2017 was the most successful since the economic crisis

  • The economy was driven upwards mainly by a burst of growth in demand
  • Increased investment is required for the economy to continue to succeed
  • An increase in employment rather than in investment has brought the labour market very close to overheating

The year 2017 was a successful one for the Estonian economy. Growth climbed to almost 5%, having been stalled in previous years, and this is one of the fastest rates since the crisis. Growth was boosted by a notable recovery in export markets and faster rises in prices there. The economy also benefited from the rapid growth in the incomes of residents of Estonia, which was reflected in household consumption. Increased demand and a higher price level in both domestic and external markets allowed companies to increase both their turnover and their profits, for the first time in some years. Data on industrial output and from corporate surveys in recent months have shown the rapid growth in the economy continuing at the start of this year too.

Catching up with richer countries will need more investment than has been seen so far. Having fallen for several years, spending on fixed assets increased last year in both the corporate sector and the general government. The increase in general government investment was largely down to more efficient use of structural funds, while companies were encouraged to invest by the much improved state of foreign markets and the goal of increasing output to claim part of the growth in demand. Even so, Estonian companies put a smaller part of their value added into investment, the source of future growth in the economy, than did companies in the other countries of the euro area on average. This means there is still not enough investment activity for Estonia to catch up with the income levels of richer countries.

The labour market is very close to overheating as companies have preferred to increase their number of employees rather than making investments. Low unemployment, a rise in the number of unfilled vacancies, deepening labour shortages, and rapid growth in labour costs are all indicators that the strong growth last year was driven mainly by short-term growth in demand, not by increases in the production capacity of companies or in labour productivity. However, success in exporting and competitiveness and the overall development of the economy depend on productivity.

There has been no clear indication that the competitiveness of exports has declined because of rising wages and production costs.The market share of exported goods and services increased slightly last year and prices have risen more than those of competitors, which is one reason why the trade surplus increased last year. Surveys of exporters do not point to any decline in competitiveness either. However, given the small share that Estonian exports have in foreign markets, it is possible that success in exporting last year was mainly due to the favourable foreign environment and problems will only appear if demand weakens in Estonia’s trading partners.

The success of the economy was also reflected in the state finances. More was taken in VAT and labour taxes than was planned, though the budget for the year as a whole was in deficit and the deficit was larger than forecast. Outgoings exceeding income means that the state contributed to boosting growth in the economy alongside the private sector. Although the deficit was not large, a surplus in the budget instead would have helped to smooth the economic cycle. Forecasts show that growth in the economy will slow in the years ahead, but will still remain above its sustainable level. For this reason it would be wise to plan a surplus in the budget, so that in the longer term it would be possible to support the economy if needed without breaking the budget rules that have been set in place.

Source: Bank of Estonia

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A cooling of growth in the Estonian economy

Having grown strongly until the end of 2017, the euro area economy is now showing the first signs of weakening, and the European Central Bank has forecast slower growth ahead, said Eesti Pank economist Rasmus Kattai at a conference of Estonian food industry association. As exports provide around 80% of Estonian GDP, a cooling in the economy of the euro area would also affect the Estonian economy.

The Estonian economy grew by around 5% last year and this growth was driven by growth in the export-oriented industrial sector as well as by domestic demand. Slower economic growth in foreign markets could thus lead to slower growth in Estonia too. Growth will also slow because there will not be the same support as in earlier years from increased activity by people in participating in the labour market and higher employment, unused capacity or loose monetary policy. Slower growth is to be expected in any case, as the Estonian economy is already running at above its average sustainable level and it is not possible to be permanently above your own average level.

Source: Bank of Estonia
Author: Rasmus Kattai, Economist at Eesti Pank

Estonian inflation fell further in March

  • Inflation slowed from 3.1% to 2.8% in March
  • Inflation for primary goods affects poorer households particularly
  • Economic growth in the external environment is gathering momentum and this will lead to higher inflation

Data from Statistics Estonia show the consumer basket was 2.8% more expensive in March than a year earlier. The price level did not change from the previous month.

Food price inflation reached 5.1% in March, and 1.7 percentage points of that came from the higher excise rates on alcohol that came into force this year. Although food price inflation has slowed a little in Estonia in recent months, its rate is still one of the fastest in the euro area. Food prices in the euro area rose by only 2.2% in March. Food price inflation affects poorer households particularly as primary consumption goods make up a larger share of their consumer basket. Food products fill 36% of the consumer basket of households in the first income quintile, who have the lowest incomes, while the richest households spend only 24% of their income on food.

Housing costs are the second largest share of the consumer basket and inflation for them accelerated to 4.2% in March. Housing costs were pushed up by a rise of 8.5% in rents and of 10% in the price of electricity. Inflation has been restrained somewhat in this heating season by the level of heat energy prices, which has remained broadly stable. Data from the business survey of the Estonian Institute of Economic Research indicate that services could start to contribute more significantly to inflation in the coming months.

Economic growth in the external environment has gained momentum since the last year, posing a risk of accelerating inflation. Some of the largest central banks outside the euro area have already decided to raise their monetary policy interest rates. Economic activity has also picked up in the euro area countries, but this has so far had only a weak impact on prices. The price of the consumer basket in the euro area was up 1.4% in March according to initial estimates.

Inflation in Estonia and euro area

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

Rapid economic growth is likely to give a boost to inflation

  • Inflation decelerated in February because of the higher reference base for prices of energy and food
  • Rapid economic growth is likely to give a boost to inflation
  • A rise of 3% in the price of the consumer basket can be expected in 2018

Data from Statistics Estonia show the cost of living was 3.1% higher in February 2018 than a year earlier, which is slightly less than the 3.5% recorded for January. Inflation remained subdued in the euro area at 1.2% in February, which is below the 2% target of the European Central Bank.

Inflation fell in Estonia in February mainly because of the higher reference base, as the largest increase in food prices came more than a year ago.

Food price inflation on global markets has now slowed and lower prices for some food groups have now passed into consumer prices. The price of butter has fallen by 6% in three months for example. However, the rise in prices of fruit and vegetables, which are more expensive in the winter months for seasonal reasons, was larger than usual. The rise of 18% in fruit prices in Estonia was one of the largest in the European Union.

The Estonian economy has grown exceptionally fast recently and the growth has been broadly based. It could be expected in consequence that inflation would be fairly even across groups of goods. However, the rise in consumer prices has again mainly been limited to higher prices for energy and food. Inflation for services and consumption goods was only 1% in February, though rising wages and company profits will probably start to raise those prices in the medium term. Inflation has been restrained to some degree by the recent strengthening of the euro against the US dollar. The overall consumer basket is forecast to rise in price by around 3% this year.

Inflation in Estonia and euro area

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

2017 was a good year for exports

The year 2017 was a successful one for the Estonian economy. The economy grew at a clearly faster rate than in previous years. Growth was boosted by the industrial sector, which is focused on exports, and by branches of the economy that serve domestic demand. The real growth in exports was less than in 2016, though this was due to a reduction in exports from one branch of industrial production. Investment finally started to increase in both the business and government sectors. Only investment by households remained the same as a year earlier. Against this background the current account surplus increased to 734 million euros, or 3.2% of GDP. The growth in passenger transport by air and information and computer services boosted the surplus in exports and imports of services by around one fifth. Alongside the growth in the surplus in the goods and services account, the surplus in the current account was also increased by fines received from abroad. The outflow of investment income was at about the same level as in the previous year, which indicates that the profit earned by companies based on foreign capital had not increased during the year.

More direct investment was made in Estonia from abroad than was made abroad from Estonia. New direct investment of around one billion euros was made in the equity capital of foreign-owned companies in 2017, which is around double the amount seen in the past four or five years. At the same time earlier investments were reduced by about the same amount, so overall there was no net flow of new money into the country. The reinvestment by non-financial companies of profits earned earlier in Estonia meant that the inflow of direct investment was still larger than the outflow, and it was at the same level as a year earlier.

Estonian assets abroad grew more than liabilities in 2017, and so Estonia was a net lender. As the current account has been in surplus for some time, there is money available in the Estonian economy that is being placed abroad more and more. In consequence, Estonia’s net international investment position, which is the difference between the foreign assets and liabilities of the country, has moved steadily towards balance. In 2017 it stood at around -30% of GDP.

Source: Bank of Estonia
Author: Kristo Aab, Economist at Eesti Pank

Estonian GDP increased by 4.9 pct in 2017

According to Statistics Estonia, in 2017, the gross domestic product (GDP) of Estonia increased 4.9% compared to 2016. In the 4th quarter of 2017, the Estonian economy grew by 5.0% compared to the 4th quarter of 2016.

2017

In 2017, the GDP at current prices was 23 billion euros.

The economic growth in 2017 was the fastest in five years. Main contributors to the broad-based growth were construction, information and communication, and professional, scientific and technical activities. The contribution of manufacturing grew gradually throughout the year. No economic activity had a strong negative impact on the economic growth. Also agriculture, which had been hindering the economic growth since the 2nd quarter of 2016, began to grow in the second half of 2017. At the same time, trade, which had driven economic growth in 2016, became the biggest drawback to the growth in the second half of 2017.

Supported by programming and software development, the value added of information and communication grew by 15.6%. The value added of professional, scientific and technical activities grew at almost the same rate – 13.9%. The value added of Estonia’s largest economic activity, manufacturing, grew despite modest results in the 2nd quarter at the fastest pace in three years – by 3.9%. The value added of trade, which went into decline in the second half of the year, grew only by 1.8%.

Net taxes on products did not grow significantly in 2017. Due to an increase in tax revenue, their growth at current prices was 5.4%, but the growth corrected for inflation was only 0.1%.

Despite the modest increase in the middle of the year, exports of goods and services grew 2.9% in 2017. The main contributor was the still solid growth in the exports of services, which reached 6.2%. This was mostly due to the exports of transport and computer services. The main hindrance to the exports of goods was the decline in the exports of electronic equipment. The imports of goods and services grew by 3.5%. The most significant contributor to this was the imports of vehicles. Net exports reached 980 million euros in 2017, which is 4.3% of the GDP. This is the largest share in the GDP in six years.

The growth in domestic demand accelerated for the second consecutive year, reaching 4.2%. This was led by the growth in investments (13.1%), which had been in decline for the past three years. Compared to 2016, investments grew in almost every sector and economic activity. The biggest impact on the GDP came from the investments in machinery and equipment by the government sector (0.4%), and in other buildings and structures by the government sector (0.5%) and nonfinancial enterprises (0.4%). Final consumption of households grew by 2.0% in 2017. The final consumption expenditures of the government sector grew by 0.8%, supported by the EU presidency.

In 2017, the growth of the GDP surpassed the growth of the number of hours worked and persons employed for the second consecutive year. As a result, productivity per hour worked grew by 1.9% and per person employed by 2.1%. While at current prices, the increase in labour costs slowed down a bit, unit labour cost grew by 3.6%.

4th quarter of 2017

In the 4th quarter of 2017, the Estonian GDP at current prices was 6.1 billion euros.

The Estonian economy grew by 5.0% compared to the 4th quarter of 2016. The seasonally and working-day adjusted GDP grew by 2.2% compared to the previous quarter and by 5.3% compared to the 4th quarter of 2016.

The main contributors to the economic growth were information and communication, professional, scientific and technical activities, and manufacturing. Energy and transportation also had a significant positive impact. The main hindrance to the economic growth were wholesale and retail trade, and real estate activities.Contribution to GDP growth, 4th quarter 2017

Domestic demand grew by 4.5% in the 4th quarter. The growth in investments slowed down significantly to 5.8% compared to the same period of the previous year. Main contributors to the growth were the investments in buildings and structures and in telecommunication equipment by nonfinancial enterprises, and investments in machinery and equipment and in defensive structures by the government sector. The final consumption of households grew by 2.6%.

The exports of goods and services grew by 3.4% compared to the same period of the previous year. The main contributors to the growth were the exports of chemicals and chemical products and electrical equipment. The same goods also contributed to the growth of the imports of goods and services, which grew 4.2%. Also the imports of vehicles increased significantly. The share of net exports in the GDP was 3.6%.

Both the number of hours worked and persons employed grew at the fastest pace in six years. As a result, the productivity per hour worked grew only by 0.5%, and the productivity per person employed fell by 0.4%. Unit labour cost grew by 3.7% in the final quarter of the year.

For the statistical activity “National accounts”, the main representative of public interest is the Ministry of Finance, commissioned by whom Statistics Estonia performs this statistical activity.

Source: Statistics Estonia

Regulated prices of goods and services have risen by 7.5 pct

According to Statistics Estonia, in January 2018, the change of the consumer price index was 0.4% compared to December 2017 and 3.5% compared to January 2017.

Goods were 4.4% and services 1.8% more expensive compared to January 2017. Regulated prices of goods and services have risen by 7.5% and non-regulated prices by 2.4% compared to January of the previous year.

Compared to January 2017, the consumer price index was affected the most by food and non‑alcoholic beverages, which contributed 40% of the total increase of the index. Milk, dairy products and eggs became 6.4%, fruit 13.3% and vegetables 11.5% more expensive. Alcoholic beverages and tobacco accounted for over a fifth of the total increase of the index. A half of the impact of alcoholic beverages and tobacco came from 23.8% more expensive beer. Motor fuel also contributed a fifth of the total increase. Petrol was 12.8% and diesel fuel 12.1% more expensive than in January 2017. Compared to the previous year, of food products, the biggest price increases were seen for eggs (38%), butter (33%) and potatoes (24%).

Compared to December 2017, the consumer price index was affected the most by large-scale sales of clothing and footwear. 4.1% more expensive fuel and 3.5% more expensive electricity that arrived at homes also had a greater impact on the index.

Due to continuous changes in consumption patterns and prices, Statistics Estonia updates the weights system of the consumer price index and the representative goods every year. In 2018, the weights system of the consumer price index corresponds to the average expenditure structure of the population in 2017. The base prices used for calculations are prices of December 2017. To ensure comparability with previous periods, the consumer price index is continued to be published on the base 1997 = 100. The linking month is December 2017. The table presents the expenditure structure (weights) used in 2017, as well as the expenditure structure used since the index of January 2018.

Change of the consumer price index by commodity groups, January 2018
Commodity group Weight 2017, ‰ Weight 2018, ‰ December 2017 – January 2018, % January 2017 – January 2018, %
TOTAL 1,000.0 1,000.0 0.4 3.5
Food and non-alcoholic beverages 226.8 227.4 0.8 5.7
Alcoholic beverages and tobacco 69.9 66.2 1.5 11.3
Clothing and footwear 57.9 55.8 -6.2 1.7
Housing 145.5 139.7 1.7 3.0
Household goods 61.7 62.4 0.7 1.0
Health 52.5 54.0 2.2 2.3
Transport 136.5 146.2 0.5 3.6
Communications 47.3 44.1 -0.4 -5.7
Recreation and culture 89.6 89.1 0.8 0.6
Education 11.8 11.6 2.0 -4.7
Hotels, cafés and restaurants 44.9 47.2 -0.7 4.9
Miscellaneous goods and services 55.6 56.3 -0.2 3.9

Statistics Estonia publishes the consumer price index on the 5th working day of each month, after the end of the reporting period. For the statistical activity “Consumer price index”, the main representative of public interest is the Ministry of Finance, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia