Inflation in Estonia this year is due to energy prices and rises in excise

  • Inflation passed 3% in April
  • Prices for commodities have shown signs of rising more slowly on world markets in recent months

Consumer price growth accelerated to 3.2% in April in the data from Statistics Estonia. Energy prices rose 6.8% over the year, food products including alcohol and tobacco were up 4.8%, and core inflation1 reached 1.4%.

Prices for commodities have shown some signs of rising more slowly on world markets in recent months. The price of a barrel of crude oil remained close to 53 dollars in March and April, but it started to fall at the end of April. This was because of increased oil production in the USA and weak demand in Asian countries. The oil producing countries of OPEC are considering a cut in their output of oil, and will probably not let prices fall very low. Data from the Food and Agriculture Organization (FAO) of the United Nations showed lower prices for food commodities on world markets for the second month in a row. Prices fell by quite a long way in March and April, down 4.3% in total. Current food prices will have a notable effect on inflation numbers next year, as consumer prices reflect changes with a time lag.

Inflation in Estonia this year is mainly being affected by energy prices and rises in excise. In July, alcohol excise will rise again, with excise on beer rising by 70%. Rises in excise will add around 0.2-0.3 percentage point to inflation. Core inflation, which is the rise in prices of services and manufactured goods, will continue to rise gradually in the second half of the year. Core inflation is affected by both import prices and faster economic growth.

The December economic forecast last year expected inflation to rise to close to 3% in 2017, and so far it has been in line with that forecast. Eesti Pank will publish a new inflation forecast in June.

1 Core inflation covers manufactured goods and services and excludes the volatile prices of energy and food, and it covers 57% of the consumer basket.

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

In March petrol was 18.5 pct more expensive than last year

According to Statistics Estonia, the change of the consumer price index in March 2017 was 0.3% compared to February 2017 and 2.8% compared to March of the previous year.

Compared to March 2016, goods were 3.2% and services 2.1% more expensive. Regulated prices of goods and services have risen by 5.9% and non-regulated prices by 2.0% compared to March of the previous year.

Compared to March 2016, the consumer price index was affected the most by the price increase of motor fuel. Compared to March of the previous year, diesel was 19% and petrol 18.5% more expensive. Almost an equal impact on the index was caused by the 4% increase in the prices of food and non-alcoholic beverages, of which 2/7 were contributed by milk, dairy products and eggs, 1/7 by sugar and confectionery, and another 1/7 by fish and fish products. Of food products, the biggest price increases were seen for potatoes (25%), fresh fish (24%) and sugar (20%).

In March, compared to February, the consumer price index was affected the most by a 1% increase in the prices of food and non-alcoholic beverages, of which more than half were contributed by 3.4% more expensive vegetables and 3.3% more expensive fruit. The end of winter sales of clothing and footwear and the 3.8% price decrease of electricity that arrived at homes also had a significant impact on the index.

Change of the consumer price index by commodity groups, March 2017
Commodity group March 2016 – March 2017, % February 2017 – March 2017, %
TOTAL 2.8 0.3
Food and non-alcoholic beverages 4.0 1.0
Alcoholic beverages and tobacco 6.3 0.8
Clothing and footwear 3.2 3.3
Housing 1.1 -0.9
Household goods 0.1 -0.4
Health 1.3 -0.6
Transport 6.6 0.0
Communications -2.2 -0.3
Recreation and culture -0.4 0.9
Education 2.8 0.0
Hotels, cafés and restaurants 4.7 0.4
Miscellaneous goods and services 1.3 -1.4

Source: Statistics Estonia

Core inflation remains low in Estonia

  • Oil and foodstuffs were cheaper on global markets in March than in February
  • Core inflation remains low in Estonia and the euro area

Data from Statistics Estonia show that consumer price inflation slowed to 2.8% in March from 3.4% a year earlier. The price level was 0.3% higher than in the previous month. Energy prices were up 7% over the year and prices for foodstuffs, including alcohol and tobacco were up 4.5%, while core inflation remained low at 1%.

Price pressure weakened a little on the world market in March, and that was reflected in Estonian consumer prices too. The crude oil price was down at the start of March on world markets as oil production increased in the USA, offsetting the earlier production limits introduced by OPEC countries. Food commodities were also cheaper in March than in February, with data from the UN’s Food and Agriculture Organization (FAO) showing prices down 2.3%. Cheaper oil had an immediate impact on Estonian consumer prices as motor fuels fell in price by 1.3% over the month. Rises and falls in food commodities on world markets usually pass through into Estonian prices over three quarters.

Around half of the rise in food prices, or two percentage points, was due to the rise in excise on alcohol and tobacco at the start of this year. As companies built up big stocks at the end of last year, the tax impact of this rise has so far passed through into consumer prices more slowly than the rise last year did. For this reason it may be assumed that the excise rise will affect prices further in the months ahead.

Average inflation in the euro area slowed in March from 2% to 1.5%, partly because of the low rate of core inflation. Core inflation is an important figure for monetary policy, as it is observed together with other key indicators for the economy. Core inflation in the euro area, from which the volatile prices of energy and food are excluded, slowed mainly because of manufactured goods. These fell further in price in several larger euro area countries even as the prices of raw materials and the intermediate goods used in manufacturing were up on the year. As core inflation is dependent on economic activity, and surveys indicate a continued increase in economic activity in the euro area, it may be assumed that core inflation will rise during the year.

Inflation in Estonia and euro area

See better graph on Bank of Estonia website here

Author: Sulev Pert, Economist at Eesti Pank

Estonia’s GDP at current prices was 20.9 bEUR in 2016

According to Statistics Estonia, in 2016, the gross domestic product (GDP) of Estonia increased 1.6% compared to 2015. In the 4th quarter of 2016, the Estonian economy grew 2.7% compared to the 4th quarter of 2015.

In 2016, the GDP at current prices was 20.9 billion euros.

The year was characterised by a slow but steady growth of the GDP. In different quarters of 2016, the increase in value added in the activities of trade, information and communication as well as transportation influenced the growth of the Estonian economy the most. In the last three years, transportation slowed the economy the most, and its decline continued in the 1st quarter. However, from the 2nd quarter onwards transportation contributed positively to the GDP growth at real prices.

In 2016, more than half of economic activities influenced the economy positively. Information and communication contributed to the increase of the GDP the most due to the strong growth in software development services. The growth of value added of trade was the highest in the comparison of the last four years mainly due to a stable growth in retail and wholesale trade. Although the value added of the largest Estonian activity, manufacturing, decreased in the 1st quarter, the value added increased 0.8% in total in 2016.

In 2016, net taxes on products influenced the Estonian economy positively. The receipts from value added and excise taxes grew. In addition, payments of subsidies increased.

After a decline in 2015, the real exports of goods and services rose by 3.6% in 2016 (including the exports of services by 4.9%). The real imports of goods and services increased 4.9%. The exports of goods and services were mainly affected by increased exports of electrical equipment, wood and products of wood and electronic equipment. The imports of goods and services was affected by the rise in the imports of motor vehicles, base metals, pharmaceutical products and chemicals. The impact of the exports and imports of the remaining commodity groups was modest. Net exports, i.e. the difference between exports and imports, was positive in 2016. The share of net exports in the GDP was 4%, which was the same level as in 2015.

In 2016, domestic demand increased 2.6%, affected mainly by increased household consumption expenditures. The increase in household final consumption expenditures was mostly caused by a rise in expenditures on transportation, food and recreation. In addition, the general government and non-profit institutions’ final consumption expenditures increased. Real gross fixed capital formation decreased 2.8% mainly due to less investments in buildings and structures by enterprises and in equipment and machinery by the government sector. Domestic demand grew faster than the GDP. The total final consumption expenditures, gross fixed capital formation and changes in inventories was smaller than the GDP by output method, totalling 97.7% of the GDP.

