Exports of goods increased by 16 pct in April

According to Statistics Estonia, in April 2018, the exports of goods increased by 16% and imports by 13% compared to April 2017. The growth in trade in April of this year was broad-based, with increased exports and imports in both mineral products and mechanical appliances.

In April 2018, exports from Estonia amounted to 1.2 billion euros and imports to Estonia to 1.4 billion euros at current prices. The trade deficit was 171 million euros (in April 2017, it was 185 million euros).

In March, the top destination countries of Estonia’s exports were Finland (16% of Estonia’s total exports), Sweden (12%) and Latvia (10%). Electrical equipment and base metals and articles of base metal were the main commodities exported to Finland; electrical equipment and miscellaneous manufactured articles (prefabricated wood buildings, furniture) were the main commodities exported to Sweden; mineral products (motor spirit, electricity) and transport equipment (motor cars) were the main commodities exported to Latvia. The biggest increase occurred in exports to Finland (up by 34 million euros), Latvia (up by 33 million euros) and the USA (up by 19 million euros). In exports to Finland, the exports of electrical equipment and wood and articles of wood increased. There was also an increase in the exports of mineral products and transport equipment to Latvia and electrical equipment to the USA. The biggest decrease occurred in exports to Sweden (down by 16 million euros).

In April, the biggest share in the exports of goods was held by electrical equipment (15% of the total exports of goods), followed by mineral products (13%), and wood and articles of wood (11%). The greatest increase was in the exports of mineral products (up by 50 million euros), mechanical appliances (up by 25 million euros) and transport equipment (up by 21 million euros). The growth in the exports of mineral products was mainly due to increased export quantities (motor spirit up by 51% and electricity up by 31%), compared to the same period of the previous year.

The share of goods of Estonian origin in total exports was 70% in April 2018. The exports of goods of Estonian origin increased by 14% and re-exports by 23%. Increased exports in the commodity sections of mineral products, wood and articles of wood and mechanical appliances contributed to the increase in the exports of goods of Estonian origin. Among the main destination countries, the exports of goods of Estonian origin had the highest share (over 90%) in exports to the Netherlands, Denmark, Sweden and Norway.

The main countries of consignment in April were Finland (14% share of Estonia’s total imports), Germany (11%) and Sweden (10%). The main commodities imported were: mineral products and metals and articles of base metal from Finland; mechanical appliances and transport equipment from Germany; and electrical equipment and transport equipment from Sweden. The biggest increase occurred in imports from Finland (up by 42 million euros), Belarus (up by 33 million euros, i.e. approximately 8 times) and Sweden (up by 26 million euros). Mineral products (motor spirit, fuel additives) were imported more from Finland and Belarus, electrical equipment from Sweden. Imports decreased the most from Poland (down by 25 million euros) and Turkey (down by 21 million euros), with less transport equipment imported.

The main commodities imported to Estonia were electrical equipment (15% of Estonia’s total imports of goods), mineral products (13%), mechanical appliances and transport equipment (both 11%). The greatest increase was in the imports of mineral products (up by 67 million euros), mechanical appliances (up by 30 million euros) and electrical equipment (up by 21 million euros). Increased imports of mineral products were due to higher import quantities (imports of fuel additives increased by approximately 4 times and imports of motor spirit by 31%), compared to the same period of the previous year.  In April, the greatest decrease occurred in the imports of transport equipment (down by 48 million euros).

In April 2018, the foreign trade export volume index increased by 16% and the import volume index by 12% compared to April 2017.Estonia’s foreign trade by month, 2016–2018

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The number of people of working age rose

  • The growth in employment has been boosted by a rise in the number of entrepreneurs
  • The Work Ability Reform raised unemployment by less than forecast as demand for labour is strong
  • The number of people of working age rose for the first time in more than 20 years

The Estonian labour force survey found that the unemployment rate in Estonia rose in the first quarter of 2018 to 6.8%, as people engage more actively in the labour force. Employment rose at the same time, though at a slower rate than previously. The state of the labour market has not deteriorated from the second half of last year. Registry data suggest that the wide volatility in labour market indicators can largely be explained by the variability in the quarterly assessments of the labour force survey.

