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

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

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