New conference centre may become part of Tallinn Airport

The new multifunctional conference centre that the state wants to complete by 2018 when Estonia holds EU Presidency could be located in Ülemiste City and be made part of Tallinn Airport which is close by, writes Eesti Päevaleht.

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Slow economic growth has a visible impact in the labour market

In the second half of 2013 the first signs of slower economic growth having an impact in the labour market appeared. Employment in the second half of the year was at about the level of a year earlier and unemployment rose at the end of the year, but the decline in the working age population meant that the employment rate actually increased.

Despite the weak economic growth, wages grew rapidly in Estonia in the second half of 2013 and distinctly faster than productivity. Recent developments have reduced the likelihood of companies successfully increasing profitability with support from external demand. In consequence, a slowdown in the growth of labour costs can be expected soon and it is more likely to be sharper than was previously thought.

Wage growth accelerated in the second half of the year in the public sector, where wages started to rise after the crisis a bit later than those in the private sector. However, the state should not become the driver of wage growth. This is partly because it would make wage growth adjustment in the private sector, which is competing for the same supply of labour, harder, and partly because rapidly rising labour costs would make it harder for budget goals to be met. This risk is even greater when there is a lot of uncertainty about economic growth and fiscal revenues.

The second main source of wage pressures was again the shortage of qualified labour and the strengthening of the position of employees in wage negotiations, which is backed in some cases by the option of going to work abroad. Behind the shortage of labour and any reduction in it stands the high structural unemployment in Estonia. Although the budget for active labour market measures per unemployed person has increased in recent years, the spending on such measures is generally still low in international comparison. The participation of risk groups in the labour market is often hindered by problems that cannot be solved only through active labour market measures but need support from regional, educational and population policies.

If the rate of participation in the labour force remains unchanged, then the labour force will shrink by one fifth by 2040. The new population forecast from Statistics Estonia expects the reduced supply of labour could last for a long time and could be even more serious than was earlier forecast. This will make it even more important for the social security system to be designed to encourage people to participate in the labour market, and it should not reduce social support by the same amount that an additional earned income brings in to the family budget. This principle should be used for reassessing those benefits where not working is a condition for receiving the benefit, such as an early retirement pension, or where the marginal tax rates are very high, as with income support.

Source: Bank of Estonia

Authors:  Orsolya Soosaar and Natalja Viilmann, Economists at Eesti Pank

Inflation hit record low levels

Data from Statistics Estonia show that inflation in Estonia slowed in March to 0.2% over the year, while prices were up 0.3% on February. Preliminary assessments show that harmonised consumer price index inflation in the euro area slowed from 0.7% to 0.5%.

Recent price movements indicate strongly that the slower inflation in the external environment may successfully offset the price pressure coming from the Estonian domestic economy. The external environment has had a large impact as imported goods make up around 40% of the Estonian consumer basket. This is one reason why prices of durable goods continued to fall, as they have now for some years. The main cause of the slowdown in inflation is, however, the fall in the prices of commodities, especially the fall in the euro price of oil over the past two years. Cheaper imported energy lowers the compulsory expenditure of households, allowing them to consume more and supporting the real growth of the economy. Energy takes a larger share of the Estonian consumer basket than it does of the euro area’s, and this means that the fall in energy prices has had a larger impact on inflation here.

Estonian inflation slowed sharply at the start of this year, but the slowdown had a relatively narrow base. In the consumer basket, 33% of the items were cheaper in March than a year earlier, which is not particularly unusual. In recent months the share of goods and services with falling prices has remained almost unchanged, while the share of goods with prices rising rapidly, that is by more than 5%, has shrunk to 11%.

Although the inflation rate is remaining low at present, the chances of a long-term fall in prices are not high. Average wages continue to grow by around 7% and there is no clear sign of any slowdown in wage growth, so domestic price pressures are relatively strong. The impact of higher labour costs can be seen most directly in the prices of services, which rose by 1.1% year-on-year in March. As in previous months, inflation in the prices of services was held down by falling prices for communication services, without which service price rises would have reached 3.2%.

Another cause of the slowdown in inflation is that administrative price rises have been lower this year than in some preceding years. Although prices for alcohol and tobacco continue to be pushed higher by increases in excise taxes, there has been an offsetting effect from free services for higher education. The largest fall in regulated prices in March from a year earlier was in the price of heat.

