The economy was more in balance in Q1 than previously

  • Retail sales volumes grew more slowly in March, but still faster than GDP
  • Seasonally adjusted exports grew fast in quarterly terms
  • Corporate investment increased
  • Growth in industrial production indicates faster GDP growth

The flash estimate from Statistics Estonia shows that the economy grew in the first quarter of 2016 by 1.7% year-on-year and was at the same level as in the fourth quarter of 2015. Economic growth was restrained by the oil shale industry, but was very positively impacted by the stocking up in January of goods subject to excise, which is reflected in increased product taxes and value added in the retail sector. Growth is slowing in consumption among components of demand, though it remains above the general indicators of economic growth against a background of increased investment.

Growth in industrial production indicates GDP growth was more positive in quarterly terms than the official estimate. Despite the problems in the oil shale sector the total output of manufacturing in the first quarter of 2016 was 1.5% more than in the fourth quarter of 2015, which is close to its historical average growth rate. Output of the total industrial sector, including energy and mining, increased by 1.3%. Slower growth in the industrial sector was due to a reduction in mining of oil shale, which is probably a consequence of the build up of stocks last year. The production of the energy industry was higher than a year earlier and than in the previous quarter. The estimate by Statistics Estonia of changes in the volume of goods exports confirms that the industrial sector is stronger than in the previous quarter. Goods exports were down only 2% over the year, which means that seasonally adjusted exports grew very fast compared to their performance in the fourth quarter. Growth in external demand, seen as growth in imports in trading partners, was probably less than this.

Consumption growth is slowing. Retail sales volumes grew more slowly in March, but still faster than GDP. The slowdown was caused by slower growth in real incomes. Growth in real household incomes last year was driven by rapid growth in wage incomes, falling prices, increased social benefits and lower taxes. These factors impact household incomes positively, but more so in 2015 than in 2016. Growth in private consumption was probably still quite strong in the first quarter because it was subject to the leap year effect, which is apparent in the turnover of companies in February. Private consumption was boosted further by the cold weather, which lifted unavoidable spending on communal utilities.

A notable positive development in the first quarter of 2016 was increased corporate investment, which is illustrated by VAT data.Growth in investment is in line with increased imports. Investment growth will be aided more and more by the use of resources from the European Union Structural Funds, which show up primarily in investment growth in the general government, and partly also in private sector projects. The need for new investment is indicated by increased use of production capacity in the industrial sector, though the use of capacity is still below the European average in a majority of branches of industry. More efficient organisation of work can also increase production even without investment. At the same time there are some areas where production capacity is being used more intensively than the European average, such as wood processing, where growth has been fast in recent years.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Estonian financial stability review

The international financial environment became less confident at the start of 2016, Bank of Estonia reports in its financial stability review. The review is published twice a year.

Doubts about the outlook for global growth led to increased volatility in international securities markets and falls in the prices of financial assets. With commodities prices remaining low for a long time and inflation very low, central banks maintained their position of using accommodative monetary policy to support inflation and GDP growth. At the same time, the activities of banks in several European Union countries are continuously being affected by the problem assets that appeared at the time of the global financial crisis, and more and more by the combination of weak economic growth and low monetary policy interest rates.

There has been no reduction in the main risks to the stability of the Estonian financial sector, which arise from imbalances in the Swedish economy and from the funding of the large Nordic banking groups. Relatively strong growth continued in Sweden and the loose monetary policy environment saw rapid growth in loans with real estate as collateral and in real estate prices. Macroprudential supervisory institutions in the Nordic countries have put in place measures to support the resilience of the banks, but this has not slowed the build up of risks in Sweden. Although the larger banking groups in the Nordic countries are well capitalised by international standards, their capital buffers have not particularly increased as a ratio to total assets while risks have been increasing, and in international comparison they are around the average.

The ability of Estonian companies and households to repay their loans remains good. Rapidly rising incomes have led to increased demand for loans from households. However, indebtedness remained at the same level for the second consecutive year and the coverage of debt liabilities with liquid assets increased further. Corporate results worsened further in the second half of 2015 though because of weak demand for exports and the continuing rapid rise in labour costs. Investment activity was sluggish, and so demand from companies for loans did not increase. Although sales turnover was down, companies managed to increase their liquid assets. This means that the borrowing capacity of companies and households is being supported both by larger liquidity buffers than before and by low loan servicing costs, and also by the continuing rapid rise in household incomes.

Together with the rise in real estate prices, construction of residential property picked up, and increased supply restrained the growth in average prices in the second half of 2015. Demand for dwellings has been aided in recent years by relatively fast growth in wages, a labour market that favours households, and low interest rates, while credit growth has remained moderate. Alongside residential property, office and retail space is being developed at quite a rapid rate. The bigger banks remained fairly conservative in lending for real estate development however, and the volume of loans to real estate companies has not increased faster than volumes to other companies. However more has been lent to real estate companies by companies in other sectors than was the case before, which means that exposure to risks in the real estate market could affect businesses more broadly.

