Estonia’s 1st quarter GDP at 6.7 bEUR

According to Statistics Estonia, the year-on-year growth of the gross domestic product (GDP) of Estonia was 4.5% in the first quarter of 2019.

Seasonally and working day adjusted GDP grew 0.5% compared to the previous quarter and 4.6% compared to the 1st quarter of 2018.

Economic growth was driven by manufacturing. The last time that manufacturing had such an impact was four years ago, in the 2nd quarter of 2015. Nevertheless, economic growth in the 1st quarter was broad-based, as five other economic activities made notable positive contributions. These were information and communication; professional, scientific and technical activities; wholesale and retail trade; agriculture, forestry and fishing, and transportation and storage. The value added in construction, which had driven economic growth for the last two and a half years, did not increase in the 1st quarter, remaining at the previous year’s level. The only significant negative impact on economic growth came from electricity, gas, steam and air conditioning supply.

Domestic demand grew 4.6% in the first quarter. The slower growth compared to the previous quarters was mainly on account of household final consumption (2.8%). The fast growth of gross fixed capital formation, which had started at the end of the previous year, continued in the 1st quarter, at 20.4%. This was primarily the result of investments by nonfinancial enterprises into transportation equipment, and machinery and other equipment. Household investments into dwellings grew notably as well.

The exports of goods and services grew 4.6% in the first quarter. The exports of goods grew 6.9%, the fastest pace in the last two years. Biggest contributions to growth came from the exports of coke, petroleum products and computer, electrical and optical equipment. The exports of services, which have usually grown faster than the exports of goods, experienced a slight decline (-0.4%). This was the result of the decline of exports of construction and freight rail transport services. The imports of goods and services grew 3.8%. The import of goods grew 4.8%, largely due to the imports of metal products and electrical equipment. The imports of services grew 0.5%. The share of net exports in GDP was 3% in the first quarter of 2019.

In the 1st quarter, both the number of employed persons and worked hours increased. As a result, the productivity per person employed grew 2.7% and the productivity per hours worked grew 3.3%. The growth of unit labour cost was the same as the GDP growth rate, at 4.6%.

Source: Statistics Estonia

See graph here 

 

Strong beginning of 2019 exceeded expectations

Economic growth remained very strong at the beginning of 2019. In the first quarter of 2019, GDP growth in Estonia accelerated to 4.5% yoy in real terms and to 8.5% yoy in nominal terms. Strong first quarter growth exceeded our expectations. Seasonally and working day adjusted GDP grew by 0.5% compared to the previous quarter. In addition, the fourth quarter GDP growth was revised up by 0.1 pp to 4.3%. However, these are preliminary numbers, which will be revised several times.

Construction sector growth running out of momentum

Economic growth in the first quarter was broad-based. After a moderate growth of the last three years, manufacturing shot up again by 11%. Manufacturing was the main contributor to GDP growth in the first quarter and accounted for roughly one third. Previously, the main driver of economic growth had been construction sector, which did not contribute to economic growth in the first quarter. However, the slowdown of construction sector growth was expected. Strong contribution to GDP growth came also from agriculture; professional and technical activities; wholesale and retail trade; transportation and ICT sectors. Negative impact to the growth came mainly from energy sector.

Foreign demand still supporting Estonian economy

The growth of foreign demand has slid from the peak, but still offered good export opportunities. In the first quarter, export of goods has accelerated to 7%, while export of services has decelerated for the first time in three years. Total export increased by 5% and exceeded total import growth.

The growth of domestic demand decelerated to 4% in the first quarter. The growth of private consumption slid from the last year’s strong growth and decelerated to 2.8%. This was surprisingly weak growth considering that in the first quarter retail sales were strong, rapid wage growth continued and refunds of the excess income tax amounts were made. Investments showed strong growth for the second quarter in a row, increasing by 17% in the first quarter of 2019. The main contribution was the growth of investments of non-financial corporations due to base effect.

Economic growth in Estonia is expected to slow this year

According to our latest Swedbank Economic Outlook published in April, economic growth in Estonia is expected to decelerate to 3% this year. The main reason of the slowdown is expected weakening of the foreign demand. Economic growth has been above its long-term potential for already three years in a row and slower growth should be more sustainable for the economy. Although, due to the rapid growth of the beginning of the year we should revise up our April forecast, the next large revision this year by the Statistical Office will probably change the GDP time series.

Source: Swedbank

Goods have become 1.5 pct and services 4.9 pct more expensive

According to Statistics Estonia, in January 2019 compared to December 2018, the change of the consumer price index was –0.2% and compared to January of the previous year, 2.7%.

Goods were 1.5% and services 4.9% more expensive compared to January 2018. Regulated prices of goods and services have risen by 4.0% and non-regulated prices by 2.3% compared to January of the previous year.

Compared to January 2018, the consumer price index was affected the most by housing, which contributed nearly half of the total increase. Of the latter, half was contributed by 18.1% more expensive electricity that reached homes and one-sixth by 19.8% more expensive solid fuels. Motor fuels were cheaper in January 2019 compared to January 2018. Petrol was 5.4% and diesel fuel 3.5% less expensive than a year ago. The biggest year-on-year price increases among food products were seen for fresh vegetables (27%), potatoes (25%) and ready-made meals (14%), and the biggest price decreases were seen for sugar (20%), fresh fruit (11%) and eggs (11%).

Due to continuously changing consumption pattern of the population and prices, Statistics Estonia updates the weights system of the consumer price index and the representative goods every year.

In 2019, the weights system of the consumer price index corresponds to the average expenditure structure of the population in 2018. The base prices used for calculations are December prices of the year 2018. To ensure comparability with previous periods, the consumer price index is continued to be published on the base 1997 = 100. The linking month is December 2018.

Change of the consumer price index by commodity groups, January 2019
Commodity group Weight 2018, ‰ Weight 2019, ‰ December 2018 – January 2019, % January 2018 – January 2019, %
TOTAL 1000.0 1000.0 -0.2 2.7
Food and non-alcoholic beverages 227.4 217.9 0.8 1.7
Alcoholic beverages and tobacco 66.2 61.0 0.8 5.1
Clothing and footwear 55.8 54.6 -4.8 2.6
Housing 139.7 140.6 1.3 8.8
Household goods 62.4 62.0 0.9 2.1
Health 54.0 55.0 0.2 2.7
Transport 146.2 151.7 -2.7 -2.8
Communications 44.1 47.9 -0.4 -4.8
Recreation and culture 89.1 92.5 -0.8 5.3
Education 11.6 10.8 2.4 7.2
Hotels, cafés and restaurants 47.2 48.3 0.3 4.6
Miscellaneous goods and services 56.3 57.7 0.5 3.7

Statistics Estonia publishes the consumer price index on the fifth working day of each month, after the end of the reporting period. For the statistical activity “Consumer price index”, the main representative of public interest is the Ministry of Finance, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Estonian GDP at current prices was 26 bEUR in 2018

According to Statistics Estonia, in 2018, the gross domestic product (GDP) of Estonia increased 3.9% compared to 2017. For the third consecutive year the economic growth in Estonia was faster than 3%. In the 4th quarter of 2018, the Estonian economy increased by 4.2% compared to the 4th quarter of 2017.

2018

In 2018, the GDP at current prices was 26 billion euros.

Main contributors to a growth covering the majority of economic activities were construction, manufacturing, professional, scientific and technical activities. A significant contribution to growth came also from transportation and storage, information and communication. All the above-mentioned economic activities showed good results in 2018. The only significant negative impacts on the economic growth were exerted by agriculture, forestry and fishing. This was largely due to their poor performance in the second half of the year.

The value added in construction increased 18.6% in 2018. Last time the growth in construction was that fast was in 2011 when the economy just began to recover from the crisis. Other activities with fast value added growth were professional, scientific and technical activities (13.3%), information and communication (10.6%), transportation and storage (9.2%) and mining and quarrying (8.7%). The growth of value added in manufacturing, which contributes the largest share in the GDP, accelerated to 5.3% in 2018. The value added in trade increased only 0.9%.

Net taxes on products did not increase in 2017, while in 2018 their growth recovered. The net taxes on products at current prices increased by 6.9% and by 2.2% adjusted for inflation.