In 2016, the GDP grew faster than the number of hours worked and persons employed.  Therefore, labour productivity per employee increased by 1.4% and labour productivity per hour worked increased by 1.2%. At the same time, the labour costs related to GDP production have increased. Unit labour cost grew 4.2% compared to 2015.4th quarter of 2016

The GDP at current prices was 5.6 billion euros in the 4th quarter of 2016.

In the 4th quarter of 2016, the Estonian economy grew 2.7% compared to the 4th quarter of 2015. In the 4th quarter, the seasonally and working-day adjusted GDP increased by 1.9% compared to the 3rd quarter of 2016, and by 2.8% compared to the 4th quarter of 2015.

The GDP in the last quarter of 2016 was driven the most by a rise of value added in the information and communication activity due to an increase in software development services. Furthermore, the value added in trade, transportation, energy, administrative and support service activities, manufacturing and construction also provided significant support for economic growth. Compared to recent years, more economic activities contributed positively to the GDP growth.

Contribution to the GDP growth, 4th quarter 2016

In the 4th quarter, the number of persons employed and hours worked decreased, but the GDP increased. Therefore, compared to the same quarter of the previous year, labour productivity per employee and labour productivity per hour worked increased. Unit labour cost increased 2.5% in the 4th quarter of 2016.

After decreasing in the 3rd quarter, in the 4th quarter of 2016 the domestic demand grew 3.7% in real terms, compared to the 4th quarter of 2015. Domestic demand was mainly affected by enterprises’ increased inventories of goods and increased final consumption expenditures. In the 4th quarter, real gross fixed capital formation fell 5.5% mainly due to a decrease of investments in buildings and structures by the enterprise sector. At the same time, investments of enterprises in equipment and machinery increased. For all other sectors, gross fixed capital formation grew compared to the previous year.

In the last quarter of 2016, the real exports of goods and services increased 2.7% and the real imports of goods and services 2.4%, compared to the same quarter of the previous year. The exports of goods and services grew due to an increase in the exports of electronic equipment, mineral products and wood and of products of wood. The imports were affected positively by other transport equipment and base metals. The share of net exports in the GDP was 3.3%.

Source: Statistics Estonia (see better graph here)

Price rises in February were primarily due to higher prices for oil and food

  • Inflation continued to rise in Estonia, and it was at its fastest for four years in February
  • Inflation is being driven by higher global prices for oil and food, and by higher excise rates
  • Core inflation has also risen in recent months because of service prices

Data from Statistics Estonia show that consumer price inflation was 3.4% in February, with prices up 1.3% on the previous month.Preliminary estimates put inflation in the euro area at 2% and prices had stopped falling in all the euro area countries according to the latest data from January. Higher inflation reduces the purchasing power of consumers, but it could be the long-awaited sign of increasing economic activity.

Inflation has risen mainly because of external factors, particularly the rise in the price of oil and food. Food prices are rising on the Estonian and European Union markets mainly because the oversupply that was exacerbated by the loss of the Russian market in 2014 has relented. A second reason is that the weather has been bad in southern Europe this year and the bad weather has harmed fruit and vegetable crops. Prices for unprocessed food, including garden produce, rose in the euro area at a record rate of 5.2% in February. More stable rises in commodities prices will be supported by the narrower fluctuations in the oil price on world markets after its jump to 55 dollars at the end of November following the OPEC agreement to cut production. Commodities prices on world markets are still relatively low in historical terms.

The causes of higher inflation in Estonia are about the same as those elsewhere in the euro area. Around one quarter of inflation in February was due to motor fuels being 23% more expensive than a year earlier, and the continuing broad-based rise in prices for food products. One reason that inflation in Estonia has been higher than the euro area average is that excise rates have risen. Excise on motor fuels, alcohol and tobacco lifted inflation by around one percentage point in February. Core inflation, which covers manufactured goods and services, has also picked up a little in recent months, and it reached 1.3% in February. It is mainly prices for services that have risen, while prices for manufactured goods have climbed more slowly because of cheap import prices.