Employment was raised strongly both last year and at the start of this year by a rise in the number of one-person businesses and businesses with employees. The labour force survey shows the number of waged employees to be slightly lower than it was a year earlier. Registry data from the Tax and Customs Board show that 1.6% more people received a declared wage in the first quarter of 2018 than in the same quarter of the previous year. There was a rise in the number of employees in the private sector and a fall in the number in government institutions.

Without the Work Ability Reform, participation in the labour force would have increased more slowly and the number unemployed would have fallen. The number registered as unemployed has risen since the Work Ability Reform was launched. Now around one third of the 33,000 registered unemployed in Estonia have reduced ability to work. Leaving out random fluctuations from quarter to quarter, there has been no clear upward trend in the total unemployment rate in recent years. This is because the reform was well timed, as people with reduced ability to work can find a job more quickly at times of labour shortages than otherwise.

The updated estimate by Statistics Estonia is that the number of people aged 15-74 did not fall in 2017, but in fact rose by 0.1%. This is partly because Estonia has become a more attractive place to work for foreign labour, and partly because residents of Estonia who had previously gone to work abroad temporarily are returning. The improved migration balance means there is a larger supply of labour in the Estonian labour market and the wage pressures caused by labour shortages have been eased. The experience and skills of workers coming from abroad offer opportunities for businesses to develop.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Household borrowing remains large

  • The growth in the volume of car leases accelerated even further in April
  • Real estate companies borrowed a little more modestly than in previous months
  • Bank deposits continued to grow strongly in April and were up 10% over the year

Borrowing by households was again large in April, with especially strong demand for car leases. The value of new car leases signed in April was 43% larger than in the previous April, and the yearly growth in the portfolio of car leases accelerated to 20%. Other consumption loans also grew fast, at a yearly rate of 9%. The strong growth in consumption loans reflects both the favourable economic environment and the increased supply. Consumption loans provide a substantially smaller share of the loan and lease portfolio than do housing loans at only 9%.

Interest in housing loans remained strong among households in April. Some 101 million euros of new housing loans were taken out, which was 15% more than at the same time a year earlier. The yearly growth in the portfolio was 6.7%, like it has been for the past half year.

The new corporate loans issued in April were more evenly divided between sectors than in earlier months of the year. Some 213 million euros of new corporate loans were issued, which was a little less than at the same time a year earlier. Although real estate and construction remained the sectors that took the largest amount of new loans, like before, the amount they took in loans was less than in previous months. Given that loans to real estate and construction account for a large share of the portfolio of the banks, a more even division of loans represents positive progress. Companies in agriculture stood out particularly for borrowing more than in previous months[1].

The average interest rate on new long-term corporate loans was a little higher in April than it was a year ago at 2.7%. This was partly because fewer loan contracts for large loans with low rates were signed in April. In the second half of last year there were some individual large loan projects with low interest rates that affected the average margin quite significantly. The average interest rate for housing loans remained at 2.4%, which is comparable to what it was a year earlier.

Alongside the elevated activity in borrowing, deposits also grew strongly. The deposits of both households and companies were up 10% on a year earlier, meaning they grew faster than the loan and lease portfolios. At the end of April the total deposits of companies and households stood at 13.2 billion euros.

Author: Kirstin Saluveer, Economist at Eesti Pank

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Growth in net wages leapt sharply

  • Growth in the gross wages of people earning minimum wage was slowed down by lower negotiated wages, but net wages increased considerably owing to the income tax reform
  • The cut in income tax initially benefited employees more than employers
  • Pay rises in the general government exceeded those of the private sector. If this gives a signal to the private sector, labour costs may start to accelerate, and wages would move out of line again with productivity growth

The smaller rise in the minimum wage slowed down the growth in gross wages, but the income tax reform more than offset the impact on current net wages. The minimum wage rose by 6.4% this year, which is much slower than the rate of close to 10% seen in recent years. The declared gross monthly wage of people earning minimum wage rose more slowly in the first months of 2018 than it did on average in 2017. Without the income tax rebate system for the low-paid that applied last year, which is not reflected in statistics for current wages, the rise in the tax-free threshold to 500 euros meant that those earning the minimum wage saw a rise of 18% in the pay they received.

The cut in income tax initially benefited employees more than employers. As the gross wage is generally fixed in employment contracts, it is to be expected that a fall in the tax rate will lead the net wage to rise. Over the longer term a large cut in the tax rate could reduce wage rises agreed in wage negotiations. The effect of this would slow down the growth in labour costs for employers. Employers will probably benefit less from the reform as the general shortage of labour gives employees a stronger hand in wage negotiations.

The fast rate of wage growth in the general government increases the risk of faster growth in private sector labour costs as well, meaning that the wages will move further out of line with growth in productivity again. Wages in the general government continued to rise fast, although temporary factors from last year should not have had an impact any longer. Wage growth in local government, which accelerated to 12% in the first quarter, reflected faster growth in education, but wage growth also remained strong in public administration. This may have been affected by the reform of administration, under which many employment contracts were terminated and signed.

Eesti Pank observes and comments on wage developments as labour costs have a direct impact on the price of goods and services produced in Estonia and wage growth is an important indicator of price stability.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Competitiveness concerns looming for Estonian economy

  • Economic growth is supported by favourable monetary and fiscal policies
  • Potential threats include the political uncertainty in Italy and restrictions on free trade
  • Growth in private consumption and exports has been subdued
  • Growth outlook is affected by supply-side restrictions

Figures from Statistics Estonia show that in the first quarter of 2018, Estonia’s economy grew by 3.6 per cent year-on-year and declined by 0.1 per cent quarter-on-quarter, seasonally and working day adjusted.

Albeit more modest than short-term forecasts, the growth was in line with Eesti Pank’s December forecast projecting a growth of 3.7 per cent for Q1. Growth was slowing across the board for Europe. The drop in output growth has been associated with various factors such as an extended flu season, strikes, etc.  Estonia’s economy is running close to its full potential and an increasing scarcity of resources is starting to put pressure on economic growth. Potential growth in Estonia is estimated at 3 per cent. A sustained output gap may lead to imbalances and increase vulnerabilities in the economy.

To maintain a solid growth, Estonia needs to boost competitiveness. On the demand side, investment was decreasing and the investment-to-GDP ratio fell below 20%, its lowest level since the first quarter of 2010.  Growth in exports and private consumption remained subdued as well.  „Technical“ factors such as stock change and statistical difference account for a large share of the growth. On a more optimistic note, manufacturing value added outpaced the overall growth rate and the nearly 20 per cent growth in construction reflects an increase in investments.

The modest growth figures for private consumption may be partly attributable to the fact that rises in excise duties have made estimating private consumption more complex in the short term as it is difficult to calculate the exact decrease in the purchases made by foreigners in Estonia and the increase in those made by Estonians abroad. Increase in the personal tax allowance influenced consumption somewhat less than expected, although the impact of the income tax reform is likely to increase over the next quarters.

While Q1 figures remained below expectations in many countries, growth is expected to continue at a moderate pace over the coming years. In Estonia, the growth outlook is supported by favourable monetary and fiscal policies; in the world economy, by US budget deficit. Business expectations have weakened somewhat over 2018 but still indicate that a moderately paced growth is likely to continue at least during the coming months. The risk of a sharp slowdown has however increased and downside risks to the economic outlook outweigh the upside. External risks include political uncertainty in Italy and restrictions on free trade, while domestic risks are related to competitiveness.

Albeit slowing considerably from Q4 2018, growth remained fairly robust in the first quarter, in view of potential output growth. While risks of a sharp slowdown have increased, the growth is set to continue at a moderate pace in the near future.

