 2015.

Heat energy were 9%, pipeline gas 20%, and motor fuels 4% cheaper than in 2015. Nevertheless, due to a gradual rise in oil prices since January 2016, and a hike in excise taxes in February 2016, the prices of motor fuels have started to rise. In December 2016, gasoline and diesel prices were already 16% higher than one year before.

In 2017, inflation in Estonia is expected to accelerate to around 3%, due to more expensive commodities, and new rounds of excise tax hikes on alcohol, tobacco, and fuels. In 2014-2016 average price level remained flat in Estonia, prices increased last time in 2013 (+2.8%).

Source: Swedbank

Standard and Poor’s affirms AA- rating on Estonia

The international ratings agency Standard and Poor’s has affirmed its AA- long-term foreign and local currency sovereign credit rating on the Republic of Estonia. The outlook of the rating is stable.

The short-term rating was affirmed at A-1+ with a stable outlook.

The S&P ratings are the highest granted to Estonia. Fitch and Moody’s rate Estonia at A+ and A1 respectively. A credit rating reflects the agency’s assessment on the government’s ability to honour debt obligations in the future.

S&P does not expect the recent change of government to undermine Estonia’s key credit strengths, including strong public finances and effective policymaking.

The agency expects prudent fiscal policy to remain in place following the change of government, and further expects the government to continue the focus on EU commitments, regional security, and energy supply diversification.

S&P understands that the new coalition will continue the ongoing government reform to consolidate local and regional governments by reducing the number of entities and increasing economic development focus and initiatives for the regions.

Economic growth in Estonia is expected by S&P to accelerate to 2.4 per cent in 2017 and to an average of 2.3% over 2016-2019. Growth in 2016 is estimated at 1.4 per cent.

For further information, see the press release by Standard and Poor’s (registration required).

Source: Estonian Ministry of Finance

Estonian GDP increased by 1.3 pct in the 3rd quarter

According to the second estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 1.3% in the 3rd quarter of 2016 compared to the 3rd quarter of the previous year. The biggest contribution to GDP growth was made in the economic activity of transportation, followed by trade and the energy sector.

In the 3rd quarter, the GDP at current prices was 5.2 billion euros. The seasonally and working-day adjusted GDP increased by 0.2% in the 3rd quarter compared to the 2nd quarter of 2016 and by 1.3% compared to the 3rd quarter of 2015.

According to second estimates, in the 3rd quarter of 2016, Estonian GDP growth was influenced the most by the value added generated in the economic activity of transportation. In addition, a significant contribution to GDP growth was made in trade and energy activities. Among trade activities, the value added generated in retail trade increased the most, and wholesale trade increased as well. Although the energy sector experienced a fall in the manufacture of gas, the production of the remaining types of energy rose.

In the 3rd quarter of 2016, GDP growth was inhibited the most by agriculture, forestry and fishing, construction, and real estate activities. Although the value added of real estate activities increased at current prices, an increase in prices in this economic activity resulted in a decrease in the value added at constant prices.

Similarly to the previous quarter, the value added of manufacturing (the biggest economic activity in the Estonian economy) had a positive impact on GDP. The manufacture of motor vehicles and electrical equipment had the greatest positive impact. The manufacture of electronic equipment, mineral products, and food products and beverages experienced the greatest fall.

The export of goods and services rose by 5.6% at real prices, mainly due to an increase in the export of electronic products and electrical equipment. The import of goods and services increased by 4.1% at real prices compared to the 3rd quarter of the previous year. The import of goods and services increased the most due to a growth in the import of motor vehicles and chemicals. In the 3rd quarter of 2016, net export amounted 6.9% of GDP, being the highest share in the last 20 quarters.

In the 3rd quarter of 2016, employment fell after having increased for the last 9 quarters, and the number of hours worked remained on the level of the previous year. Productivity of the total economy rose both per person employed and per hour worked. Compensation per employee grew faster than productivity and unit labour costs increased 5.3% compared to the 3rd quarter of the previous year.

Domestic demand fell. Although, at real prices, final consumption expenditures increased, inventories and gross fixed capital formation decreased. In the 3rd quarter of 2016, gross fixed capital formation fell by 8.4% at real prices. The investments of non-financial enterprises as well as the investments of the government sector decreased.

Household final consumption expenditure increased by 3.9%, manly due to a  growth in expenditures on food, transportation and recreation.

