The volume of industrial production increased in September

According to Statistics Estonia, in September 2016, the production of industrial enterprises increased 7% compared to September of the previous year. Production increased in manufacturing and the energy sector, but decreased in mining and quarrying.

In September, manufacturing production rose 5% compared to September 2015. The production growth was broad-based – in September, production surpassed the volume of the previous year in two-thirds of the branches of industry. The growth in production was mostly due to an increase in the manufacture of electrical equipment, chemical products and textiles. Production rose also in the manufacture of wood products, building materials and motor vehicles. Production fell in the manufacture of electronic, food and metal products.

In September, 71% of the whole production of manufacturing was sold on the external market. According to unadjusted data, the export sales of manufacturing production rose 10% and domestic sales 1% compared to September 2015.

In September 2016 compared to the previous month, the seasonally adjusted total industrial production rose 5%, with production in manufacturing having increased 6%.

Compared to September 2015, the production of electricity increased 33% and the production of heat 3%.Diagram: Volume index of production in manufacturing and its trend

Read more from Statistics Estonia

In August, the volume of industrial production increased

According to Statistics Estonia, in August 2016, the production of industrial enterprises increased 1% compared to August of the previous year. Production increased in the energy sector, but decreased in manufacturing and in mining and quarrying.

Compared to August 2015, the production of electricity increased 49% and the production of heat 9%. More than one-third of the produced electricity was exported.

In August, manufacturing production fell 1% compared to August 2015. Production did not surpass the volume of the previous year in half of the branches of industry. The decline in production was mostly due to a decrease in the manufacture of electronic, food and metal products. Production rose in the manufacture of wood products, electrical equipment and furniture.

In August, 69% of the whole production of manufacturing was sold on the external market. According to unadjusted data, the export sales of manufacturing production rose 8% and domestic sales 4% compared to August 2015. In August 2016, there were three working days more than last year.

In August 2016 compared to the previous month, the seasonally adjusted total industrial production fell 1%, with production in manufacturing having decreased 3%.

Diagram: Volume index of production in manufacturing and its trend

Read more from Statistics Estonia

The volume of industrial production decreased in March

According to Statistics Estonia, in March 2016, the production of industrial enterprises decreased 5% compared to March of the previous year. Production decreased in the energy sector, mining and quarrying, and manufacturing.

In mining, production fell 40% because of a drop in oil shale mining due to low demand caused by the low price of oil and oil shale products.

In March, manufacturing production decreased 3% compared to March of the previous year. The fall in production was mostly caused by the continued decrease in the manufacture of electronic and metal products. Among the branches of industry holding larger shares, production fell also in the manufacture of food products and chemicals. In March, about a half of the branches of industry did not surpass the volume of the previous year. Although among some of the branches of industry holding larger shares (the manufacture of wood products, electrical equipment and furniture), production rose, it did not compensate for the fall in other branches.

70% of the whole production of manufacturing was sold on the external market in March. Compared to March 2015, the export sales of manufacturing production fell 6% according to unadjusted data, while domestic sales remained on the same level as in March 2015.

In March 2016 compared to January, the seasonally adjusted total industrial production fell 3%; production in manufacturing decreased by 4%.

Compared to March 2015, the production of electricity decreased by 8% and the production of heat increased by 10%. The decline in electricity generation was caused by the partial replacement of own production with cheaper imports.Diagram: Volume index of production in manufacturing and its trend

Read mored from Statistics Estonia

Manufacturing sector investment dynamics

 

Despite the gradual drop since 2014, investments’ share in Estonian GDP still the largest in euro area
 More investments needed in manufacturing sector
 Wood sector makes the largest positive contribution to manufacturing sector investment growth.

Investment share in GDP highest in euro area
Although the volume of total investments has been decreasing since 2014, investments’ share in GDP is still the largest in the euro area. Roughly 65% of
investments in Estonia come from the business sector, whereas in the EU the average is 60%.
Investment structure needs improvement
Comparing the long-term investment structure of Estonia to the EU average, there are some large differences. In Estonia, considerably more investments have been
made in the fields of electricity generation and transportation, whereas manufacturing sector investments are lagging. In Estonia, manufacturing sector investments make up roughly 12% of total investments, much lower than the EU average of16%, even though the manufacturing sector is relatively more important in Estonia.

Manufacturing sector hampered by rapid wage growth and lower
output prices
The decrease in manufacturing sector investments is influenced by falling profitability, which, in turn, is a result of multiple factors: demand is weak and prices are falling, while labour costs are biting profitability. The situation is different among the subsectors of manufacturing. The wood industry has increased its share in investments, whereas the food industry has had a long period of decreasing investment volumes (although the situation has shown improvement in recent quarters). The manufacture of electronics and electrical equipment, on the other hand, has witnessed a serious decrease in profitability, and investments’ share of turnover has fallen very low.

In the latest April 2016 edition of the Swedbank Economic Outlook, the bank noted that Estonia is in need of more investments. Although the decline in total investment volumes slowed towards the end of last year, business sector investments have not yet shown a clear-cut improvement. This overview tries to shed some light on the Estonian investment structure in general and, in particular, on the situation of manufacturing sector investments.
Investments’ share of GDP highest in the euro area
Although the share of investments in GDP has been in a decline since the second half of 2014, the situation is not that bad in comparison with the rest of the euro area. Of the 19 euro area countries, Estonia has had the biggest investment share of GDP since 2011. In fact, it has had one of the largest for the past 20 years. Part of this can be written to the account of reinvested earnings not taxed in Estonia, a unique system of taxation put in force in 2000. According to the 2015 international tax competitivness index, Estonia has the most competitive tax system of OECD countries. The World Bank has ranked Estonia 6th globally in terms of ease of doing business. Investments’ share in GDP skyrocketed to 37% in 2007. The financial crisis of 2008 naturally took a toll on the share of investments, which showed a healthy recovery in 2010-2014. The recovery was supported by a cycle of increased demand in the world economy and larger investments in the renovation of dwellings, supported by funds from the trading of carbon dioxide quotas. However, the share of investments in GDP has been in decline since 2014.

In the euro area, on average, investments make up nearly 20% of GDP, whereas in the Baltics this share tends to be larger. The share of investments in GDP is relatively similar in Latvia and Estonia. In Lithuania, the share is somewhat smaller and the recovery of this indicator, after the financial crisis, has been slower but shows a steady pace. Roughly 65% of total investments in Estonia are business sector investments, while in the EU this number is 60%. Government sector investments account for more and households less than in the EU on average.
Even though Estonia has a large volume of investments in the euro area, a decline in this
volume of investments, together with a shrinking labour force, will not contribute positively to the future growth of the economy. The share of investments in GDP has fallen to the lowest level in 20 years, except in 2009-2010. In recent years, differences between euro area and Estonian GDP growth have shrunk. Without further investment growth, especially in R&D, machinery, and equipment, it will be hard to raise productivity or production volumes and catch up with average living standards in the euro area.
Investment structure needs improvment
The long-term investment structure of the total economy in Estonia is somewhat different from that of the European Union (EU), based on 2004-2014 average figures. Out of total investments in the economy, considerably more has been invested in the fields of electricity generation, transportation/storage activities, and agriculture. Investments related to electricity generation accounted for 4.4 percentage points (pp) more than the EU average in 2004-2014 and 7 pp more in 2010-2014. On the other hand, investments in manufacturing accounted for 4% less than the average in those EU countries for which Eurostat has data.
Therefore, the structure of investments, in recent years, has been tilted towards electricity generation, leaving other sectors in the shade. Investments in electricity generation have been necessary in the context of the opened electricity market. The EUR 638 million invested in the Auvere power plant makes up the majority of these investments, which have been focused on increasing the productivity of electricity generation and staying competitive in the international market. Although these investments have been necessary, the strategy for generating sustainable GDP growth probably doesn’t lie merely in electricity exports.
Investments in the manufacturing sector are important in order to increase productivity or production volume and start making higher-value-added products.