The resilience of the banks to risks remained strong. The portfolio of loans and leases was up around 5% over the year in 2015 and its quality remained generally good. The funding of the banks was mainly supported by growth in domestic deposits. The banks kept a high level of liquid assets and new liquidity requirements that started to apply from the start of 2015 will help to ensure that banks maintain their liquidity. The capital buffers of most banks increased last year and the share of CET1 capital was very large at the end of the year, standing at 35% of risk weighted assets for the banks on a consolidated basis. Although the low rate of base interest rates put pressure on the income of the banks, improved cost effectiveness means this has not really yet affected the return on assets, and profitability remained high by international standards. Weak GDP growth and low interest rates and additional legal requirements for the banking sector mean that banks will probably continue to make changes in their business operations.

Read more from the Bank of Estonia website

Source: Financial Stability Review 1/2016

Cheap oil will lower the price level in the months ahead

  • The fall in the price level was again mainly due to cheaper energy
  • Services prices are rising, reflecting wage and inflation pressures in Estonia
  • The price of industrial goods has not reacted to rises in incomes and demand
  • The consumer basket will become more expensive in the second half of the year

Data from Statistics Estonia show the price level of the consumer basket was the same in April as a month before, though average prices for goods and services were 0.8% lower than in April last year. The average yearly price change in the member states of the euro area was also negative in April, with the harmonised consumer price index for the euro area down 0.2% over the year.

Consumer prices in Estonia mainly reflect the consequences of the fall in the oil price over the preceding 12 months from 65 dollars a barrel in April 2015 for crude oil on global markets to 43 dollars a barrel this year. Since the middle of January the price level of oil has risen steadily and the forecourt prices of motor fuel have climbed by 9% in that time. Fuel excise was raised from February, which accounts for part of the rise in fuel prices in the first months of the year.

Consumer price inflation without energy prices reached 0.6% in April. The main rise in food prices was in the price of alcohol. Prices of fruit and vegetables have been as volatile as usual this year, rising fast in the first months of the year and then falling in April. Falling vegetable prices accounted for a large part of the deeper fall in prices in April. For the second year in a row, prices were down for dairy and meat products, which make up one third of the consumer basket. The farm-gate price of milk has fallen further in the European Union and there is no clear sign yet on the world market that it will stop doing so.

Conditions in the Estonian domestic market are causing service prices to rise, as wages paid out have risen by an average of around 6% this year and unemployment fell at the end of last year to 6.4%. The unemployment rate has fallen below the estimated natural rate of unemployment and it is becoming harder and harder for companies to find staff, which is causing wage and inflation pressures in the economy. This is indicated by the rise of 2.8% in prices for services in April once the effect of higher education reform is removed. Rapid rises in incomes and in demand have not lifted the prices of consumer goods though, and in April they remained at the same level as a year before. This is despite the higher import prices caused by the depreciation of the euro.

Deflation will continue in the coming months because of the earlier fall in oil prices, and consumer prices are likely to turn upwards in the second half of the year.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

Banker emphasised to the parliament the importance of a balanced budget

Governor of Eesti Pank Ardo Hansson told the Riigikogu on May 3, 2016 that the Estonian government has acted correctly by keeping its budget in balance, as now is not the time from the economy’s perspective to increase spending significantly.

He explained that the central bank does not give an opinion on the total amount of income and expenditure in the state budget, nor on how the spending is shared out. “As a central bank we cannot say whether it is right or wrong for the government to spend its money on one thing or another. We talk about balance under the present circumstances, as we see that there are tensions in the labour market. We do not see any reason right now to start a wider stimulus of the economy given that several companies are already on the limit of profitability. If wages start to rise a lot faster than productivity, companies may start to go bankrupt at some point. Eesti Pank considers it more important to focus on structural reforms that would give a more solid foundation for faster wage growth”.

Governor Hansson said that it was necessary when planning the budget to assess whether the Estonian economy is in recession. “Estonia could spend and borrow more if all the economic indicators were showing that the economy is in recession. Right now the messages from those indicators are quite contradictory. Looking only at the speed of economic growth, it appears that growth is quite slow. In contrast, the labour market is overheated, and if you ask businesses where they see tight spots, most of the discussion is centred around labour shortages. By increasing government spending we would be adding fuel and stoking an already overheated labour market.”

He noted that the state fiscal position has in some ways been surprisingly strong as there has been a rapid rise in tax revenues, which make up a large part of the state’s income. “Value added tax and labour tax revenues have grown rapidly as wages have risen and retail sales have gone up fast. Things will be harder in future because we will receive less money from the European Union as we become richer, while our demographic situation will become worse, needing us to spend more on pensions and healthcare while there are fewer employees paying taxes. Looking at both the short term and the long term, now is not the right time to start spending more money”.

Source: Bank of Estonia

Labour market data stronger than expected

• In Q1 2016, employment increased due to a higher number of part-time workers.
• Unemployment rate was slightly smaller than one year ago.
• We still expect unemployment rate to grow and employment to decline a bit in 2016.

