Inflation in Estonia reflects price developments on global markets

Data from Statistics Estonia show that the consumer price index was 0,6% higher in March than in February. The price level was 0.6% lower compared to March 2014 and consumer prices have been falling for ten consecutive months, year-on-year. Preliminary data indicate that the harmonised consumer price deflation for the euro area was 0.1% in March, which is the smallest price decrease over the past four months.

In the first three months of this year, consumer prices were mostly influenced by major price fluctuations on commodities markets. After a sharp price decrease at the start of 2015, the price of motor fuels went up by a total of 12% in February and March. In addition to the growth of crude oil prices on global markets, the price of motor fuels in monthly terms was pushed up by the simultaneous depreciation of the euro. Motor fuels were, however, 11% cheaper than a year earlier and this is probably the reason behind the price drop of many transport services in March.

At the same time, the euro was 4.3% lower against the dollar than in February, but compared to the peak of 2008, the euro is now approximately 30% cheaper. The depreciation of the euro should cause a pick-up in inflation, but so far, the impact on inflation has been small. The influence of exchange rate fluctuations on consumer prices is limited because of the large share of other euro area countries in Estonian foreign trade: about a fifth of the cost of imported goods are open to exchange rate changes. Capital goods and the intermediate consumption of companies are imported more often on the basis of contracts in foreign currency, and the price changes of such goods are passed into consumer prices over a longer period of time. Such transactions make up around 12% of consumer goods imports. However, the depreciation of the euro against the dollar has been offset by the appreciation of the euro against the rouble, which has made imports from Russia cheaper.

Most food prices were lower in March compared to the year before, but alcohol prices grew due to a rise in excise rates. The fall in food prices was influenced by global markets: the price index of the Food and Agriculture Organisation, which reflects prices on global markets, was about 18% lower in March than a year earlier. Food prices have been falling since early 2014, both because of an increase in inventories and good harvests. However, the impact of Russian sanctions has become greater and led to lower prices for milk and meat products on the internal market of the European Union.

Eesti Pank estimates that the cost of the consumer basket price in 2015 will remain on the same level as last year. The fall in consumer prices is likely to continue over the coming months. Price increases may still be expected in the second half of the year, as domestic inflation is growing and the fall in energy prices is decreasing.

Estonian CPI inflation

Largest contributions to CPI inflation

 

Source: Bank of Estonia

Author: Rasmus Kattai, economist at Eesti Pank

The current account was in surplus in January

The flash estimate put the Estonian current account at 55 million euros in surplus in January 2015. Exports of both goods and services were up on a year earlier, but import volumes were smaller than in January 2014. The smallest deficit on the goods account in recent years and an increased surplus in services turned the current account balance to surplus.

The total balance of the current and capital accounts was also positive. This means that the Estonian economy was a net lender to the rest of the world at the start of this year, so  all the economic sectors of the economy taken together invested more resources abroad than they received from there.

See more on the Bank of Estonia website

Modest growth of sales expected in 2015

• Profitability stable despite stagnant turnover
• Investment volumes a bit larger outside the energy sector
• Modest growth of sales expected in 2015

Profitability stable despite stagnant turnover
In 2014, enterprises’ turnover and costs in Estonia stayed at the previous year’s level. While the level of total costs did not change, labour costs increased; therefore, the share of personnel expenses to total costs rose from 12% in 2013 to 13% in 2014. Despite no change in turnover, total profits grew by 3%. Profitability, measured as the ratio of total profits to turnover, has been at the same level for three years.

Investment volumes a bit larger outside the energy sector
Business sector investments increased by 2%, excluding the energy sector. Compared with 2013, investments in land, acquisition of buildings, and computers increased. Other investments decreased, with the biggest decline registered in investments in equipment and machinery, due to smaller investment volumes in the energy sector.

Modest growth of sales expected in 2015
The growth of sales and profits will probably remain limited this year. Sentiment indicators have worsened in recent months. Operating capacity in the manufacturing sector hit the seasonal average of recent years in January, but the volume of orders has been declining during the last few months. Exports to Russia have been hit, but the volume of total exports of goods was still growing, at least in January. According to the recent Swedbank survey of Estonia’s manufacturing sector, 64% of polled industrial enterprises planned to increase their turnover (by 3.0%, on average), and 44% of companies expected an increase in their profitability in 2015.

Source: Swedbank

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The Estonian economy grew 2.1% in 2014

According to Statistics Estonia, the gross domestic product (GDP) of Estonia in 2014 increased 2.1% compared to 2013. In the 4th quarter of 2014, the Estonian economy grew 3.0% compared to the 4th quarter of 2013.

2014

In 2014, the GDP at current prices was 19.5 billion euros.

The year was characterised by a slow but steady growth of the Estonian economy. In the 1st quarter the GDP grew 0.5% compared to the 1st quarter of 2013, while in the 4th quarter the year-over-year growth was 3.0%. In total, the Estonian GDP rose 2.1% in 2014.

