Estonian economy grew in the 1st quarter

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 1.2% in the 1st quarter of 2015 compared to the 1st quarter of 2014.

In the 1st quarter of 2015, the seasonally and working-day adjusted GDP decreased by 0.3% compared to the previous quarter and increased by 1.8% compared to the 1st quarter of 2014.

According to the preliminary calculations, manufacturing was the main contributor to the GDP growth in the 1st quarter of 2015, mainly due to the increase in the manufacture of electronic equipment, mineral products and wood products. The value added of manufacturing depends substantially on exports. The real growth of the export of goods of the total economy was 3% in the 1st quarter, mainly due to the increase in the export of electronic equipment and mineral products. At the same time, the real import of goods grew 1%.

In addition, the GDP growth in the 1st quarter was positively influenced by the net taxes of products. There were increased receipts at current prices of value added tax and excise taxes on fuel and tobacco. However, receipts of alcohol excise decreased compared to the 1st quarter of 2014. Payments of subsidies decreased as well.

In the 1st quarter of 2015, the Estonian economy was inhibited the most by the decrease in value added in transport.Diagram: Real growth of GDP, export and import of goods compared to the corresponding quarter of the previous year

The flash estimate is calculated only by production method using the information from the Estonian Tax and Customs Board and data derived from monthly statistical surveys. Therefore, the flash estimate may differ from the revised estimates of the GDP, which are calculated by expenditure, production and income method using quarterly data. The revised estimates for the 1st quarter of 2015 will be published by Statistics Estonia on 9 June 2015.

Source: Statistics Estonia

The current account was in deficit in March

The flash estimate1 put the Estonian current account at 62 million euros in deficit in March 2015. Exports of both goods and services were higher than in March last year and imports of goods were also higher, though imports of services were smaller than a year ago. Foreign investment dividends paid and received dominated in incomes.

The current and capital accounts were also negative in March. This means that the Estonian economy was a net borrower from the rest of the world, so the country as a whole received more resources from abroad than it invested there.

Eesti Pank publishes the flash estimate of the balance of payments monthly for the last month but one. From January 2015 Eesti Pank accompanies the publication of the flash estimate with a short comment. The statistics on the first quarter of 2015 will be published with a comment on 9 June.

1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

See graph here: Bank of Estonia

Economic growth decelerated as expected

According to the flash estimates of Statistics Estonia, GDP decelerated to 1.2% YoY in the first quarter of 2015. The seasonally and working-day adjusted GDP increased by 1.8% YoY. Compared to the previous quarter, economic growth decreased by 0.3%.

Deceleration of export growth and decrease in investments slowed the economic growth the most. Exports of goods grew by 3% in real terms in the first quarter. Decreased export volumes to Russia had the largest negative impact, but it was partially compensated by the fast growth of electronics exports. Electronic equipment has considerable contribution to the export growth and, in turn, to the economic growth. Unfortunately the orders of electronic equipment have decreased and its export has decelerated this year.

Although export growth has decelerated, the growth of import was even weaker in the first quarter, only 1%. This referred to the continuous decline in investments. In the second half of last year import growth accelerated, but that did not increase investments, which means that a large share of imported goods was used in intermediate consumption.

Private consumption contributed the most to the economic growth, supported by robust growth of real wages and solid consumer confidence. Lower prices of motor fuel helped consumers to save money or spend it on something alternative. Increased receipts of excise taxes and value added tax made a strong contribution to the GDP growth.

We expect Estonian economy to grow by 2.1% in 2015, mainly supported by strong private consumption. Steep decrease in exports to Russia will continue. Meanwhile the companies have increased their exports to other countries – to Sweden, the Netherlands, the US, Poland and Spain. If orders of electronic equipment will not turn to the growth in the coming months, it will have a negative impact both on our exports, as well as, on our economic growth. Although foreign demand will be weaker this year, we are more optimistic than few months ago. The European economy is improving, which gradually gives more opportunities to our exporters. We expect weaker euro to have a positive impact on our competitiveness and exports, but it will only affect about 1/3 of the exports, which is denominated in US dollars. Enterprise investments will remain modest, whereas public sector investments are expected to grow.

Source: Swedbank

Household savings increased more than debts in 2014

Corporate indebtedness and leverage edged upwards slightly in 2014. The increased need for external funds meant that the growth in corporate debt liabilities accelerated somewhat last year to 5%. Domestic debt liabilities increased by 3.3% and borrowing from abroad and issues of bonds abroad increased by 8%. Growth in corporate equity in 2014 slowed in contrast, to 1.3%, as corporate profits declined. As a result reinvested profits declined and there was also a slight decline in the value of shares listed on the stock exchange.

The income and savings of households increased faster in 2014 than their debt liabilities did. Higher incomes helped the cash and deposits of households to increase by 9% while debt liabilities increased by 3% at the same time. Long-term debt liabilities grew by 2.8%, mainly because of the growth in the housing loan stock, while short-term debt liabilities increased by 5%.

The unconsolidated debt liabilities of the general government grew by 186 million euros last year to some 2.2 billion euros. Although the general government budget for 2014 was in surplus, some subsectors of the general government still borrowed additional funds. Debt liabilities also increased by 27 million euros because of Estonia’s participation in the European Financial Stability Facility, the EFSF. The liquid financial assets of the general government in the form of deposits, bonds and listed shares and its credit claims together grew by 180 million euros last year to some 2.8 billion euros.

As domestic saving was again bigger than investment, the Estonian economy as a whole was a net lender in the fourth quarter of 2014 and in the year as a whole, just as in the past five years. This means that more funds were invested abroad or returned there than were taken in from abroad.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

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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