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

Exports from Estonia amounted to 0.9 billion euros in February

According to Statistics Estonia, in February 2015, exports of goods decreased by 7% and imports by 4% compared to February of the previous year. The decrease in exports and imports was mostly influenced by a fall in the trade of mineral products and mechanical appliances.

In February, exports from Estonia amounted to 0.9 billion euros and imports to Estonia to 1 billion euros at current prices. The trade deficit was 141 million euros and it increased by 17 million euros compared to February 2014.

The biggest share in Estonia’s exports in February was held by electrical equipment (22% of Estonia’s total exports), followed by wood and products thereof (11%) and agricultural products and food preparations (10%). The decrease in exports compared to February 2014 was due to a significant decrease in the exports of mineral products (down by 34 million euros) and mechanical appliances (down by 11 million euros). The biggest increase occurred in the exports of wood and products thereof (up by 11 million euros) and electrical equipment (up by 6 million euros).

In February, the main commodities imported were electrical equipment (21% of Estonia’s total imports), agricultural products and food preparations (10%) and mineral products (10%). The drop in imports was influenced the most by a decrease in the imports of mineral products (down by 43 million euros) and mechanical appliances (down by 11 million euros). At the same time, the imports of electrical equipment increased (up by 44 million euros).

The top destination country of Estonia’s exports in February was Sweden (19% of Estonia’s total exports), followed by Finland (15%) and Latvia (10%). Electrical equipment and wood and products thereof 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 Russia (down by 46 million euros), to Latvia (down by 15 million euros) and to Norway (down by 14 million euros). Exports to Russia were affected by a decrease in the exports of mechanical appliances (incl. bulldozers, excavators) and agricultural products and food preparations (incl. spirits, milk and dairy products, fish). Exports to Latvia fell mainly due to a decrease in the exports of mineral products (incl. motor spirits, electricity) and transport equipment (incl. motor cars). Exports to Norway decreased due to reduced exports of mineral products (incl. aromatic hydrocarbon mixtures) and miscellaneous manufactured articles (incl. prefabricated buildings). At the same time, there was a significant increase in exports to the Netherlands (up by 17 million euros) and Iran (up by 11 million euros). In the case of the Netherlands, the exports of mineral products (incl. oil shale) increased. In the case of Iran, there was a rise in the exports of agricultural products and food preparations (incl. barley).

The main countries of consignment in February were Finland (13% of Estonia’s total imports), Germany (10%) and Latvia (9%). The main commodities imported were electrical equipment and mineral products (incl. motor spirits, electricity) from Finland; mechanical appliances and transport equipment from Germany; and electrical equipment and agricultural products and food preparations from Latvia. The biggest decrease occurred in imports from Germany (down by 29 million euros) and Finland (down by 26 million euros). There were decreased imports of mineral products (incl. heavy oils) and mechanical appliances from Germany, and decreased imports of mineral products (incl. motor spirits and electricity) and transport equipment from Finland. At the same time, there was an increase in imports from China (up by 15 million euros) and Hungary (up by 13 million euros). The increased imports from China were mainly due to the growing imports of electrical equipment and textiles and products thereof, while the imports from Hungary grew mainly due to the increased imports of electrical equipment.

Read more from Statistics Estonia

The external balance improved last year

Growth in exports of goods and services was faster in the final months of last year than in the preceding quarters, though the developments were different for different groups of goods. So whereas exports of dairy products were around 30% smaller in the fourth quarter of last year than in the same quarter of the previous year for example, growth in exports of goods averaged around 3-4%. Growth was positive even though export prices fell by 3.7%. The growth in the export of goods was aided significantly by an increase in net re-exports. Exports of services also grew strongly in the final months of the year, mainly driven by maritime other transport services and construction services. The goods and services account was again in surplus in the last quarter of the year and the current account as a whole also moved into surplus.

The current account deficit in 2013 stood at 1.1% of GDP, but for 2014 as a whole it was very small, shrinking mainly because of increased exports of services. Growth in domestic demand was modest as companies reduced their investment activity for the second consecutive year, which held back growth in imports and so supported balance in the current account.

A current account that is close to balance means that substantial movement of capital in the financial account is not needed, as there is no need for additional funds from abroad to cover investment. The turnover of transactions, or the inflow and outflow of funds, was actually larger than in 2013 though, probably because of transactions made for liquidity management and financial investment. However, the increased inflow and outflow of funds did not significantly affect investment activity in the private sector last year. The Estonian economy was a net lender in 2014, as it had been in 2013 and by a similar amount, and by the end of the year, the net external debt stood at -9% of GDP.

This meant that the external balance of the Estonian economy improved last year in the figures for both the balance of payments and the international investment position.


Source: Bank of Estonia

Author: Andres Saarniit, Economist at Eesti Pank

Estonian Competitiveness Report 2015

Summary of the Estonian Competitiveness report published by the central bank of Estonia

• Estonian consumer price inflation was below average in 2014. Estonian price competitiveness strengthened in the markets of countries in the euro area, where Estonian relative prices fell, but it weakened in several other markets. Price-based competitiveness declined most in relation to Russia, while local inflation was not enough to compensate for the fall in the rouble, meaning that Estonian relative prices increased in the Russian market.

• The IMF methodology for the equilibrium current account position and the real exchange rate implies that the real exchange rate of the euro could be around 6% undervalued for Estonia, which should continue to favour opportunities for growth for Estonian exports.

• Products from different countries compete not only on price but also on other, qualitative, factors. Those European Union countries where prices and costs are rising faster than in other countries managed to increase export market share more.

• The share of Estonian exports of goods and services in global exports increased by a factor of 2.1 in current prices in 2000-2013 and by a factor of 1.5 at constant prices. The most recent data from 2013 show that the market share of Estonian exports was still increasing at current prices but had shrunk slightly at constant prices. This means that the value of Estonian exports only grew because of rises in relative prices.

• The role played by non-price factors in the growth of the market share of Estonian exports is shown by several expert analyses of export quality and complexity. The quality of Estonian exports has improved over the years, and relatively faster than in many other European Union countries. Improved quality allows prices to be raised without any threat to competitiveness.

• The complexity of exports also helps explain how relative growth in export prices shows only improvement in the qualities of export products. This indicates that Estonia is capable of achieving GDP growth that is better than average. Faster growth needs faster movement in the direction of more complex export products.

• Micro-level data show that the export premiums in the productivity and wages of Estonian exporters are large. The productivity of Estonian exporting companies is on average 25% higher than that of non-exporting companies and exporting companies pay 15% higher wages on average. These premiums have shrunk since the recession though.

Source: Eesti Pank

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