Estonian economy grew in the 2nd quarter

According to the second estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased 0.8% in the 2nd quarter of 2016 compared to the 2nd quarter of the previous year.

In the 2nd quarter, the GDP at current prices was 5.3 billion euros. The seasonally and working-day adjusted GDP increased by 0.5% compared to the 1st quarter of 2016 and by 0.6% compared to the 2nd quarter of 2015.

According to the second estimates, GDP growth was inhibited the most by a decrease in value added in the energy sector, mining and quarrying and real estate activities. In the energy sector, production of all types of energy fell. The decrease in the value added of mining and quarrying was caused by a fall in the extraction of oil-shale. Although the value added of real estate activities increased at current prices, the increase in prices in this economic activity resulted in a decrease in the value added at constant prices.

In the 2nd quarter of 2016, GDP growth was influenced the most by information and communication, the value added of which rose mainly due to the rapid growth in the value added of computer programming and information service activities. I addition, the biggest contributor to GDP growth were agriculture, forestry and fishing, and trade. Among trade activities, retail trade contributed the most to GDP growth and the value added of wholesale increased as well.

Also, the value added of manufacturing (the biggest economic activity in Estonian economy) contributed to the increase of GDP. In the 2nd quarter, value added increased in more than half of manufacturing activities. The main contributors to the growth of manufacturing were the manufacture of electrical equipment, textiles and wearing apparel. At the same time, the manufacture of fabricated metal products, electronic products and mineral products decreased.

The export of goods and services rose by 4.1% at real prices, mainly due to an increase in the import of electronic products, electrical equipment and wood and articles of wood. Total import increased by 8.8% at real prices compared to the 2nd quarter of the previous year. This is the biggest growth of the last 14 quarters. Import of goods and services was increased the most by a growth in the import of electronic products, motor vehicles and base metals.

In the 2nd quarter of 2016, net export amounted 3.8% of the GDP.

Real GDP grew slower than the number of persons employed and hours worked (respectively 2.0% and 2.9%), meaning that there was a fall in the productivity of the total economy per person employed as well as per hour. Compensation per employee grew faster than productivity and unit labour costs increased 6.4% compared to the same quarter of the previous year.

Domestic demand rose. At real prices, all components of domestic demand increased, except for the final consumption expenditures of government sector. Households’ final consumption expenditure increased by 3.0%. The expenditures on transport, food and recreation increased the most.

In the 2nd quarter of 2016, after having declined in the last 8 quarters, gross fixed capital formation increased by 5.4% at real prices. Households’ investments in dwellings as well as the gross fixed capital formation of non-financial enterprises in buildings and structures and machinery and equipment increased the most. At the same time, gross fixed capital formation of the government sector decreased.

Diagram: Contribution of economic activity to GDP growth, 2nd quarter 2016

As part of a regular revision, Statistics Estonia revised the national accounts data for 2012–2015 based on the supply and use tables and annual reports of enterprises. In conjunction with the publication of the estimates for the 2nd quarter of 2016, the estimates for the 1st quarter of 2016 were also revised. Additionally, data for 2010 were revised.

Source: Statistics Estonia
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Long-awaited investment growth is starting to take off

Statistics Estonia revised second-quarter annual GDP growth 0.2 percentage points up to 0.8%. Regular revision of last four years was also published and led to changes in real growth rates of previous years. 2012-2014 GDP growth was revised down 0.9 to 0.1 percentage points whereas last year’s GDP growth was revised up by 0.4 percentage points to 1.4%.

Private consumption still contributed the most to GDP growth in the second quarter, although at a decelerating pace. Investments, which have had a negative influence on growth for the past two years, have started to improve. The recovery originates from private households, who invest into dwellings, as well as non-financial enterprises. The growth of non-financial enterprises’ investments has accelerated from 0.7% in the first to 5.5% in the second quarter. Compared to the second quarter of 2015, non-financial enterprises’ investments into transportation equipment have doubled. On the other hand, investments into machinery and equipment, the key to future growth, are still lagging.

Export and import growth of goods and services gained momentum in the second quarter. The growth of these has been very broad based with goods and services having almost equal growth rates. Import growth exceeded export growth and therefore the negative contribution from net exports to GDP increased.

ITC and agriculture sector had the largest positive and energy production the largest negative contribution to GDP growth in the second quarter of 2016. It is noticeable that the value added of transportation and storage activities has started to increase after being in a decline for three years. Also the value added in manufacturing sector has started to grow. As manufacturing sector makes up the largest piece of value added in the Estonian economy, it is assuring that the growth there is broad-based and more than half of the economic activities of manufacturing had positive growth rates.

According to our estimates, investments will continue to support GDP growth while the influence of private consumption will decrease. We expect the economy to grow 1.5% this year and 2.5% in 2017 due to increasing support from investments and export.

 

Source: Swedbank

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