The Estonian economy was a net borrower in 1stQ

  • Corporate debt liabilities are increasing through loans from banks, while the share of foreign borrowing has declined slightly
  • Household savings continue to grow faster than loans.
  • The Estonian economy was a net borrower again in the first quarter for the first time in more than two years

Yearly growth in corporate debt liabilities reached 3.7% in the first quarter. Growth in corporate debt has been driven in the past half year by loans from the domestic financial sector, the stock of which was 9% larger in the first quarter than a year earlier. The amount taken in loans from abroad or issued as bonds abroad shrank by 2% at the same time. The share of foreign loans in the debt liabilities of companies is a couple of percentage points lower than a year previously, and was 32% at the end of the quarter.

The volume of household loans was 5.6% larger than a year ago. Growth was much faster in loans and leases from leasing companies and other credit intermediaries1 than in bank loans. The share of all loan liabilities that was issued by such lenders climbed to its highest level ever at 9%. Yearly growth of 7% in household cash and deposits remains faster than growth in loans, but the gap has narrowed in recent quarters.

Yearly growth in the debt liabilities of households was faster than nominal growth in the economy in the first quarter. This did not have any significant impact on the level of debt in the non-financial sector though, and it remained at 130% of GDP.

The Estonian economy was a net borrower again in the first quarter for the first time in more than two years. In most quarters since 2009, Estonian residents have put more funds abroad than they have taken in from abroad, reflecting the decline in investment in the Estonian economy and increased saving. Although the financial transactions position was negative for a long time, there were no substantive changes in the financial behaviour of households. Companies reduced the loans they issued to other companies and their participation in other companies, and at the same time they increased their financial liabilities by taking out long-term loans.

Source: Bank of Estonia
Author: Jana Kask, Deputy Head of the Financial Stability Department of Eesti Pank

Consumer prices continued to decline in the first half of 2016

Consumer prices continued to decline in the first half of 2016

• Cheaper energy and food behind the decline in prices
• Price growth is expected to be flat in 2016

In June 2016, consumer prices decreased by 0.4%, year on year, in Estonia. Goods were 0.6% and services 0.1% cheaper compared to one year ago. Consumer prices declined due to lower energy and food prices.

Motor fuels were 10% and heat energy 9% cheaper than in June 2015. In global markets, crude oil prices were around 20% lower than one year ago in EUR terms. In Estonia, in June, food prices declined by 1%. Abundant supply and favourable weather conditions have pushed down the prices of vegetables, milk, and meat products.

According to our current estimates, consumer prices are expected to be flat in 2016. Deflation should end during the second half of the year due to higher prices of commodities, especially oil, and an increase in excise tax rates of motor fuels, alcohol beverages, and tobacco.

Source: Swedbank

Estonian prices stop falling

  • The price level was lower in May than a year earlier, but consumer prices have climbed consistently since the start of this year
  • At the start of the year the oil price started its next cyclical rise, helping consumer prices to increase
  • Deflation should end in the second half of the year after two years

Data from Statistics Estonia show prices falling further in May from a year earlier, with goods and services 0.9% cheaper than they were last May. Prices have risen slightly but steadily in monthly terms since the start of this year and in May consumer prices were up 0.1% on April. In the first five months of the year, the price level rose by a total of 1.4%.

Heat and electricity were cheaper in May than a year previously, which helped bring prices down. The oil price began rising on global markets in January, but its previous very low level means it has not yet led to a rise in inflation. Higher oil prices will be seen in the Estonian consumer price index from the third quarter, ending two years of deflation. Prices for food mainly fell in May with the exception of alcohol, which was more expensive because of the rise in excise rates at the start of the year. Part of the fall in food prices was due to seasonal price changes.

Wage growth increased in the first quarter to 8.1% and unemployment was low, and this has supported domestic demand growth. This can be seen in the turnover volume of retail companies, which were up on average 6.7% in the first four months of the year. Despite increasing demand and sales volumes, inflation for consumer goods has remained low. Prices have risen moderately probably because wholesale prices have been favourable, which has compensated for the rise in labour costs. The trade margins of retail companies increased in the first quarter to a record 31%. It should be noted in this that the margins covered only a part of the increased expenses, including the rapid growth in labour costs, as the profits of retail companies fell at the same time.

Service price inflation slowed in May from 2.1% to 1.2%. Rent prices have stopped rising quite so fast, which is in line with the slowing growth in real estate prices. Rents were still up 6.5% over the year in May, and rising rent prices are still the most important factor among services. Higher wage costs have created extra costs for companies providing market-based services, and that is probably why prices have risen for leisure services. Inflation is currently low for transport services, but faster price rises in transport are to be expected as the oil price continues to climb.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

Acceleration of the economic growth was not broad based

Statistics Estonia did not revise the GDP growth of 1Q2016 with its second estimate: it remained 1.7% yoy and flat qoq (swda) in real terms. Despite the fall in prices, GDP growth reached to 3% in nominal terms (2.5% in 2015). 

Despite the acceleration, the real growth was not broad based – it was contributed primarily by net taxes on products and wholesale and retail trade activity. The growth of net taxes on products came from the increase in the receipts of excise taxes due to the raised excise tax rates on alcohol and fuels as of 1st February. Robust growth of wages and purchasing power contributed to the increase in private consumption (5.5% yoy) as well as domestic trade. Together with the expected recovery in consumer prices as of 2H of this year, the growth of real wages will decelerate and this can slow down consumption. The strongest negative impact on the GDP growth came from energy sector: production of electricity has fallen due to the import and use of cheaper electricity from Finland.

Although the drop of exports has slowed to 1% and export of goods remained flat in the 1Q, decrease in the value added of manufacturing sector deepened (70% of its turnover is exported). Decrease in the value added of transport sector has gradually slowed and its negative contribution to the GDP growth has receded. However, while the volumes of land transport have improved, value added created in ports still fell.

The decrease in imports receded in 4Q2015, while in 1Q2016 even more goods were imported to Estonia compared to the same period in last year. Unfortunately, the increased imports have not brought about the recovery of investments (-5.8%). The accelerated growth of import of capital goods and the credit portfolio of non-financial enterprises (8% in 1Q) have not increased investments. Business sector investments have still decreased, government sector investments dropped sharply as well, while the growth of household sector investments in dwellings have accelerated.

Investments have decreased already 7 quarters in a row. Despite of that, real growth of productivity per hours worked has increased during the last two quarters and this has lessened the negative impact of the increased labour costs on the (price) competitiveness of our goods and services.

According to our estimates, import demand from Estonia’s major trade partners will improve this and next year, providing more opportunities for exporting enterprises. We expect that Estonian economy grows 2% this year contributed primarily by the improving exports and investments.

Source: Swedbank

Estonian companies have increased investments

  • Imports of goods increased again after four quarters of decline
  • Imports of services declined because exports of transport and travel services were down
  • The Estonian economy was a net borrower again after two years

The current account deficit in the first quarter was more than twice what it was a year earlier at 2.3% of GDP. With exports still in decline, goods imports increased over the year by 2% after a pause of a year. The foreign trade statistics show that it is imports of capital goods that have started to increase, which indicates increased investment activity at companies. This is confirmed by the turnover declarations for the first quarter submitted to the Tax and Customs Board. This means the widening of the current account deficit in the first quarter can be seen as a potential positive impulse that will push the economy to grow faster.

The concern remains that services exports are some 4% down on the year, largely because of a fall of 8% in transport services and of 6% in travel services. Transport services are still influenced by the drop in transit flows, which have seen orders reduced for many service providers in the sector. The negative impact from Russia on travel services is starting to fade gradually. The drop in the first quarter came mainly from Finnish tourists contributing less to the Estonian economy. Over a longer term stretching back to 2011, the current account deficit was smaller than the average in the first quarter.

A possible increase in investment activity is also shown by the financial account, which shows liabilities to the rest of the world increased more than assets did in the first quarter. This made the Estonian economy a net borrower again for the first time in two years. Alongside the foreign aid received from the European Union, increased direct investment in non-financial companies lifted the net inflow of capital. The increase in direct investments came mainly from increase in intra-group debt liabilities though, which may have been just for the purpose of intra-group liquidity management. Changes in equity were smaller. The international net investment position fell by one percentage point in response to this, to -41% of GDP in the first quarter.

Source: Bank of Estonia

Author: Kristo Aab, Economist at Eesti Pank

Estonian economy grew in the 1st quarter

According to the revised estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 1.7% in the 1st quarter of 2016 compared to the 1st quarter of the previous year.

In the 1st quarter GDP at current prices was 4.9 billion euros. The seasonally and working-day adjusted GDP did not change compared to the 4th quarter of 2015 and grew by 1.8% compared to the 1st quarter of 2015.

The economic growth was driven by the increase in the receipts of net taxes on products, which was influenced by the increase in alcohol and fuel excises. As the rise in the excise rates was shifted one month forward, the proceeds from excises shifted from the end of the previous year to the 1st quarter of 2016.

In the 1st quarter of 2016, the GDP was driven the most by a rise in value added in trade due to wholesale and retail trade. At the same time, the Estonian economy was inhibited the most by a decrease in value added in energy.

Real GDP grew faster than the number of persons employed and hours worked. The number of persons employed grew 0.9% and the number of hours worked decreased by 0.1%. Therefore, labour productivity both per employee and per hour worked increased. The labour costs for GDP production have increased. In the 1st quarter of 2016, unit labour costs increased 2.9% compared to the same quarter of the previous year. Consequently, compensation per employee has grown faster than productivity.

The exports of goods and services of the total economy decreased in the 1st quarter of 2016 compared to the same quarter of the previous year. The exports of goods and services decreased for the fourth quarter in a row, being influenced the most by a decrease in the export of electrical equipment and mineral products (incl. motor spirit, fuel oils, gas).  Although the exports of goods and services decreased, the exports of other machinery and equipment positively contributed to foreign trade.

After a 4-month decrease,  the import of goods and services increased by 2.6% at real prices due to the growth in the imports of other machinery and equipment, motor vehicles and mineral products (incl. motor spirit, fuel oils, gas). Net export (i.e. the difference between export and import) was positive in the 1st quarter of 2016, amounting to 0.6% of the GDP.

Estonia’s economy was positively influenced by domestic demand. Domestic demand increased 3.0% at real prices, mainly due to household final consumption expenditures. Also, non-profit institution and government final consumption expenditures increased, but their growth slowed down.

Household final consumption expenditure increased 5.5%. The expenditures on housing, recreation, culture and catering increased the most.  The gross fixed capital formation decreased 5.8% in real terms. It was mainly influenced by a decrease in investments in buildings and structures by non-financial corporations and government sector.Diagram: The real growth of GDP and domestic demand

On 8 September 2016, Statistics Estonia will release the regular revision for 2012–2015 based on supply and use tables and annual business reports. The updated data for the 1st quarter of 2016 will be published on the same date.

Source: Statistics Estonia

Estonian inflation in May 2016

According to Statistics Estonia, the change of the consumer price index in May 2016 was 0.1% compared to April 2016 and -0.9% compared to May of the previous year.

Compared to May 2015, goods were 0.9% and services 1.0% cheaper. Regulated prices of goods and services have fallen by 2.4% and non-regulated prices by 0.3% compared to May of the previous year.

Compared to May 2015, the consumer price index was influenced the most by transport, which became 5.9% cheaper, while petrol became 10% and diesel fuel 13.6% cheaper. The impact of electricity, heat energy and fuels, which became 7.9% cheaper, was nearly as big, with 11.5% cheaper heat energy contributing to almost two-thirds of the change. Out of the products which have become more expensive, alcoholic beverages had the biggest impact on the index, as their prices have increased 8.2% compared to May of the previous year. Compared to May 2015, of food products, the prices of processed fruit and sugar have increased the most (31% and 27%, respectively) and the prices of fresh vegetables have decreased the most (20% cheaper).

In May compared to April, the consumer price index was influenced the most by 11% cheaper fresh vegetables. 14% cheaper plane tickets which were bought for May and 11.6% more expensive accommodation services also had a bigger impact on the index.

Change of the consumer price index by commodity groups, May 2016
Commodity group May 2015 – May 2016, % April 2016 – May 2016, %
TOTAL -0.9 0.1
Food and non-alcoholic beverages -1.3 -0.3
Alcoholic beverages and tobacco 6.9 0.9
Clothing and footwear 3.8 0.9
Housing -3.8 -0.3
Household goods 0.3 0.1
Health 1.8 0.5
Transport -5.9 -0.3
Communications -1.8 -1.5
Recreation and culture 2.4 0.2
Education -13.5 0.0
Hotels, cafés and restaurants 2.4 2.3
Miscellaneous goods and services 1.4 0.5

Source: Statistics Estonia


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