Diagram: Real growth of GDP and of domestic demand, compared to the same quarter of the previous year, 1st quarter 2010 – 3rd quarter 2016

Source: Statistics Estonia

Every 5th person in Estonia lived in relative poverty in 2015

According to Statistics Estonia, in 2015, 21.3% of the Estonian population lived in relative poverty and 3.9% in absolute poverty. The overall percentage of people living in relative poverty decreased 0.3 percentage points compared to the previous year, the percentage of people living in absolute poverty decreased 2.4 percentage points.

At-risk-of-poverty rate is the share of persons with yearly disposable income lower than the at-risk-of-poverty threshold. Absolute poverty rate is the share of persons with yearly disposable income lower than the absolute poverty threshold. The at-risk-of-poverty threshold is 60% of the median yearly disposable income of household members, the absolute poverty threshold is the estimated subsistence minimum. Equivalised disposable income is the total household income, which is divided by the sum of equivalence scales of all household members.

In 2015, the income of the population increased and income inequality decreased. Social transfers (state benefits and pensions) helped to prevent falling into poverty, as had they not been included in income, 39.2% of the population would have lived in relative poverty and 25.2% in absolute poverty.

In 2015, a person was considered at risk of poverty if his/her monthly equivalised disposable income was below 429 euros (394 euros in 2014), and in absolute poverty if his/her monthly equivalised disposable income was below 201 euros (203 euros in 2014). In 2015, the income of the poorest and the richest quintile of the population differed 5.7 times.

Compared to 2014, the poverty rate has decreased in the case of children, young and middle aged people, but in the case of the elderly, the at-risk-of-poverty rate has increased. In 2015, 40.2% of persons aged 65 and over lived in relative poverty (35.8% in 2014). In 2015, 18.5% of children under 18 lived in relative poverty or one and a half percentage points less compared to the previous year. The absolute poverty rate of children has also decreased – this indicator was 9.1% in 2014 and 4.6% in 2015.

The level of education significantly affects the risk of falling into poverty. Among persons with basic education or lower, every third was in the poorest and only every fourteenth in the richest income quintile. At the same time, one third of people with higher education belonged to the richest fifth. Therefore, the at-risk-of-poverty and absolute poverty rates of persons with higher education (12.4% and 2.0%, respectively) were almost three times smaller than those of persons with basic education or lower (34.8% and 5.0%, respectively). A higher level of education is an important prerequisite for the prevention of poverty.

Source: Statistics Estonia

Estonian economy is not as bad as it seems from GDP

  • The economy is not doing as badly as it might seem from GDP alone, and additional stimulation might cause harm rather than good
  • Various sources indicate that economic activity increased in the third quarter
  • Further economic growth may be limited by the low rate of corporate investment

The flash estimate from Statistics Estonia shows that the Estonian economy grew in the third quarter by 1.1% year-on-year and 0.2% quarter-on-quarter. The poor harvest in the agricultural sector had a strong negative impact, as the current data put grain production down by one third over the year. In assessing economic activity in the third quarter it is necessary to look at a range of indicators and not focus only on GDP. Further stimulating the economy with government borrowing could under current circumstances lead to higher wage pressures and a further reduction in corporate investment.

Various sources indicate that economic activity increased in the third quarter. VAT declarations indicate that growth in value added among companies was strong in the third quarter. The whole of the industrial sector strengthened, with support primarily from the oil shale sector boosting manufacturing, energy and mining. The oil shale sector strengthened partly because charges for resources were cut. Increased economic activity is also indicated by corporate sentiment surveys. Corporate assessments of output in the previous quarter improved sharply in autumn in both the industrial and construction sectors. Companies working in the construction of facilities were a sector that stood out in sentiment surveys. Retail sales, which have supported economic activity so far, remained strong at the same time.

September was the month when activity strengthened. The signals from the monthly statistics for July and August were mixed and did not show a particular increase in activity, but the figures for September and those that are already available for October are notably stronger. It is too early to say yet from those figures whether they represent a general strengthening in the economic climate, or a temporary phenomenon. Elsewhere in the world some strengthening in economies in the third quarter has been noted. It has come in connection with the construction industry in Europe, while in the USA the strengthening in the third quarter came partly from agricultural exports.