Investment growth contributions in the business sector show different causes for the negative growth in recent years. In 2014, investment growth was negative, mainly due to reduced investments in the electricity sector after the Auvere power plant had been constructed. In 2015, though, the decline in investments was more broad-based, with the transportation/storage and agricultural sectors making the largest negative contribution.
Russian sanctions, the reduced purchasing power of its citizens, and political decisions, as well as reduced export volumes, played a role in the decrease of transportation and storage activity investments in 2015. Investments in the agricultural sector were influenced by low market prices and a break in the agricultural subsidies programme. Rising real net wages and strong private consumption encouraged trade-related enterprises to increase their investments, thereby making a positive contribution to total investment growth. The contribution of manufacturing sector investments has, in recent years, vacillated between positive and negative territory without showing any clear-cut improvement.
Manufacturing sector hampered by multiple factors: weak demand, strong wage growth, and lower output prices

The Estonian economy is small and open, relying heavily on exports. Approximately 60% of total export volume come from the manufacturing sector, which, in turn, exports 70% of its turnover. In 2015, there was practically no change in the investment volumes of
manufacturing enterprises. In fact, investments in the manufacturing sector have not picked up since the 2008-2009 crisis. Before the crisis, the share of investments in manufacturing sector enterprises was close to 8% of their turnover, whereas, for the past five years, it has been close to 4%. The situation varies in different manufacturing sub-sectors. For example, the wood sector has shown significant growth in its share of investments, while the shale-oil products sector has seen a massive cut due to low oil prices.
In Estonia, roughly 12% of total investments in the economy are made by the manufacturing sector. In the EU28, this number is close to 16%, even though the manufacturing sector is relatively more important in Estonia than in the EU on average.
One way of measuring the importance of the manufacturing sector is to look at how much value added is being produced, and how many people are employed in the sector. In the EU28, employment, as well as the share of value added in the manufacturing sector,
accounts for 15% of the total. In Estonia, the value-added share of the manufacturing ector
is similar (16%), but the share of people employed is larger. Comparing these two figures also gives an idea of the efficiency of the sector. For example, in Germany, only 19% of people are employed in the manufacturing sector, but the sector produces 23% of the total value added in the country.

In Estonia, the gap between the share of value added and the share of employment in the manufacturing sector had, until 2012, been closing quite quickly, indicating an overall increased productivity. Productivity growth has been lagging since, and it is hard to increase it without further investments in technology.

There are several factors influencing investments in the manufacturing sector. One key factor, profitability, is of the utmost importance to entrepreneurs. Looking at the long-term average, we see that profitability has been around 8-9%. After recovery from the financial downturn, the share of profits in the turnover of manufacturing enterprises has been constantly falling, thus explaining the weak confidence about increasing investments.
The reasons for the fall in profitability are wide-ranging. The share of labour costs has been constantly rising and will soon reach the pre-crisis level. This could be kept under control with investments in efficiency, so that fewer people would produce the same amount of output. At the same time, export and import prices have been falling for the past five years, with export prices falling more heavily than import prices. These two factors are both having a negative impact on profitability, which, in turn, hampers investments growth.

Manufacture of food products and beverages, on the other hand, has shown a decrease in investments’ share, whereas labour costs have been on the rise. Production volumes declined 2% last year, mainly due to decreased exports to Russia. Last year, the export volume of milk products to Russia declined by 4.5 times and exports of beverages by 2 times. Long-term average profitability of the food and beverages sector is roughly 4%, but this figure has currently fallen below 2%. The future seems optimistic, nevertheless, as investments have started to increase and the labour cost rise has smoothed out. According to the survey by Swedbank, mentioned above, 37% of enterprises in that sector plan to increase investments this year.
The situation in the electronics and electrical equipment manufacturing industry, which has the biggest share in manufacturing industry turnover, is somewhat different. The profitability of the sector has decreased the most, and the share of investments has fallen below 2% of turnover, with labour costs rising. The sector has been extensively using a rental labour force since 2010, which means that the actual effect of a labour cost increase on the sector is even bigger. Although orders in the electronics sector increased since November last year, March data shows a 19% drop, year on year. Therefore the future of electronics sector is still unconfident.
All in all, there is a need for investments, as well as the hope that the investment climate will improve during this and the next year. This is also our main scenario in the Swedbank Economic Outlook. Growth of investments is also bolstered by an environment of low interest rates, expected to last at least a couple of years and supports investments financed by loans.

Source Swedbank

http://www.swedbank-research.com/5zmpga/english/estonian_economy/2016/may/ee_newsletter_manufacturing_sector_investment_dynamics_2.pdf

The production of manufacturing increased in February

According to Statistics Estonia, in February 2016, the production of industrial enterprises decreased 2% compared to February of the previous year. Production decreased in electricity and mining, while the production of manufacturing increased.

In February, manufacturing production increased 1% compared to February of the previous year. The growth in production was mostly caused by an increase in the manufacture of wood products, electrical equipment and furniture. The production growth was broad-based – production surpassed the volume of the previous year in three-fourths of the branches of industry. Among the branches of industry holding larger shares, production continued to fall in the manufacture of electronic, metal and food products.

71% of the whole production of manufacturing was sold on the external market in February. Compared to February 2015, the export sales of manufacturing production rose 2% and domestic sales 4% according to unadjusted data.

In February 2016 compared to January, the seasonally adjusted total industrial production remained on the level of the previous month; production in manufacturing rose by 5%.

Compared to February 2015, the production of electricity decreased by 20% and the production of heat increased by 2%. The decline in electricity generation was caused by the partial replacement of own production with cheaper imports.Diagram: Volume index of production in manufacturing and its trend

Read more from Statistics Estonia

The producer price index of industrial output increased in January

According to Statistics Estonia, in January 2016, the producer price index of industrial output changed by 2.0% compared to December 2015 and by -0.1% compared to January 2015.

In January, compared to the previous month, the producer price index was more than average influenced by an increase in prices in electricity, gas, steam and air conditioning supply, and in the manufacture of electronic equipment and fuel oils but also by a decrease in prices in the repair and installation of machinery and equipment.

Compared to January 2015, the producer price index was more than average influenced by a decrease in prices in the manufacture of food products, wood and wood products and chemicals and chemical products but also by an increase in prices in the manufacture of electronic equipment, in electricity, gas, steam and air conditioning supply, mining and quarrying.

Change in producer price index of industrial output by economic activity, January 2016
Economic activity according to EMTAK 2008 January 2016 – December 2015, % January 2016 – January 2015, %
TOTAL 2.0 -0.1
Manufacturing 0.6 -0.9
Mining and quarrying -1.1 5.3
Electricity, gas, steam and air conditioning supply 20.6 4.7
Water supply; sewerage, waste management and remediation activities 3.4 3.4

In January 2016, the export price index changed by 0.7% compared to December 2015 and by 1.6% compared to January 2015.

In January, compared to the previous month, the prices of electricity, wood products and electronic equipment increased more than average, while the prices of oil products, leather and textile products decreased more than average.

In January 2016, the import price index changed by –1.4% compared to December 2015 and by 2.7% compared to January 2015.

In January, compared to the previous month, the prices of oil products, leather and chemical products decreased more than average, while the prices of electricity and paper and paper products increased more than average.

Source: Statistics Estonia

In 2015, industrial production decreased

According to the preliminary data of Statistics Estonia, in 2015, the production of industrial enterprises fell 2% compared to the previous year. Production decreased in energy and mining as well as in manufacturing.

While at the beginning of 2015 manufacturing production grew compared to the same month of the previous year, then in the second half year the growth turned into decline. In 2015, production in manufacturing fell 1% compared to 2014. More than half of the branches of industry did not surpass the volume of the previous year. The growth in the production of manufacturing was negatively influenced by the branches holding bigger shares: the manufacture of electronic products decreased 4%, the manufacture of chemical products 12% and the manufacture of building materials 5%. Although in many of the branches of industry that hold larger shares (the manufacture of wood products, metal products, electrical equipment, furniture and motor vehicles) production rose, it did not compensate for the fall in other, smaller branches.

In 2015, both exports and domestic sales of manufacturing production decreased. 70% of the whole production of manufacturing was sold on the external market. Export sales as well as sales on the domestic market fell about 2% compared to 2014.

In December 2015, the working-day adjusted industrial production decreased 9% compared to December 2014; the production of manufacturing fell 7%. In December 2015 compared to December 2014, the production of electricity decreased by 23% and the production of heat by 16%.

In December 2015 compared to November, the seasonally adjusted industrial production decreased 3%; the production of manufacturing fell 2%.Diagram: Volume index of production in manufacturing in the European Union countries

Read more from Statistics Estonia