In 2018, the exports of goods and services increased 4.3%, mainly due to the growth of the services exports. Although the growth was slightly lower than in 2017, the export of services increased by 5.6%. This was mostly due to the exports of computer and transportation services. The export of goods increased 3.6%. Main contributors to that growth were the exports of computers, electronic and optical equipment, motor vehicles, trailers and semi-trailers. Imports of goods and services increased 6.1%, which was the fastest growth in the last 6 years. This was mostly influenced by the imports of machinery and equipment not elsewhere classified, basic and pharmaceutical products and pharmaceutical preparations. The imports of services increased 11.6%, thanks to the imports of travel and transportation services. Net exports reached 904 million euros in 2018, which is 3.5% of the GDP.

Domestic demand also produced the best results in the last 6 years, growing 5.3%. This was mostly due to final consumption of households, which increased 4.6% in 2018. Last time the household consumption grew that fast was at the peak of the previous boom in 2007. Investments that declined in the first half of the year started to grow again in the second half. The investments increased 3.3% in 2018, which is a very good result compared to previous years. Biggest contributions to growth came from investments into buildings and structures by nonfinancial enterprises and from investments into dwellings by households. The investments by nonfinancial enterprises and government sector into transport equipment declined. The final consumption expenditure of the government sector grew by 0.3 in 2018.

In 2018, the growth of the GDP once again surpassed the growth of the number of persons employed. As a result, the productivity per person employed grew by 2.6%. The number of hours worked decreased in 2018, causing a productivity growth of 5.3% per hour worked. As the pressure on wages continued in 2018, the unit labour cost also increased rapidly and at 6% surpassed the growth of productivity per hour worked.

Read more from Statistics Estonia

Per capita GDP of counties becoming more even

According to Statistics Estonia, 64% of the gross value added of the Estonian gross domestic product (GDP) in 2017 was created in Harju county. However, the differences between counties as regards GDP per capita are getting smaller.

In 2017, Estonia’s GDP reached 24 billion euros at current prices. Harju county’s contribution amounted to 15 billion euros, 13 billion euros of which came from Tallinn. Harju county was followed by Tartu county and Ida-Viru county, the shares of which in Estonia’s GDP stood at 11% and 6%, respectively. Hiiu and Põlva counties had the smallest shares in 2017 – both contributed less than 1% to the Estonian GDP.

Over 70% of the gross value added of Estonia was created in the service sector in 2017. The influence of the cities of Tallinn and Tartu, in particular, resulted in Harju county and Tartu county having the largest share of services – 76% and 70%, respectively. Contrary to the previous trend, the share of the service sector in value added declined slightly in all counties except in Lääne county. Most notable drops in the share of the sector took place in Põlva, Järva and Jõgeva counties.

Industry and construction accounted for 28% of the gross value added of Estonia in 2017. As the share of the service sector has declined, the share of industry and construction in the value added of multiple counties has increased slightly over the past year. The sector accounts for the largest share in value added in Ida-Viru county (51%), and for the smallest share in Harju (23%), Põlva (26%) and Tartu (27%) counties. While the reason for the small share in Harju and Tartu counties is a large service sector, Põlva county has a large agricultural sector.

The agricultural sector accounted for 3% of the gross value added of Estonia in 2017. This sector had the largest share in Jõgeva county (18%), followed by Viljandi (16%) and Põlva (13%) counties. While in general, the share of the sector in the value added of counties has shown a downward trend, it saw some increase in 2017 following a weak 2016. This was most notable in counties where the sector has a larger share in value added.

In 2017, GDP per capita was 17,943 euros, which is 1,464 euros more than a year earlier. GDP per capita was highest in Harju county – 144% of the Estonian average. Harju county was followed by Tartu and Pärnu counties, where GDP per capita amounted to, respectively, 92% and 69% of the Estonian average. The lowest GDP per capita was recorded in Põlva county – 42% of the Estonian average. In recent years, the GDP per capita of many counties has been approaching the Estonian average. This is most notable in Lääne, Saare and Valga counties. The gap between Harju county and the Estonian average has also narrowed. This means that the per capita GDP of the rest of Estonia is getting closer to Harju county.

Read more from Statistics Estonia

Using the budget to stimulate the economy was a mistake

  • Living standards in Estonia are at almost 80% of the European Union average
  • Further growth in the economy will be restrained by the fall in investment by companies and the slow growth in productivity
  • The economy continues to grow faster than its long-term sustainable rate
  • Labour shortages would have been less of a problem if the government had not given the economy a boost

Statistics Estonia estimates that GDP was up over the year by 3.7% in the second quarter and by 1.4% over the first quarter, adjusted seasonally and for the calendar. Data from earlier years were adjusted and showed that living standards in Estonia have reached almost 80% of the European Union average. The problem for the economy though is the fall in investment by companies and the slow growth in productivity.

The upward adjustment of GDP for 2016 and 2017 by almost 3% supports the opinion that the Estonian economy has been running at a high rate for some time now. This means it was a mistake to use additional fiscal measures to stimulate the economy in 2017. As the public and private sectors are competing for the same resources, the state giving the economy an additional boost during good times can squeeze out private sector projects. It is probable that labour shortages would have been less of a problem for businesses had the government not stimulated the economy.

Although the growth in the economy was slower last year, it continues to be faster than the long-term sustainable rate for the Estonian economy. The rapid growth has until now been supported by increased participation in the labour force and growth in employment, but growth in productivity has been slow. Labour productivity rose by only one per cent in the second quarter. As the labour force participation rate in Estonia is already quite high compared to the rates in other European countries, it is unlikely that employment can continue to increase in the same way in the longer term. If productivity does not rise faster, the economy will grow more slowly in future.

Productivity growth requires investment, but earlier data for GDP show that investment by companies has fallen. However, the good times in the economy should favour growth in investment. The fall in investment may have been partly caused by the orders from the state, though rapid growth in construction of residential property has also squeezed orders from companies out of the market. This is probably not the only cause of the fall in investment by companies though, as total investment has also fallen.

That said, it is not impossible that corporate investment has simply been underestimated. The GDP revision that raised GDP by almost 3% for 2016 and 2017 was accompanied by a substantial upwards revision in the data for corporate investment. Repeated corrections to the GDP figures in the same direction and an initial underestimation of GDP pose the risk that economic policy decisions are taken on the wrong foundations and can knock the economy out of balance. This makes it imperative that the accuracy of statistical estimates be improved and that economic policy decisions be taken following thorough analysis.

 

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Consumer price index affected the most by housing

According to Statistics Estonia, the change of the consumer price index in July 2018 was 0.1% compared to June 2018 and 3.5% compared to July of the previous year.

Compared to July 2017, goods were 2.9% and services 4.4% more expensive. Regulated prices of goods and services have risen by 10.1% and non-regulated prices by 1.7% compared to July of the previous year.

Compared to July 2017, the consumer price index was affected the most by housing, which contributed nearly a third of the total increase. Over a half of the latter was contributed by electricity that reached homes, which became 16.9% more expensive. More than a fourth of the total increase was contributed by motor fuel. Petrol was 19.3% and diesel fuel 16.8% more expensive than in July 2017. A greater impact on the index came also from alcoholic beverages and tobacco, which were 9% and 7.6% more expensive, respectively. Compared to July of the previous year, the price of beer increased by 11.7%. Of food products, the biggest price increases were seen for frozen fruit and berries (26%) and eggs (22%), and the biggest price decreases for potatoes (30%) and sugar (23%).

Compared to June, in July the consumer price index was affected the most, on the one hand, by seasonal sales of clothing and footwear, and on the other hand, by housing where electricity that reached homes became 5.8% more expensive in a month. Alcoholic beverages also had a greater impact on the monthly change of the index, as after June discounts ended, there was a 3.1% price increase.

Change of the consumer price index by commodity groups, July 2018
Commodity group July 2017 –
July 2018, %
June 2018 –
July 2018, %
TOTAL 3.5 0.1
Food and non-alcoholic beverages 1.7 -0.5
Alcoholic beverages and tobacco 8.5 2.3
Clothing and footwear -1.4 -6.5
Housing 7.8 2.2
Household goods 0.2 -0.6
Health 4.1 0.1
Transport 5.7 0.4
Communications -3.6 -0.5
Recreation and culture 2.6 0.9
Education -3.9 0.0
Hotels, cafés and restaurants 4.1 1.4
Miscellaneous goods and services 3.1 -0.7

Statistics Estonia publishes the consumer price index on the 5th working day of each month, after the end of the reporting period. For the statistical activity “Consumer price index”, the main representative of public interest is the Ministry of Finance, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia