Profit of the business sector decreased in 2015

According to the preliminary data of Statistics Estonia, in 2015 the total profit of the business sector was 3.0 billion euros, which was 8% less than the year before. The increase in the business sector’s total profit turned to decline after five years of growth.

Compared to 2014, the total profit decreased in almost all economic activities. The biggest contribution to the total profit was made by real estate activities. The growth in the profit of the business sector was negatively influenced mostly by manufacturing and energy enterprises. The profit of manufacturing decreased 16% compared to 2014, mainly due to the decreased profits in the manufacture of electronics and fuel oil products.

In 2015, enterprises sold goods and services for 49.1 billion euros, which was 3% less than the year before. The turnover of trade enterprises, which have the biggest share in the total turnover of the business sector, decreased 3%, influenced mostly by a decrease in the turnover of wholesale trade. At the same time, the turnover of retail trade and motor trade continued to grow. The turnover of manufacturing enterprises stayed the same as the year before.

Compared to 2014, the total costs of enterprises decreased 2%, while personnel expenses increased 7%. Both the number of persons employed and the number of hours worked increased 2%. The labour productivity of the business sector on the basis of value added amounted to an average of 22,100 euros per person employed in a year and stayed on the same level as in 2014.

The investment activity of enterprises continued to decrease for the third year in a row. In 2015, enterprises invested 2.3 billion euros, which is 4% less than the year before. Similarly to 2014, the largest investments were made mainly in equipment and machinery and in the construction and alteration of buildings. The main investors were manufacturing, energy and trade enterprises with about a half of the total investments of enterprises. Compared to 2014, the investments in acquisition of buildings and in equipment and machinery increased. Other investments decreased, with the biggest decrease registered in investments in land.

In the 4th quarter of 2015, enterprises sold goods and services for 12.7 billion euros, which was 2% less than in the same period of 2014. In the 4th quarter of 2015, enterprises invested 759 million euros, i.e. the same as in the 4th quarter of 2014.Diagram: Total profit of the business sector, 2002–2015

Source: Statistics Estonia

Expenditure on research and development fell last year

According to Statistics Estonia, in 2014 the expenditure on research and development (R&D) in Estonia amounted to 286.7 million euros, which was 12% less than in 2013.

It was somewhat expected that in 2014, R&D expenditure remained on a downward trend as the large investments made in 2010–2012 to start the pilot project in the oil industry led to the exponential increase in total spending on R&D. In 2013, the pilot factory reached the production phase and the share of investments began to decrease. The impact of this was clearly recognizable in 2014.

In 2014, half of R&D expenditure in Estonia came from the State Budget. The share of R&D financing in the total general government expenditure was 1.87%.

The R&D expenditure in non-profit institutional sectors (higher education, government and non-profit private sectors) was 161.9 million euros, which was 5% less than in the previous year. This was mainly influenced by the higher education sector, where spending fell by 8% compared to the previous year.

The R&D expenditure in the business enterprise sector was 124.8 million euros, which accounted for 44% of the total R&D expenditure. Spending decreased by a fifth compared to the previous year mainly at the expense of investments. The share of investments in R&D expenditure in the business enterprise sector was 19%, which is the lowest in the recent years. This is influenced by the overall economic situation, where investment activity had started to decline already in 2013 and in 2014 business investments were a tenth smaller than in the year before.

R&D intensity i.e. the ratio of R&D expenditure to GDP was 1.44% in 2014, which meant a decrease of 0.28 percentage points compared to the previous year. According to Eurostat’s preliminary data, Estonia did not fit into the top ten countries based on the R&D intensity index, but retained its position at the top of the following ten.

Compared to 2013, the R&D personnel in non-profit institutional sectors increased from 7,517 to 7,562. Calculated in full-time equivalents (only by working time spent on R&D) the number of employees increased from 3,789 to 3,998. In full-time equivalents, R&D personnel were nearly half of the total, which means that almost every other person has been looking for extra work. In the business sector, R&D personnel also increased (from 2,767 to 2,930) while in full-time equivalents, the number fell from 2,069 to 1,798. R&D labour costs in the business enterprise sector remained at the same level as in the previous year.

Diagram: R&D expenditure, 2002–2014

Source: Statistics Estonia

 

The profit of the business sector increased in 3Q by 5 pct

According to Statistics Estonia, in the 3rd quarter of 2015, the total profit of the business sector was 892 million euros, which was 5% more than in the same period a year ago.

Compared to the 3rd quarter of 2014, total profit increased in almost all economic activities. The biggest contribution to the growth in total profit was made by real estate and information and communication enterprises. The growth in the profit of the business sector was negatively influenced mostly by transportation and storage and manufacturing enterprises.

In the 3rd quarter of 2015, enterprises sold goods and services for 12.4 billion euros, which was 2% less than in the same period a year ago. The turnover of trade enterprises having the biggest share in the total turnover of the business sector stayed on the level of the previous year, influenced mostly by a decrease in the turnover of wholesale trade. At the same time, the turnover of retail trade and motor trade continued to grow. The turnover of manufacturing enterprises decreased 3%.

Compared to the 3rd quarter of 2014, the total costs of enterprises decreased 3%, while personnel expenses increased 7%. The number of persons employed as well as the number of hours worked increased 2%. The labour productivity of the business sector on the basis of value added amounted to an average of 5,800 euros per person employed per quarter, i.e. 5% more than in the 3rd quarter of 2014.

The investment activity of enterprises continues to be at a low level. In the 3rd quarter of 2015, enterprises invested 578 million euros, which was 6% less than in the same period the year before. Compared to the corresponding quarter of the previous year, investments continued to decrease for the second year in a row. The largest investments were made mainly in buildings, and machinery and equipment. The main investors were manufacturing, energy, trade and real estate enterprises, with more than a half of the total investments of enterprises. Compared to the 3rd quarter of 2014, only the investments in the acquisition of buildings and in machinery and equipment increased. Other investments decreased, with the biggest decrease registered in investments in vehicles.

Diagram: Total profit of the business sector, 1st quarter 2010 – 3rd quarter 2015

Source: Statistics Estonia

 

Estonian companies have increased their competitiveness

At the Äriplaan 2016 conference on Wednesday, Sept.30 2015, Governor of Eesti Pank Ardo Hansson spoke of how Estonian companies have succeeded in increasing their non-price competitiveness. The need to improve competitiveness has become ever more important in coming years as higher labour costs have made production more expensive.

Despite the strong growth in wage costs, companies find that their competitiveness in the European Union market has improved. “The opinion of companies suggests that non-price competitiveness has improved and Estonia’s advantage as a producer lies in more than cheap labour resources,” explained Governor Hansson.

Non-price competitiveness shows whether companies are able to increase exports despite higher prices and labour costs by concentrating on something other than prices. Non-price factors can include innovation, product variety, recognition and quality, position in global production chains, and integration in international production networks.

However, Mr Hansson underlined that in the near future Estonian companies will have to work on developing non-price competitiveness even more than they have so far as the working age population in Estonia starts to shrink. “The number of workers has not fallen yet, but Estonia is entering a demographic autumn and the labour market will lose 30,000 people over the next five years. The decline in the working age population means that it will soon become harder for companies to find employees and wage pressures will increase. Estonian companies have done well at improving their competitiveness and this gives us the chance to become gradually more successful”, he explained.

He noted that inflation is likely to move from its level of around zero this year to 2.5-3% in the coming years. “The biggest beneficiaries so far have been companies focused on the domestic market, as cheaper energy has boosted the real purchasing power of households. If prices start to rise in the years ahead, people will find their purchasing power no longer rises so fast”.

Mr Hansson said that the Estonian economy is capable of faster growth than the current 2%, but to grow faster than 4% would need assistance from structural reforms.

He considered that another risk to economic growth alongside excessive rises in labour costs is that corporate profits may continue to decline. This would limit the ability of companies to make the investments that will provide growth in the future. He also noted the risk from the Nordic real estate markets, because if prices start to fall sharply there, the Nordic bank groups operating in Estonia could face difficulties that could mean they may not be able to continue providing loans to Estonian companies on favourable terms.

Source: Bank of Estonia

Refugees find it tough to start a business in Estonia

Äripäev writes that a case of an Armenian family who moved to Estonia three years ago and has been planning to open a national restaurant in Estonia shows that it’s tough for refugees to start their own business in Estonia.

The main problem that is that banks are unwilling to grant loans to a family that does not have citizenship. They also don’t comply with the requirements to the grants offered by Enterprise Estonia.

Read more from BBN

The profit of the business sector decreased in Q2

According to Statistics Estonia, in the 2nd quarter of 2015, the total profit of the business sector was 724 million euros, which was 15% less than in the same period a year ago.

Compared to the 2nd quarter of 2014, total profit decreased in almost all economic activities. The growth in the profit of the business sector was negatively influenced mostly by manufacturing, information and communication and agricultural enterprises. The profit of manufacturing, which holds the largest share in the total profit of the business sector, decreased 16%, mainly due to the decrease in profits in the export-oriented manufacture of metal products and wood.

In the 2nd quarter of 2015, enterprises sold goods and services for 12.5 billion euros, which was 3% less than in the same period a year ago. The turnover of trade enterprises, which have the biggest share in the total turnover of the business sector, decreased 4%, influenced mostly by a decrease in the turnover of wholesale trade. At the same time, the turnover of retail trade continued to grow. The turnover of manufacturing enterprises increased 1%.

Compared to the 2nd quarter of 2014, the total costs of enterprises decreased 2%, while personnel expenses increased 6%. The number of persons employed as well as the number of hours worked increased 2%. The labour productivity of the business sector on the basis of value added amounted to an average of 5,500 euros per person employed per quarter, i.e. 3% lower than in the 2nd quarter of 2014.

The investment activity of enterprises continues to be at a low level. In the 2nd quarter of 2015, enterprises invested 520 million euros, which was 3% less than in the same period the year before. The decrease in investments compared to the corresponding quarter of the previous year continued for the seventh quarter in a row. The largest investments were made mainly in equipment and machinery and buildings. The main investors were energy, manufacturing, trade and agricultural enterprises, with more than a half of the total investments of enterprises. Compared to the 2nd quarter of 2014, only the investments in the acquisition of buildings and in equipment and machinery increased. Other investments decreased, with the biggest decrease registered in investments in vehicles.Diagram: Total profit of the business sector, 1st quarter 2010 – 2nd quarter 2015

Source: Statistics Estonia

The low investment activity is reflected in the slower growth of corporate debt

The growth of corporate debt decreased at the start of the year. In quarterly terms, the volume of loans taken and bonds issued stopped increasing by the end of the first quarter of 2015, but year-on-year, the growth reached nearly 4%. The volume of long-term loans has decreased because of moderate investment activity, both in case of loans taken from the Estonian financial sector and loans taken from abroad.

Corporate equity decreased somewhat in the first quarter. Reduced profits and relatively substantial dividend payouts meant that reinvested profits also decreased, and the growth of equity, which was fast-paced after the economic crisis, stopped. In international comparison, however, the level of equity in the Estonian corporate sector is quite high.

The incomes and savings of households are still growing faster than their loan liabilities. Higher incomes helped the cash and deposits of households to increase by 9% over the year, to 6.3 billion euros. At the same time, loan liabilities grew by 3.5% and reached 7.8 billion euros. The growth rate of both long-term housing loans and short-term loan liabilities has accelerated somewhat. The indebtedness of households as a ratio of disposable income decreased and as a ratio to GDP remained at 40%.

Like in the past five years, Estonian residents still invested or returned more funds abroad than they took in from there. This was because Estonian residents still saved more in the first quarter than they invested.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

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