Estonia’s highest ever surplus – 5.9% of GDP

The current account of the Estonian balance of payment recorded its highest ever surplus in the second quarter of 2015 at 308 million euros, or 5.9% of GDP, which is more than two and a half times larger than in the same quarter of last year. The main contribution to the growth in the surplus came from the primary income account, which shows labour and investment income, and from the trade account. Having been in deficit to a large degree for years, the primary income account showed a small surplus in the second quarter, while the deficit on the goods account decreased1. Exports and imports of goods and services had a positive balance of 295 million euros on the current account, with exports 3% below their level of the same quarter in the previous year, and imports 4% below theirs.

The deficit in the export and import of goods fell by around one fifth over the year to 196 million euros as imports declined faster than exports did. Imports of goods crossing the Estonian border were 242 million euros larger than exports going the other way. The turnover of goods under merchanting, which are those bought abroad by Estonian merchants for sale in a third country, made up 14% of the turnover of exports and imports of goods, and sales of goods under merchanting exceeded purchases of such goods by 46 million euros.

Exports and imports of services were down by 1% and the surplus from exports and imports of services was the same size as in the second quarter of last year at 491 million euros. There was a decline in the surplus of travel services and transport services, two important services sectors, while the positive balance of other business services increased its share slightly. The surplus in construction services increased almost fourfold at the same time.

The investment and other income account recorded a net inflow in the second quarter2 as a sharp fall in the outflow of direct investment income meant that the inflow of income exceeded the outflow by 13 million euros. The outflow of direct investment more than halved as income tax on superdividends3 was paid to the Estonian state.

The net inflow of labour income and subsidies for production from European Union funds increased somewhat, but remained at about the same level as last year.

The surplus on the capital account increased in the second quarter mainly because of the 69 million euros received in investment support from the European Union Structural Funds.

The net total of the current and capital accounts, or net lending (+) or borrowing (-), saw a surplus of 376 million euros in the second quarter, meaning that the Estonian economy was a net lender to other countries. This was reflected as a net outflow of capital on the financial account of the balance of payments as foreign direct investors reduced the equity of their direct investment companies in Estonia. Credit institutions brought capital in from their external accounts, which was reflected on the cash and deposits account under other investments, with the result that the external assets of the central bank, reflecting the deposits of the banks at the central bank, increased.

Eesti Pank will release the statistics for the balance of payments and the external debt for the third quarter together with a comment on 9 December.

1 All comparisons have been drawn on an annual basis, if not indicated otherwise.

2 Net flow = inflow minus outflow. If the inflow exceeds the outflow, there is a net inflow, if the outflow exceeds the inflow there is a net outflow.

3 Superdividends are on-off dividend payments that are treated as a reduction in equity and shown in the financial account.

The structure of the current account

Net lending (+) and net borrowing (-) and the total current and capital account


Source: Bank of Estonia

In July foreign trade decreased

According to Statistics Estonia, in July 2015, exports of goods decreased by 6% and imports by 4% compared to July of the previous year. The decrease in exports and imports was mostly influenced by a fall in the trade of electrical equipment and mineral products.

In July, exports from Estonia amounted to 0.9 billion euros and imports to Estonia to 1.1 billion euros at current prices. The trade deficit was 165 million euros and it increased by 6 million euros compared to July 2014.

The biggest share in Estonia’s exports in July was held by electrical equipment (20% of Estonia’s total exports), followed by mineral products (12%), mechanical appliances (9%), wood and products thereof (9%) and agricultural products and food preparations (9%). The biggest decrease occurred in the exports of electrical equipment (down by 50 million euros), mineral products (down by 17 million euros) and metals and products thereof (down by 13 million euros). Compared to the same month of 2014, the biggest increase occurred in the exports of miscellaneous manufactured articles and mechanical appliances (up by 16 and 14 million euros, respectively).

In July, the main commodities imported were electrical equipment (17% of Estonia’s total imports), mineral products (12%) and agricultural products and food preparations (11%). The drop in imports was influenced the most by a decrease in the imports of electrical equipment (down by 44 milion euros) and mineral products (down by 14 million euros). At the same time, the imports of transport equipment increased up by 5 million euros.

The top destination country of Estonia’s exports in July was Sweden (18% of Estonia’s total exports), followed by Finland (16%) and Latvia (11%). Electrical equipment and mechanical appliances were the main commodities exported to Sweden; electrical equipment and metals and products thereof were the main commodities exported to Finland; mineral products (incl. electricity) and agricultural products and food preparations were the main commodities exported to Latvia. The biggest decrease occurred in exports to the USA and Latvia. Exports to the USA and Latvia decreased mainly due to a decrease in the exports of mineral products and electrical equipment. At the same time, there was a significant increase in exports to Norway (up by 10 million euros). The increased imports to Norway were mainly due to the growing exports of miscellaneous manufactured articles (incl. furniture and prefabricated buildings).

The main countries of consignment in July were Finland (14% of Estonia’s total imports), Germany (11%) and Lithuania (10%). The main commodities imported were electrical equipment and mineral products (incl. motor spirits, electricity) from Finland; mechanical appliances and transport equipment from Germany; mineral products and agricultural products and food preparations from Lithuania. The biggest decrease occurred in imports from Germany (down by 17 million euros), from the United Kingdom (down by 13 million euros) and from China (down by 10 million euros). Imports from Germany decreased mainly due to a decrease in the imports of mineral products (incl. motor oils); imports from the United Kingdom decreased due to a decrease in the imports of mechanical appliances and imports from China decreased due to the decreased imports of electrical equipment. At the same time, the greatest increase occurred in the imports from Lithuania (up by 10 million euros). Imports from Lithuania increased mainly due to the increased imports of mineral products (incl. motorspirits).

Read more from Statistics Estonia

Weak foreign demand inhibits the economic growth in Estonia

• GDP real growth 2% in the second quarter
• Main contribution from private consumption, but investments decreased
• Economic activities dependent on foreign demand (transportation and manufacturing) had the largest negative contribution to the GDP growth
• Exports decreased less than imports, resulted in increased contribution to the GDP growth

According to the second estimate of Statistics Estonia, GDP grew 2% yoy in real terms in the second quarter (flash estimate was 1,9%). Compared to the previous quarter, GDP grew 0.7% (seasonally and working day adjusted).

Statistics Estonia published its regular revision of last four years, as well, whereas the last year’s GDP was revised up from 2.1% to 2.9% (major correction in the first quarter). This lifted Estonia together with Lithuania among the fastest growing countries in the region.

Wholesale and retail trade contributed the most to the economic growth in the second quarter. However, more than half of the GDP growth came from net taxes on products with the support of robust growth of VAT revenues. Whereas, primarily those economic activities which sell their goods and services on the domestic market contributed to the growth, activities dependent on foreign markets and foreign demand (transportation and manufacturing) inhibited the growth the most. Transport sector suffers primarily from the weakened demand from Russia and increased competition from Russian cargo ports. Substantial role in the decrease of manufacturing value added is played by the halted production and export of electronic products. Weak Russian market has substantial negative effect as well.

Export of goods and services decreased by 1% annually in the second quarter. Whereas, last year the robust growth of exports of electronic products compensated for the fall in exports to Russia, this is not the case anymore. At the same time, its positive, that enterprises have gradually redirected their exports to new markets. We expect that export volume remains approximately on the same level this year as in 2014.

According to the revised figures, private consumption has been even stronger this year, growing 5.4% yoy in the second quarter, as well as in the first half of the year. The main contribution has come from the increased consumption of food and goods and services of recreation and culture. Considering the accelerated real growth of net wages, the robust growth of private consumption has been expected. However, the expected deceleration in the growth of real net wages, together with the decrease in population and employment, can inhibit the growth of private consumption next year.

Investments have decreased already four quarters in a row. In the second quarter, the decrease was 8%, primarily due to the negative contribution of corporations. Its positive, that government investments increased after falling five quarters in a row. Considering weak foreign demand in this year together with the decrease in business sector turnover, increased labor costs and decrease in profitability, as well as worsened sentiment, we do not expect broad based growth of investments shortly.

Major share of intermediate and capital goods have to be imported to Estonia. Together with the decreased demand for the intermediate goods and investments, imports have decreased, as well. Whereas, the imports have decreased more than exports resulting in the increased contribution of net exports to the GDP growth.

We expect that foreign demand will gradually improve next year, and will give stronger support to the GDP growth. According to our recent estimates, GDP growth reaches to 1.9% in this year and it will accelerate in the next year. However, downward risks have increased in the global economy, which can worsen the outlook of the GDP growth in Estonia, as well.


Source: Swedbank

The fall in exports to Russia reduced GDP growth

The flash estimate from Statistics Estonia shows that the Estonian economy grew by 1.9% over the year to the second quarter, and by 0.8% over the quarter, adjusted seasonally and for the number of working days. The growth in manufacturing output in recent months and figures for exports had indicated that the economy grew more slowly than the flash estimate showed, but the flash estimate indicates that while exports did act as a brake on growth, they did so by less less than the amount added by domestic consumption.

Exports mainly declined because demand in Russia is weak and exports to other markets have not been able to compensate fully for this (see Figure). The index of European economic confidence strengthened again for the second consecutive quarter. However, there are few areas of the Estonian economy that are able to benefit quickly from the improvement in the European economy and increase exports, as traditional target markets for exports by Estonian companies have been faring less well.

Exports to Russia dropped by one third in the second quarter, which reduced GDP growth by around one percentage point. Exports to Russia fell by less than they did in the first quarter, when they halved. Exports to Russia largely consist of products from other countries and so the main impact of the reduction in exports was felt by companies providing intermediation services and transport companies. The rouble has continued to slide in recent weeks, making it likely that Russian demand for imported goods will remain low.

Although manufacturing output declined, the sector still made a positive contribution to GDP growth. This means that the value added of manufacturing industry must have grown, with fewer inputs being used for a similar volume of output. Wood production has boosted output from manufacturing, and has grown relatively stably in recent years. The fall in the price of energy meant that the energy industry and oil production had a negative impact on industrial output in the second quarter.

Although wages and household incomes have started to grow more slowly, retail sales and consumption have continued to grow rapidly. Available data on corporate financial results for the second quarter indicate that major investments were made in the second quarter, but they are likely to have had a one-off impact on economic growth. There is more spare production capacity in most sectors than there was before the economic crisis of 2008, and production can be increased without major investment. Spare capacity shrank during the second quarter however, meaning there was probably an increase in the need for investment in growing sectors.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Estonia’s exporters still struggling

• Sluggish export volumes to be expected in 2015
• Situation across sectors differs
• Growth of exports expected to strengthen in 2016

Sluggish export volumes to be expected in 2015
The growth of exports has been rather modest in recent years. One of the reasons has been weak demand in Estonia’s export markets. Import demand in Latvia and Finland has been stagnant for the past two-three years, and demand in Russia has deteriorated remarkably in 2014-2015.

Situation across sectors differs
The producers of electronics, wood/furniture, and metal products are doing relatively well, while exporters related to the Russian market (dairy, vodka, the oil industry, logistics and tourism) feel the impact of smaller orders from the east. Also, in terms of output prices, some enterprises have been able to ask higher prices for their products (pharmaceuticals, metals, and furniture), while others have had to accommodate not only weak demand but also lower prices (most notably, petroleum products, but also electronics, food, and chemicals).

Growth of exports expected to strengthen in 2016
Sentiment among Estonian manufacturers has deteriorated somewhat this year as export order books are thinner. We expect export demand, as well as export prices, to remain tepid throughout 2015. Demand will weaken in Russia, Latvia, and Lithuania and remain stagnant in Finland this year. Export volumes should pick up in 2016, supported by more robust economic growth among Estonia’s trade partners. This should widen export opportunities for Estonian companies and boost export volumes.

Source: Swedbank

Foreign trade turnover decreases

In May 2015, the turnover of exports of goods of Estonia decreased by 6% and imports by 10%, year on year. After the first five months, exports’ turnover has declined by 1% and imports’ turnover by 5%, year on year. Export sales to Russia have declined by around 50%, year on year, during the first 5 months of this year, while exports to other markets have increased modestly (+4%, yoy).

One reason behind a decrease in the turnover of foreign trade has been a fall in output and input prices. Export prices in the Estonia’s manufacturing sector have declined by 4% and import prices by 3% (5 months data). A decline in prices has been caused by modest demand on world’s markets as well as an oversupply of commodities. Among Estonia’s main export articles, export volumes of mobile network devices (Estonia’s main export article), wood products, furniture, various optical and other instruments, and metal products are on the rise. The export volumes of construction machinery (bulldozers, etc.; transit goods from Western Europe to Russia), milk, vodka (Russia one of the main markets) and petroleum oils (partly transit goods from Russia to other parts of the world) have decreased substantially. The share of Russia in Estonia’s exports of goods and services has decreased from 10% in 2013 to 5% in the first quarter of 2015. Sentiment among Estonia’s manufacturing industry has remained relatively stable throughout this year, according to a survey of the Estonian Institute of Economic Research, published yesterday, although demand on export markets is below historical average. Manufacturing enterprises expect their sales, prices, and the number of employees to stay at current level. Managers in the industry perceive the Russia/Ukraine conflict and Greece as main risks surrounding the outlook. Source: Swedbank

April saw a reduction in Estonia’s activity in foreign markets

The flash estimate1 put the Estonian current account at 20 million euros in surplus in April 2015. Almost all the components in the current account were down, as exports and imports of goods and services and income from direct investment were less than in April last year. As the fall in imports was larger than that in exports however, the current account moved into surplus.

The sum total of the current and capital accounts was also positive in April. This means that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more resources abroad than it received from there.

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. From January 2015 Eesti Pank is accompanying the publication of the flash estimate with a short comment. The statistics on the second quarter of 2015 will be published with a comment on 8 September.

1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

Read more from Bank of Estonia website


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