Economic growth in 2015 was the slowest of the past 6 years

  • Real household incomes and sales by companies in the domestic market have increased rapidly, but goods exports declined further
  • The fall in corporate profits over several years indicates that the economy will have to adjust through faster productivity growth or slower wage growth
  • The monetary policy decisions of the European Central Bank are keeping financing conditions for investment favourable

Economic growth in Estonia slowed in 2015 and was the slowest of the past six years, remaining below the long-term potential of the country. Growth slowed mainly because of weaknesses in the economies of neighbouring countries and this restricted opportunities for exports, though sales in the domestic market grew rapidly as household incomes and purchasing power increased. Income growth has been spurred by a rise in the minimum wage, wage agreements in education and health, and more generally by the decline in the working age population and in available labour resources.

Estonian exports of goods have dropped in the past two years and Estonian exports lost market share in target markets in 2015. The latest foreign trade data indicate that exports continued to fall at the start of this year. As the fall in exports has been accompanied by a reduction in company profits and a rise in wage costs, the issue of competitiveness in the economy has been to the fore. Possible problems in competitiveness and the risk that the economy is out of balance were also highlighted last year by the European Commission.

Faster Estonian growth will depend a lot on the performance of target markets. In the first months of this year the economic figures in the euro area have proven weaker than expected and the March forecast of the European Central Bank concluded that growth in 2016 will be lower than was earlier forecast. The spluttering recovery in growth in the euro area means that the stimulus to growth in the Estonian economy provided by external demand will be modest.

Energy prices have been falling for several years by now, and this has significantly reduced inflation. Consumer prices have been falling in Estonia for about two years now, and in February inflation in the euro area turned negative again. For this reason the Governing Council of the European Central Bank decided at its meeting in March to ease monetary policy even further, which means that financing conditions will continue to be very favourable in Estonia and in the euro area.

Source: Bank of Estonia

Prices have declined because energy is cheaper

  • Prices are mainly lower than a year earlier because energy is cheaper
  • Inflation for manufactured goods remains low because prices for raw inputs and levels of economic activity are both low
  • Rises in food prices reflect the rise in alcohol excise
  • Surveys show two-year expectations for Estonian inflation have remained relatively stable

Data from Statistics Estonia show the annual change in consumer prices to have been negative again, and prices were 0.2% lower than in the previous March. However, the price level was 0.8% higher in March than in February, and 0.7% higher in February than in January.

Energy costs for households came down further in the first months of the year as prices fell for heating and for natural gas. Energy prices were 8% lower in March than a year before, though motor fuels have gone up by around 6% from February because the excise rate was raised. A small contribution to inflation was made by the monthly rise in the global oil price.

Food prices were 1.7% higher in March than a year earlier, and they were also affected by higher excise rates. Alcohol should become 8% more expensive because of the rise in excise, and most of this rise had already been passed on into prices in March. Without the effect of alcohol excise, food prices rose in March by 0.5%, mainly because of fruit and vegetable prices.

Estonian core inflation, which is inflation without energy and food, was 1.1% in March. Rises in prices for services were somewhat more modest in March than in the fourth quarter of last year. Slower rises in prices for transport services have been helped by the indirect effects of the earlier fall in the price of oil, which were seen in the prices of road and maritime transport services. At the same time, rents and prices for leisure services have risen consistently by 4-5%, which is normal for Estonia and is a consequence of rising wages. Furthermore, the prices of air tickets have risen in recent months despite the fall in fuel prices.

Inflation for manufactured goods remained low at 0.1% in March because prices for raw inputs and levels of economic activity are both low. No sign of increasing price pressures has yet been seen, as producer prices of consumption goods fell by an average of 1.8% in the first two months of this year. However, the low exchange rate for the euro since the start of last year has raised the import prices of consumption goods. The euro fell by more than 10% against the dollar in 2015, but in the first months of this year it has been strengthening against the dollar again.