Trade contributed significantly to the increase in the GDP, mainly due to an increase in value added in retail trade. In addition, manufacturing and professional, scientific and technical activities contributed the most to the GDP growth in 2014. Manufacturing increased mainly due to a growth in the exports of production; there was also an increase in the domestic sales of manufacturing production.

In 2014, the decrease in value added in transportation and storage slowed the Estonian economy down the most. The decline in construction and accommodation and food service activities had a big negative effect on the GDP as well. The construction volumes on the domestic construction market decreased 2%. The value added of construction decreased 4.1% mainly due to a decrease in the construction of structures.

In 2014, the GDP grew faster than the number of hours worked and persons employed (which grew 0.4% and 0.8%, respectively). Therefore, labour productivity per employee and hour worked increased by 1.3% and 1.7%, respectively. At the same time, the labour costs related to GDP production have increased. Unit labour cost grew 6.4% compared to 2013.

Domestic demand grew 4.8%, mainly as a result of changes in inventories and an increase in household final consumption expenditures. There was an increase in all types of inventories, but the increase in the inventories of goods contributed the most to the changes in inventories. The increase in household final consumption expenditures was mostly caused by a growth in the expenditures on food, transport and clothing and footwear.

Real gross fixed capital formation fell 3%, primarily due to a decrease in investments in buildings and structures and in other machinery and equipment. The main positive factor was the growth of investments in transport. Although domestic demand grew faster than the GDP, the total final consumption expenditures, gross fixed capital formation and changes in inventories were smaller than the GDP by output method. The share of domestic demand in the GDP was 99.4%.

In 2014, the real export of goods and services grew 2.6% compared to 2013 in spite of the decrease in the 1st quarter. The import of goods and services increased 2.3% in 2014. The increased export and import of electronic products had the biggest positive impact on Estonian foreign trade.

Net export, i.e. the difference between export and import, was positive in 2014. The share of net export in the GDP was 2.5%, which was higher than in the two previous years.

4th quarter of 2014

The GDP at current prices was 5.1 billion euros in the 4th quarter of 2014. In that quarter, the seasonally and working-day adjusted GDP increased by 1.2% compared to the 3rd quarter of 2014 and by 2.9% compared to the 4th quarter of 2013.

Similarly to the 3rd quarter, the GDP in the 4th quarter of 2014 was driven the most by a rise in manufacturing, Estonia’s biggest economic activity, mainly due to the production of electronic, coke and wood products. Furthermore, the value added in energy and trade also provided important support for economic growth. The increase in value added in trade was supported by the growth of sales by retail trade enterprises.

In the 4th quarter of 2014, the value added of transportation increased at current prices. However, in real terms, transport slowed the Estonian economy down the most. In addition, the decline in the value added of real estate activities and health had a considerable negative effect on the GDP in the 4th quarter.

Domestic demand grew 5.0% in real terms, mainly due to changes in inventories and an increase in household final consumption expenditures. In the 4th quarter, the change in inventories was mainly caused by a growth in the inventories of finished goods. Household final consumption expenditures increased 5.7% at real prices. In the 4th quarter, the decrease in gross fixed capital formation, which began already in the 3rd quarter, continued. The 7% decrease in gross fixed capital formation at real prices was mostly influenced by a decrease in general government investments in buildings and structures, in other machinery and equipment and in military equipment. There was also a decrease in investments in other machinery and equipment made by the sector of non-financial corporations. In the last quarter of 2014, the real export of goods and services increased 6.0% compared to the same quarter of the previous year. At the same time, the real import of goods and services grew 5.9%. Trade was influenced the most by an increase in the export and import of electronic equipment. The share of net export in the GDP was 2.8%.

Diagram: Real growth of GDP and gross fixed capital formation

Statistics Estonia harmonised its revision policy of national accounts estimates with Eesti Pank. The table outlines the correction depth of periods to be revised in 2015.

1st quarter 2015 2nd quarter 2015 3rd quarter 2015 4th quarter 2015
Revision range Max. three quarters Max. one quarter Max. 17 quarters Max. one quarter
Publishing date 11 March 2015 9 June 2015 8 September 2015 9 December 2015
Published period 4th quarter 2014 1st quarter 2015 2nd quarter 2015 3rd quarter 2015
Revised period 1st quarter 2014 up to 3rd quarter 2014, if necessary 4th quarter 2014, if necessary 1st quarter 2011 up to 1st quarter 2015 2nd quarter 2015, if necessary

Compared to the indicators published in December 2014, GDP real growth has been revised upwards by 0.2 percentage points in the 1st quarter, by 0.4 percentage points in the 2nd quarter and by 0.2 percentage points in the 3rd quarter.

Source: Statistics Estonia

Estonia’s economy grew by 2.1% in 2014

Estonia’s GDP growth was revised up. GDP increased by 2.1% in 2014 and by 3.0% in the last quarter of 2014, year on year (initial estimates, published in December, were +1.8% in 2014 and +2.7% in the last quarter).