First quarter’s labour market data turned out better than expected. Employment grew further and unemployment rate slightly decreased, year on year. The number of unemployed stayed around the same level as in the first quarter of 2015 but unemployment rate declined slightly to 6.5% (6.6% in Q1 2015).

The number of employed grew by 1.1% compared with the first quarter of last year. Employment increased among the part-time wage-earners in the services sector. The number of full-time employees decreased. Employment in agriculture decreased. Substantially lower output prices and the African swine fever have resulted in substantially lower production volumes in this sector.

Today’s labour market data published by Statistics Estonia differs from earlier data released by the Unemployment Insurance Fund or the Tax and Customs Board. According to the Unemployment Insurance Fund, registered unemployment rate exceeded last year’s level by 0.2 pp in the first four months of 2016. Tax revenues’ data show that the number of wage earners decreased for the 8th month in March.

In 2016, employment is expected to fall by 0.2% because of a lower supply (a shrinking working-age population) and demand of labour (weak export demand, investments in machinery). A state reform will reduce the number employed in the public sector. A cutback in the number of public workers and the reorganisation of the social benefits system for the disabled (forcing them to find jobs) will lift the number of unemployed, at least temporarily. We expect the unemployment rate of Estonia to grow from 6.2% in 2015 to 6.5% in 2016.

Source: Swedbank

Swedbank: Acceleration of GDP growth was expected

According to the flash estimate of Statistics Estonia, GDP growth in Estonia accelerated to 1.7% yoy in 1Q 2016, while compared to the previous quarter (seasonally and working day adjusted) remained flat. 

On the supply side, continued robust growth of domestic trade contributed the most to the GDP growth. Growth of retail trade is kept up by the improved purchase power of consumers, i.e. robust growth of real wages, low fuel prices and low interest rates.

One substantial technical issue contributed strongly to the GDP growth – namely, due to the raised excise taxes on alcohol and fuels as of 1st February, receipts of excise taxes on these goods increased abruptly (205% yoy) in February and this had a strongly positive impact on GDP.

Decrease of value added in energy sector inhibited the economic growth the most. Production of electricity has fallen due to the import and use of cheaper electricity from Finland. According to the preliminary calculations decrease of value added in transport sector and construction has eased, but situation in manufacturing sector hasn’t made remarkable positive turnaround from contraction. Falling export volume is still holding on the recovery of manufacturing production. At the same time, new orders (including, export orders) of manufacturing sector enterprises has increased already second quarter in a row. In the 1Q, confidence among industrial sector enterprises was on the average level of last five years, but it has slightly improved. Confidence among construction enterprises has improved relatively fast since last autumn. This information refers to the brighter outlook for both sectors.

Export of goods decreased by 2% in real terms, contributed dominantly by the decrease in export of electronic and shale oil products. According to our estimates, import demand from Estonia’s major trade partners will improve this year and this should offer more opportunities for exporting enterprises (70% of manufacturing turnover is exported).

Contrary to export, import of goods increased even 4%, contributed primarily by increased import of capital goods and vehicles. Import growth of capital goods has accelerated since last autumn and this refers to the improving investments. Although capacity utilisation is still below the pre-crisis period’s high level, it is gradually increasing. Therefore, expected improvement of foreign demand should bring about more investments. According to the Swedbank industrial sector survey, 37% of enterprises expected to increase investments in 2016.

We expect that Estonian economy grows 2% this year contributed primarily by the improving investments and exports, while growth of private consumption will slow down a bit.

Source: Swedbank

In the 1st quarter the Estonian economy grew 1.7 pct

According to the flash estimates of Statistics Estonia, the gross domestic product (GDP) of Estonia increased by 1.7% in the 1st quarter of 2016 compared to the 1st quarter of 2015.

In the 1st quarter of 2016, the seasonally and working-day adjusted GDP did not change compared to the previous quarter and grew by 1.8% compared to the 1st quarter of 2015.

The main contributor to the growth in the 1st quarter was the receipts of net taxes on products. The increase in alcohol and fuel excises had a significant impact on the growth. As the rise in the excise rates was shifted one month forward, the proceeds from excises shifted from the end of the previous year to the 1st quarter.

According to the preliminary estimates, added value in trade was the main contributor to the GDP growth among economic activities in the 1st quarter of 2016. The Estonian economy was inhibited the most by the decrease in value added in energy. While the domestic demand was strong, the economic growth was also slowed down by a decrease in foreign demand.

The export of goods of the total economy decreased at real prices by 2% compared to the 1st quarter of 2015, mainly due to a decrease in the export of electrical equipment and mineral products (incl. motor spirit, fuel oils, gas). However, the real import of goods of the total economy increased 4% compared to the same quarter of the previous year. According to the preliminary estimates, the increase was biggest in the imports of other machinery and equipment, motor vehicles and trailers, and mineral products.

Diagram: GDP, real growth of the export and import of goods compared to the same quarter of the previous year

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 GDP estimates for the 1st quarter of 2016 will be published by Statistics Estonia on 9 June.

Source: Statistics Estonia
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