Surveys show two-year expectations for Estonian and euro area inflation have remained relatively stable at close to 2%. Analysts have still corrected their inflation forecasts for 2016 slightly downwards though.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

 

Estonian Competitiveness Report 2016

Key notes from The Estonian Competitiveness Report written by experts from Eesti Pank:

The main trends of 2014 in international price competitiveness continued and deepened in 2015.

• In the past two years the currencies of Estonia’s continental European trading partners that have floating exchange rates have weakened against the euro; this has compensated for a simultaneous rise against the euro in the US dollar and currencies following it.

• The depreciation of the euro against the dollar is generally supportive for competitiveness in the euro area, especially given the share of global trade that is in currencies linked to the dollar. The specific composition of the Estonian export markets means that the depreciation of the euro against the dollar has little impact here as the nominal effective exchange rates have strengthened over all foreign partners combined.

• The deflationary environment of the past two years has meant the change in the nominal effective exchange rate has had greater significance for the real effective exchange rate than the change in relative prices has, except in the case of the real exchange rate based on unit labour costs.

• Analysis of competitiveness at the micro data level and separate treatment of the price-based and non-price components indicate that there were no fundamental changes in competitiveness in 2011-2014; there are no comparative data for 2015 yet.

• The economy is becoming increasingly polarised in competitiveness terms as non-price competitiveness is improving for some groups of export goods while the structural trade deficit is growing for other groups of goods at the same time; in the past two years more groups of goods have moved into structural deficit than have moved out.

• The global market share of Estonian exports declined a little in 2013-2014. One reason for this is the fading of the CIS markets of Russia, Ukraine and Kazakhstan.

• The competitiveness of Estonian manufacturing and services is around the average for countries in Central and Eastern Europe.

• Competitiveness is better for manufacturing, which is more exposed to foreign trade, than for services.

• Competition has become tighter in several branches of manufacturing and services since the crisis of 2009.

• In the absence of perfect competition in the labour market, mark-ups are estimated to be higher, as employers in most sectors share a large part of their short-term profit with their employees. An average of 12-13% of short-term profit is shared with employees in Estonia, which shows that employees have a relatively good negotiating position in the Estonia labour market even given the minor role played by trades unions.

Read the report from here

The Estonian economy grew 1.1% in 2015

According to Statistics Estonia, in 2015, the gross domestic product (GDP) of Estonia increased 1.1% compared to 2014. In the 4th quarter of 2015, the Estonian economy grew 0.7% compared to the 4th quarter of 2014.

2015

In 2015, the GDP at current prices was 20.5 billion euros.

The year was characterised by a slow but steady growth of the Estonian economy. In the 1st quarter the GDP grew 1.1% compared to the 1st quarter of 2014, while in the 4th quarter the year-over-year growth was 0.7%. In total, the Estonian GDP increased 1.1% in 2015.

In 2015, the decrease in value added in transportation and storage influenced the Estonian economy the most. The decline in construction and manufacturing activities had a big negative effect on the GDP as well. The construction volumes on the domestic construction market decreased and the value added of construction decreased mainly due to a decrease in the construction of structures and repair and reconstruction work in building construction. The biggest Estonian activity, manufacturing, decreased mainly due to a weak external demand.

Agriculture, forestry and fishing contributed to the increase of the GDP. In addition, professional, scientific and technical activities and trade contributed the most to GDP growth in 2015. Trade increased mainly due to a stable growth in retail sales.

Despite the increase in the first quarter of the year, in 2015, the real export of goods and services fell 1.1% compared to 2014. The import of goods and services decreased 1.8% . The decreased export and import of electronic products had the biggest negative impact on Estonian foreign trade.

Similarly to the external demand, domestic demand was weak. Domestic demand fell 0.7%, mainly as inventories decreased. Compared to 2014, inventories decreased in all subdivisions. However, household and general government final consumption expenditures increased. The increase in household final consumption expenditures was mostly caused by an increase in the expenditures on food, recreation and transport.

Real gross fixed capital formation fell 4.5%. The investments of non-financial enterprises sector in equipment and machinery and transport decreased the most. At the same time general government investments increased. Although domestic demand decreased, the GDP increased and the total final consumption expenditures, gross fixed capital formation and changes in inventories total was smaller than the GDP by output method, forming 96.6% of the GDP.

Net export, i.e. the difference between export and import, was positive in 2015. The share of net export in the GDP was 4%, which was higher than in the four previous years.

In 2015, the GDP grew slower than the number of hours worked and persons employed (which grew 2.3% and 2.8%, respectively). Therefore, labour productivity per employee and hour worked decreased by 1.6% and 1.1%, respectively. At the same time, the labour costs related to GDP production have increased. Unit labour cost grew 5.7% compared to 2014.

4th quarter of 2015

The GDP at current prices was 5.4 billion euros in the 4th quarter of 2015.

In the 4th quarter of 2015, the Estonian economy grew 0.7% compared to the 4th quarter of 2014. In 4th quarter, the seasonally and working-day adjusted GDP increased by 0.9% compared to the 3rd quarter of 2015 and by 0.8% compared to the 4th quarter of 2014.

The GDP in the last quarter of 2015 was driven the most by a rise in agriculture, forestry and fishing. Furthermore, the value added in information and communication and professional, scientific and technical activities also provided important support for economic growth.

In real terms in the 4th quarter of 2015, construction slowed the Estonian economy down the most. In addition, the decline in the value added of manufacturing and transportation and storage had a considerable negative effect on the GDP in the 4th quarter.

In the 4th quarter the GDP grew slower than the number of persons employed, but faster than the number of hours worked. Therefore, compared to the same quarter of the previous year, labour productivity per employee decreased, but labour productivity per hour worked increased. Unit labour cost increased 5.2% in the 4th quarter of 2015.

In the 4th quarter of 2015 the domestic demand remained on the same level as in the previous year. Domestic demand grew 0.2% in real terms, mainly due to an increase in household and general government final consumption expenditures and decrease of inventories. Household final consumption expenditures increased 3.2% at real prices. In the 4th quarter, the decrease in gross fixed capital formation slowed down, being 0.4% smaller at real prices. The growth of investments was mainly influenced by the growth of investments in machinery and equipment by the general government.

In the last quarter of 2015, the real export of goods and services decreased 2.0% compared to the same quarter of the previous year and the real import of goods and services fell 0.7%. Trade was influenced the most by a decrease in the export and import of electronic equipment. The share of net export in the GDP was 2.9%.Diagramm: Real growth of GDP, manufacturing and exports of goods and services compared to the same quarter of the previous year

Source: Statistics Estonia

Economic growth slowed to 1.1% in 2015

• In 2015, economic growth amounted to 1.1% in Estonia as the volumes of stocks and exports decreased.
• We expect GDP growth to accelerate to 2.3% in 2016 on the back of higher exports and investments.

In 2015, economic growth reached 1.1% in Estonia. Estonia registered one of the lowest GDP growth rates in the EU. By sectors, GDP was negatively influenced by a decrease in the value added in transportation, construction, and manufacturing. Transportation has been hit by lower trade volumes with Russia. The value added of construction decreased mainly due to a decrease in the construction of structures and repair of buildings. Manufacturing was affected by a decline in export demand and output prices. An increase in the value added of agriculture, professional activities, and domestic trade had a positive contribution to GDP growth.

The contribution of net exports was positive because export volumes fell less than import volumes. Domestic demand fell, mostly because of smaller inventories. Private and public consumption grew. Households’ expenditures on food, recreation and transport supported private consumption. Investment volumes fell due to lower investment volumes of enterprises in equipment and transport. Public investment volumes increased.

GDP growth in Estonia is expected to accelerate this year on the back of stronger export demand as economic activity in the European Union is expected to accelerate. Investment figures will be supported by higher external demand, low interest rates and higher volumes of public investment. Private consumption growth will slow as wage earners’ real income growth will be lower.

Source: Swedbank

The price level in Estonia falls under pressure from factors from abroad

  • The main cause of the fall in prices in February was the continuing descent of commodity prices on the global market
  • Prices fell for motor fuels in February even though the euro has weakened against the dollar and higher excise rates started to apply
  • Estonian companies use imported commodities as production inputs, and this has reduced core inflation
  • Uncertainty in the global economy is holding down the expectations of consumers and slowing growth in consumer prices in Estonia and in the euro area

Data from Statistics Estonia show that the consumer price index was 0.5% lower in February than a year earlier. The harmonised index of consumer prices for the euro area was also down, with consumer prices down by 0.2% over the year.

The main reason prices fell in Estonia was that commodities prices were again down on global markets. Falls in prices in foreign markets affect Estonian consumer prices through various channels. Lower prices for imported energy and food products have a direct impact. After the price of electricity was pushed up for a time in January by the cold weather, the fall in energy prices accelerated in February to 8.9%. Prices for motor fuels were 10.1% lower in February than a year earlier even though the euro had weakened against the US dollar and excise on motor fuels was raised in February.

Although the euro is lower against the dollar, the nominal effective exchange rate for Estonia, which takes account of all trading partners and the currencies used in transactions, has constantly strengthened over the past year. The main reason for this has been the sharp fall in the Russian rouble and the significant Russian share of Estonia’s trade, though the share has been reduced. The total effect of the divergence in the exchange rates has been to lower Estonian inflation by an estimated one percentage point.

Cheaper commodities also affect Estonian consumer prices indirectly as Estonian companies use imported commodities as production inputs. This brings down core inflation, which is the rise in prices of manufactured goods and services, and in February it stood at 1.3%. On top of the fall in prices for some production inputs, the low level of economic activity also reduced core inflation.

Inflation is also moved by the expectations of consumers. Uncertainty in the global economy is holding back rises in consumer prices in Estonia and in the whole of the euro area. The consensus forecasts of economic analysts for Estonia two years ahead have been steadily lowered for inflation to 2.3%. The calculations indicate that inflation in Estonia has been pulled down by around 0.8 percentage point by expectations in recent years. The economic forecast published by Eesti Pank in December put expected inflation at 1.2% for 2016, but the lower prices for commodities in recent months make it probable that inflation will be lower.

inflation

 

Economic growth stabilised in Q4

According to Statistics Estonia, the gross domestic product of Estonia increased by 0.7 per cent on a year-on-year basis in Q4 last year. The modest speed of growth is similar to the previous quarter and does not correspond to Estonia’s growth potential. The negative impact of one-off factors should weaken in the near future.

Various unfavourable factors independent of the Estonian economic environment had a negative impact on gross product growth late last year. Warm weather reduced added value in the energy sector, keeping demand and consequently prices low in our market region. Demand for electronic devices was in decline in the second half of the year due to the high level of the reference base. The low price of oil on the global market also reduced the production volumes and sale prices of shale oil. The logistics sector struggled because of smaller foreign trade volumes, while production in the construction sector is restricted by the continuing decrease in the number of new-builds and reconstructions.
Salaries continued to increase at a somewhat lower pace in Q4, and their growth remained below six per cent. Consumer confidence remained more or less stable and retail statistics promise excellent results at the end of the year. In addition to the strong increase in wages, people’s purchasing power was also increased by several extraordinary factors, such as the strong reduction in labour taxes, increase in child allowances and lower fuel prices. Since the confluence of these factors this year is considerably more modest and consumer prices will start going up again, we expect the growth of private consumption to slow down.
The summer growth forecast of the Ministry of Finance did not materialise overall and this year’s developments are also likely to remain weaker than expected, but the reasons for this are largely independent of us. The success of the three aforementioned areas of activity depends significantly on external factors, and Estonia’s export options are also limited by the unavoidable decline in the direction of Russia. Nevertheless, Estonia managed to increase its export footprint last year in terms of other goods. However, the constant acceleration of Estonia’s economic growth calls for improvement in local as well as global economic conditions.
Author: Madis Aben, analyst at the Fiscal Policy Department, Ministry of Finance
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