Inflation in Estonia and euro area

Source: Bank of Estonia (see better graph here)

Author: Sulev Pert, Economist at Eesti Pank

Exports led to a record surplus on Estonia’s current account in 2016

  • The current account surplus for 2016 was the largest since independence was regained at 2.7% of GDP
  • Reinvested income is preferred to new money for use in investment
  • The net international investment position continued to improve

The current account surplus passed half a billion euros last year for the first time ever. The large surplus was caused by large-scale exports of goods and services, which picked up particularly in the second half of the year. The surplus in the current account was around 100 million euros more than in 2015 mainly because the outflow of income was smaller. The increase in the current account surplus was clearly slower than in recent years, which is in line with Eesti Pank’s economic forecast.

Alongside the good results for exports there was continuing growth in the fourth quarter of 2016 in imports of goods and services.Imports of goods increased by 3% over the whole year, and imports of services by 8%. In the first half of the year the growth in goods imports was underpinned by capital goods brought in as investments, but the rate of growth could not be maintained in the second half of the year and less was imported as capital goods in the fourth quarter than a year earlier. This indicates companies are being careful in investing and overall investment activity is recovering more modestly than expected. This is confirmed by the financial account of the balance of payments, which indicates that the direct investment made in the equity capital of foreign-owned companies was less than the amount taken out from them, meaning no new money came into the country for investment in 2016.

Estonian assets abroad grew more in 2016 than external liabilities, so Estonia was a net lender for the whole year. The net international investment position, which is the difference between external assets and external liabilities, climbed in consequence to -37% of GDP for the whole year. The current account surplus gives hope that the net investment position may improve, and if the current trend were to continue, Estonia could reach the -35% recommended by the European Commission within a few years1.

1 The European Commission looks at the net international investment position as one of the indicators of possible imbalances in an economy, and it has set the threshold for where the danger appears at -35% of GDP.

Source: Bank of Estonia

Author: Kristo Aab, Economist at Eesti Pank

Economic growth in 4Q of 2016 was above expectations

In 2016, economic growth reached 1.6% in Estonia. Compared to 2015 it is a 0.2 percentage point increase, but nothing to be too proud of yet. Nominal growth of GDP accelerated from 2.5% in 2015 to 3.3% in 2016.

In the last quarter of 2016 Estonian economy grew 2.7%, which is the highest quarterly growth rate in two years and was above our expectations. Unfortunately the main contribution to this growth still came from private consumption whereas contribution of investments remained negative. Investments grew only in the second quarter and thereafter plummeted again. This means that 2016 was the fourth consecutive year in a row where investments decreased.

In 2016 ITC and domestic trade sectors had the largest positive and agriculture the largest negative contribution to GDP growth. Negative contribution from agricultural sector comes from a 30% decline in value-added as crop yields compared to averages were better in 2015 and worse in 2016. In the last quarter of 2016 economic growth was relatively broad based with only a few sectors that contributed negatively.

Households’ investments into dwellings grew rapidly in 2016 whereas investments of enterprises and general government were in a decline. The main positive contribution to enterprises investments came from transportation equipment whereas investments into buildings and machinery are still lagging. In the last quarter of 2016 enterprises’ investment into machinery has somewhat improved, but growth remains negative compared to last quarter of 2015.

On a positive note export growth in 2016 was 3.6% compared to -0.6% decline in 2015. The contribution of net export to growth remained negative in total, but in the last two quarters of 2016 export growth has been stronger than import. This implies that Estonian exporters are gaining strength, although export growth in the last quarter of 2016 somewhat decelerated.

Private consumption has remained the engine of growth due to very strong wage growth. This is about to change as this year prices will increase and real net wage growth decelerates rapidly. In 2017 we expect smaller contribution to growth from private consumption and larger contribution from investments and government expenditure. Contribution of private consumption to growth will somewhat increase in 2018 when non-taxable income threshold is raised. We expect the economy to grow 2.2% this year and 2.8% in 2017.


Source: Swedbank