By sectors, growth in the value added in retail trade, manufacturing and professional, scientific and technical activities contributed the most, while a decrease in the value added in transportation and storage; construction; and accommodation and food services had the biggest negative contributions.

Domestic demand pushed GDP higher due to bigger inventories and household expenditures (mostly on food, transport, and clothing). Inventories increased due to higher consumption but also because of accumulating stocks before a substantial increase in excise taxes. Investments fell by 2.8%, primarily due to a decrease in the investments in the energy sector (who invested heavily in 2013). The exports of goods and services grew by 2.6%, supported by higher export volumes of electronics and logistics services in ports. The imports of goods and services increased at a similar pace, by 2.7%. Due to larger net exports in nominal terms, current account deficit was only 0.1% of GDP in 2014.

GDP is expected to continue growing at a similar pace, by 2%, in 2015. Growth is supported by consumption, which is boosted by a remarkable jump in households’ real incomes because of higher wages, modest inflation, and a decline in labour taxes. In January, retail sales were up by 5%, year on year. The growth of exports and investments will probably remain modest this year. Operating capacity in the manufacturing sector was at its historic average of 68% in January, but the volumes of orders have been declining in recent months.

Although the EU’s economy is showing some positive signs, our region is affected by the economic crisis in Russia, whose GDP is expected to decline by 10% in 2015-2016. The growth of exports of goods to Russia declined by 57% in nominal terms in January, compared with the same month last year, but only around one fifth of Estonia’s exports to Russia is of Estonian origin (the rest are coming from third countries).

Source: Swedbank

Deflation slowed in February

Data from Statistics Estonia show that the consumer price index was 0.8% lower in February than a year earlier, meaning the fall in prices was smaller than that in the preceding month. The harmonised index of consumer prices for the euro area also fell by less as deflation slowed from -0.6% to -0.3%.

The global oil price ended its rapid slide of more than half a year in February, leading the price of motor fuels in Estonia to rise by 6.6% during the month and the consumer price level as a whole to rise by 0.6% from January. Motor fuels were still 16% cheaper than a year earlier, and the fall in the oil price on world markets started to have an indirect effect on other components in the consumer basket. Gas prices had already fallen for residential consumers in January by 5% from December’s levels and the consequences of the fall in the oil price were felt strongly by the price of heating, as it fell by 1% over the month in February. Although prices of imported energy have fallen substantially over the year, the fall has been restrained somewhat by the exchange rate of the euro hitting its lowest level for over ten years. The fall in the oil price to date has benefited the Estonian economy by boosting consumption and through that, economic growth.

Food prices were down in February, mainly because of price movements in global markets and the European Union’s internal market, as the food price index of the FAO (Food and Agriculture Organization) stood 14% lower in February than a year earlier. The disappearance of the Russian market as a destination market for food exporters has started to show up more and more in the food producers price index, though the impact on the consumer price index for food products has so far been limited. This can be seen in the farm gate price for milk at which dairy farms sell their output, which was 38% lower in January than it was a year earlier, while the latest data show the consumer price of dairy products falling by only 3.2%. Similarly, the farm price of beef has fallen by 10% over the year and that of pork by 15%, while consumer prices are down only 2.7%. An exception among food products was alcohol, which saw prices rise as higher excise taxes accelerated the inflation in the price of strong alcoholic drinks to 7.4%.

The largest fall in consumer prices has probably now ended, because the world oil price has started to rise. Consumer prices will continue to fall in the months ahead, but in the second half of the year growth will return to consumer prices and inflation for 2015 as a whole will be in positive territory, though close to zero.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

More complex exports help lead to faster growth

Exports of Estonian goods and services grew faster in 2000-2013 than global exports as a whole in both current and constant prices, meaning that Estonian exports managed to gain market share during those years.

Estonian price competitiveness strengthened in the markets of many countries, where Estonian exporters gained a slight advantage in trading from the depreciation of the euro or from prices rising less quickly. In some other markets, notably Russia, exporting became more difficult.

Estonian products compete not only on price but also more and more successfully on other, qualitative, factors. The movement up the quality ladder allowed a reduction in the share of competitiveness that was price-based, as Estonia moved in 2005-2011 from low-quality products towards medium-quality ones, while the number of high-quality products clearly increased. As a relatively poor country, Estonia can compete in markets for comparatively complex export products, so in 2011 Estonian productivity was 37% of that in Germany at current prices, but the indicator for complexity of exports stood at 78%. This should leave the Estonian economy relatively well placed to grow faster than the average for the European Union.

A study using detailed corporate data has shown that Estonian manufacturing companies that export are on average 25% more productive than non-exporters, pay 15% higher wages and have 50% more employees. The productivity of exporters is high because more productive companies are more likely to enter foreign markets. Productivity has also improved as a result of exports because of economies of scale and lessons learned in export markets.

Source: Bank of Estonia

Author: Natalja Viilmann and Jaanika Meriküll; Eesti Pank Economists

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