Source: Bank of Estonia

Author: Kaspar Oja, Economist at Eesti Pank

Yearly inflation remained close to 3 pct in April

  • Rises in excise have made the inflation rate in Estonia one of the highest in the euro area
  • The price of electricity has been very volatile and inflation in it slowed to 7% in April
  • Inflation this year will be close to the 3% forecast by Eesti Pank in December

Inflation in Estonia is among the fastest in the euro area and yearly inflation was at 2.9% in April. Prices for food and energy were up by about the same amount in April as in March, rising 5%, but core inflation, which is the inflation rate without the volatile prices of goods like food, alcohol, tobacco and energy, rose to 0.8%. Inflation fell in the other two Baltic states to 2.1% and the average in the euro area in April was even lower at only 1.2%. Inflation has been held high in Estonia by the rise in excise at the start of the year that led alcohol and tobacco to contribute 0.8 percentage point to inflation in April.

Energy prices have been more volatile in Estonia in recent months than in Latvia and Lithuania, mainly because of electricity prices, but also because of prices for motor fuels. The price of electricity was 7% higher in Estonia in April than a year earlier, but the price level in neighbouring countries has changed little. This is probably because of the structure or length of the contracts of households, as the exchange price of electricity has been the same in all three Baltic states for the past year and a half.

Estonian consumers were spared a sharp rise in the price of heat in the last heating season, but the price of heat was already rising notably quickly in Latvia and Lithuania in the autumn. The rise in household expenses may yet accelerate this year as the rally in the oil price on world markets has not ended. The price of crude oil is 52% higher than a year ago, and the euro has started to depreciate. This is probably because the economic indicators in the US have been in line with market expectations, while economic activity in the euro area has been weaker than predicted.

There have also been differences in service price inflation in the Baltic states. Prices for services in Estonia have risen relatively slowly by only 1.8%, while service inflation has increased in Latvia and Lithuania to 4-5%. Service price inflation is being restrained in Estonia by a fall in communications prices and some regulated prices, and by cheaper holidays. Inflation for industrial goods has been slow in all the Baltic states meanwhile, and also in the euro area as a whole. This may be because the earlier appreciation of the euro meant that import prices for consumption goods fell. The consistent fall in the price of second-hand cars in Estonia is also of note.

The Eesti Pank December forecast expects consumer price inflation will rise to 3.2% this year.

Inflation in Estonia and euro area

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

The number of tourists arriving from Finland was 8 pct lower than a year previously

A little over one million foreign tourists came to Estonia in the first quarter of 2018, which was the same as in the first quarter of 2017. The number of tourists arriving from Finland was 8% lower than a year previously, and accounted for 37% of the total. In contrast the number of visits by residents of other European Union countries was up 6%.

There were some 209,000 visits to Estonia by residents of Russia, accounting for one fifth of the total number of visitors, and that number was unchanged over the year. The number of visitors from Asia continued to rise, and was 10% higher than a year before. Trips from Belarus were down by one third though.

There were 2% more overnight visitors to Estonia in the first quarter than in the same quarter of last year, and the average length of overnight visits was 4.2 days. Same day visits accounted for 44% of visits. Foreign tourists visiting Estonia spent an estimated 220 million euros in the first quarter.

In the same quarter, residents of Estonia made 800,000 visits to foreign countries, a number that has not changed over the year.Trips to countries in the European Union were down by 4%, while those to CIS countries were up 8%, with people from Estonia visiting Belarus one third more than a year earlier. There were notable rises in the numbers of trips to Egypt, India, Greece and France. The numbers of visits to the US, Belgium, Lithuania, Denmark and the Czech Republic were down by a tenth on average.

The number of overnight visits fell by 1% and the average length of the stays was 3.6 days. Same-day trips accounted for 14% of the total, and they increased in number by 2%.

Estonian tourists spent an estimated 200 million euros abroad in the first quarter of 2018.

Eesti Pank collects data on the movement of travellers as it has a noticeable effect on the export and import of travel services in the Estonian balance of payments, which will be published on 7 June.

Source: Bank of Estonia

Author: Tarass Snitsarenko, Eesti Pank Statistics Department