The price level in July remained unchanged

  • External environment price pressures remain weak, although some commodities have become more expensive
  • Oil price, which has a major impact on the cost of the consumer basket, went down again in July
  • Domestic price growth in Estonia has slowed despite the fact that retail and wages have grown relatively fast

Data from Statistics Estonia show that the consumer price index did not change in July. Compared to July 2015, the price level dropped 0.1%. Growth in the harmonised consumer price index of the euro area accelerated in July from 0.1% to 0.2%. The price pressures in the external environment are still weak, although the global prices of some commodities have turned upwards. Over the past few months, food prices have gone up primarily for sugar. The market outlook for this year’s harvest has been positive and this is expected to rein in food price inflation. However, the price of crude oil fell again in July after six months of positive growth. The oil price significantly affects the cost of the consumer basket, as it has an impact on other energy sources, such as heat, as well as many services.

Core inflation (i.e. manufactured goods and services), which is mainly dependent on domestic factors, has slowed down to 0.4%, even though retail sales volumes and wages have continued to grow relatively quickly. Year-on-year, the prices of manufactured goods grew in July on account of clothing and footwear, as seasonal discounts were smaller this year than the year before. The growth in service prices, which was previously supported by rising rent prices, has dwindled in the past months. The consumers’ inflation expectations and sentiment indicators are low, which makes it harder for companies to raise their prices. This puts a damper on the growth of consumer prices.

Eesti Pank forecasts moderate inflation for the second half of the year. As past months have seen falling prices, it may be assumed that the average annual price level will not change compared to last year.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

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Estonian economy grew 0.6 pct in the 2nd quarter

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 0.6% in the 2nd quarter of 2016 compared to the 2nd quarter of the 2015.

In the 2nd quarter of 2016, the seasonally and working-day adjusted GDP increased by 0.3% compared to the 1st quarter and by 0.5% compared to the 2nd quarter of 2015.

In the 2nd quarter, external demand was strong. The real increase of the export of goods of the total economy was 5% compared to the same quarter of the previous year. In the 2nd quarter, foreign trade was mainly influenced by the increase in the export and import of electronic products. Additionally, the export of goods was significantly affected by the increase in the export of electrical equipment and wood and products thereof. Furthermore, the real import of goods of the total economy increased 7% compared to the 2nd quarter of 2015.

According to the preliminary calculations, GDP growth in the 2nd quarter was negatively influenced by net taxes on products. At current prices, there were increased receipts of value added tax and excises. At the same time, payments of subsidies grew.

The flash estimate of economic growth is calculated only by production approach using VAT return information from the Estonian Tax and Customs Board and data from various statistical actions of Statistics Estonia which have been obtained by the time of preparing the estimate. Therefore, the flash estimate may differ from the revised estimates of the GDP, which are based on the respective quarterly data and calculated by expenditure, production and income approach.

The revised estimates for the 2nd quarter of 2016 will be published by Statistics Estonia on 8 September. On the same date data for 2012–2015 and the 1st quarter of 2016 will be updated according to the regular revision based on the supply and use tables and annual reports of enterprises. Also, GDP figures for the year 2010 are improved due to the changes in the supply and use tables.

Source: Statistics Estonia

Deceleration of economic growth was expected

According to the flash estimate of Statistics Estonia, GDP growth in Estonia decelerated to 0.6% in the second quarter of 2016 (in the first quarter, Estonian economy grew by 1.7%). Deceleration of the growth rate was expected.

First quarter economic growth was largely supported by strong private consumption and a rise in excise taxes on alcohol and motor fuels (part of net taxes on products). At the same time, the contribution of other economic activities to GDP growth remained rather low. According to the flash estimate of the Q2, net taxes on products have decreased in the second quarter, having a negative effect on economic growth.

Even though the annual growth in export volume of goods has accelerated to 5%, it has been quite narrow-based, mostly originating from the electronics sector. Unfortunately, the value added on products in this sector is quite low and the growth in export volume has not had an effect on GDP growth yet. In addition, import grew two percentage points more than export, which has a negative impact on economic growth. During the last few months, expectations of industrial companies on the growth of export turnover have improved, although they are not too confident about their competitiveness in foreign markets.

Strong private consumption supported the growth of the value added in whole and retail sales. According to preliminary data, value added in the manufacturing sector increased after 4 quarters of decline. On the other hand, value added in the transportation sector has been declining for the past two years.

Investments, most probably, decreased (or the growth was very weak). Corporate sector credit portfolio has increased fast this year. Although new credit goes primarily to commercial real estate, capital investments have increased, as well. Due to an increase in the imports of capital goods and a decent credit growth in the business sector, we expect a decline in investment volumes to recede.

We expect that the GDP growth will accelerate in the second half of this year, supported by robust consumption, exports and an improvement in investment volumes. However, due to the stronger-than-expected imports and weaker-than-expected investments, we shall revise down our current GDP forecast (2%) for this year.

Source: Swedbank

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

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