Further economic growth may be limited by the low rate of corporate investment. Corporate investment as a ratio to GDP was about the same in the first half of 2016 as it was in 2009. Such a level is enough to cover amortisation, but it means that notably less new economic potential is being created than before. With investment volumes small, the capacity utilisation rate for the industrial sector climbed to 75% in the fourth quarter. Corporate investment cannot entirely be replaced by general government investment. One reason for the low investment rate is the reduced profitability of companies. Stimulating the economy with money that the government has borrowed could, under current circumstances, raise wage pressures further and lead to a further reduction in profits, as stimulation would primarily affect labour-intensive sectors focused on the domestic economy, where activity is already at a high level. A fall in company profits would in turn reduce corporate investment.

Current growth, in the fourth quarter, is likely to be boosted substantially by people buying in stocks of goods subject to excise in December ahead of the rise in excise rates in January. This impact will however be reversed in the first quarter of next year.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Estonian economy grew 1.1% in the 3rd quarter

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 1.1% in the 3rd quarter of 2016 compared to the 3rd quarter of the previous year.

In the 3rd quarter of 2016, the seasonally and working-day adjusted GDP increased by 0.2% compared to the 2nd quarter and by 1.3% compared to the 3rd quarter of 2015.

Real GDP growth was positively influenced by net taxes on products. Although at current prices the receipts of alcohol excise duty decreased, compared to the 3rd quarter of the previous year there were increased receipts of both value added tax and the remaining excise duties. At the same time, payments of subsidies grew.

After having declined in the previous four quarters, the industrial sector’s value added grew more than 4%. The fastest growth took place in the production of energy. In the 3rd quarter, both the export and import of goods grew in real terms compared to the same quarter of the previous year. An increase in the export of electronic products and electrical equipment was the main contributor to the growth of export.Diagram: GDP, real growth of the export of goods and value added in the industrial sector

The industrial sector includes the following economic activities: mining and quarrying; manufacturing; electricity, gas and water supply; and construction.

The flash estimate of economic growth is calculated only by the production approach using VAT return information from the Estonian Tax and Customs Board and data from various statistical actions of Statistics Estonia which have been obtained by the time of preparing the estimate. Therefore, the flash estimate may differ from the revised estimates of the GDP, which are based on the respective quarterly data and calculated by the expenditure, production and income approaches.

Source: Statistics Estonia

Economic growth in Estonia weak in the 3Q

Economic growth in Estonia continued to be weak in the 3Q. According to the flash estimate, Estonian economy grew 1.1% yoy and 0.2% qoq (seasonally and calendar adjusted). The GDP has increased 1.1% yoy during the first three quarters. We shall probably revise slightly down our GDP forecast made in August. 

Despite this meagre growth, industrial sector value added reached to the growth in the 3Q, after a year of decline, value added growth in manufacturing accelerated and energy production showed a robust volume growth, as well. According to the flash estimates, value added in transport and ITC sectors and in wholesale and retail trade increased. Although, private consumption is expected to slow gradually, retail trade growth is still strong. GDP growth was inhibited by the poor harvest in agricultural sector and the decrease in the number of employees in public sector that reduced value added in public administration.

Although the foreign trade statistics and export turnover in manufacturing showed accelerated growth of export of goods, the same indicator, after certain adjustments, in GDP slowed down compared to the second quarter. The growth of import of goods decelerated, as well.

All economic sentiment indicators have gradually improved in Estonia. The growth of corporations’ credit portfolio has accelerated this year, which refers to the improved investment activity among enterprises. Households credit portfolio and investments in dwellings have increased with the moderate pace, as well. Investment growth is restrained by government sector, who has used only a small amount of money from the EU structural funds allocated for Estonia for the period in 2014-2020.

Many of these indicators refer to the gradual improvement of economic situation in Estonia. In addition, job vacancies have increased and nominal growth of wages is robust.

Although we expect the deceleration of economic and import growth in Sweden, UK and Germany, the average import demand of the major export partners for Estonia is expected to improve in 2017. This is expected to offer more export possibilities for Estonian enterprises. In addition, we expect that government will increase the payments from the EU funds in next year and will contribute positively to the investment growth. Producer and export prices are increasing and this is expected to improve enterprises turnover, including export turnover. At the same time, negative risks in the global economy and trade are substantial. Estonia’s new government, currently under formation, will likely bring about changes in economic policy, but before the coalition agreement has been put in place, it’s too early to assess these impact on the Estonian economy.

Source: Swedbank