Source: Bank of Estonia

Author: Rasmus Kattai, Head of the Economic Policy and Forecasting Division, Eesti Pank

Ansip replaces Kaja Kallas as Europarliament’s No. 1 candidate

The general convention of the Reform Party decided over the weekend that the party’s Europarliament candidate list will be topped by former Prime Minister Andrus Ansip, writes Eesti Päevaleht.

In the initial list of candidates that was submitted to the convention on February 26 the list was topped by MP Kaja Kallas, daughter of European Commissioner Siim Kallas.

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Foreigners need more information to adapt quicker – study

In order to facilitate the adaptation of foreigners staying in Estonia it is necessary to ensure better availability of information and existence of an effective adaptation program, finds the study on foreigner adaption to Estonian society.

This week Estonian Ministry of the Interior presented a new study “Adaptation of new immigrants in Estonia: choices and political proposals to form a comprehensive and sustainable system”. In this study the interviewed foreigners and the organizations recruiting them were drawing attention to the difficulties in obtaining important practical information and information regarding functioning of the state as well as to the currently modest role of the state in facilitating adaptation.

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March price changes by commodity groups

According to Statistics Estonia, the change of the consumer price index in March 2014 was 0.3% compared to February 2014 and 0.2% compared to March of the previous year.

Goods were 0.6% more expensive and services 0.7% cheaper compared to March 2013.

Regulated prices of goods and services have decreased by 1.1% and non-regulated prices have risen by 0.6% compared to March of the previous year.

Compared to March 2013, the consumer price index was mainly influenced by the prices of electricity that arrived at homes, motor fuel and heat energy which decreased by 7.2%, 5% and 4.7%, respectively. Food was 2.4% more expensive than in March 2013 – nearly a half of this increase was caused by the 6.3% price increase of milk and dairy products. Compared to March of the previous year, 14% cheaper mobile communication services, 3.1% more expensive alcoholic beverages and 6% more expensive tobacco also had a bigger impact on the index. Compared to March 2013, of food products, the prices of cheese have increased the most (7.1%) and the prices of sugar and coffee have decreased the most (16% and 15%, respectively).

In March compared to February, the consumer price index was mainly influenced by 45% more expensive plane tickets and by the end of the sales of clothing and footwear. The index was also significantly influenced by 3.2% more expensive tobacco products, 1.3% cheaper motor fuel, 4.8% more expensive vegetables and 1.2% cheaper electricity that arrived at homes.

Change of the consumer price index by commodity groups, March 2014
Commodity group March 2013 –
March 2014, %
February 2014 –
March 2014, %
TOTAL 0.2 0.3
Food and non-alcoholic beverages 1.7 0.3
Alcoholic beverages and tobacco 3.9 0.4
Clothing and footwear 1.8 1.8
Housing -1.7 -0.2
Household goods 0.9 0.0
Health 3.1 0.2
Transport -2.9 1.0
Communications -7.1 -0.1
Recreation and culture 2.3 -0.1
Education -14.6 0.3
Hotels, cafés and restaurants 5.3 0.1
Miscellaneous goods and services 2.5 0.2

Source: Statistics Estonia

Euro area countries need to react flexibly to economic changes

Governor of Eesti Pank Ardo Hansson said on Saturday at the high-level Ambrosetti Financial Markets Workshop in Italy that the experience of the euro area shows that countries in a monetary union need to have a responsible economic policy and should be ready to react flexibly to economic changes.

Mr Hansson used his presentation to compare the advantages and disadvantages of a sharp adjustment for countries suffering an economic crisis.

He said that one advantage of a sharp adjustment is that the rapid reaction of economic policy makers means there is a shorter period of high uncertainty weighing on economic activity, especially on investment decisions. Another advantage is that a rapid adjustment frees up resources for new businesses and activities. Mr Hansson emphasised that a sharp adjustment can help avoid reform fatigue in a society and prevents debts from building up too far in both the public and private sectors.

At the same time, economic policy makers need to be careful that the speed of rapid changes does not create problems by forcing viable firms out of business. It is also important for governments to explain clearly to society why the changes are needed and what effect they will have. He showed a comparison of Estonia’s adjustment during the economic crisis with the reactions of four other euro area countries, namely Greece, Ireland, Spain and Portugal. The comparison makes it clear that the faster adjustment in Estonia helped the country exit the crisis more successfully in terms of economic growth, employment, fiscal balance and debt.

The relatively rapid long-term growth in the Estonian economy and its ability to adjust have been based on a strong fiscal policy, a flexible labour market and relatively low debt levels, particularly in the public sector, explained Mr Hansson. The ability of the Estonian economy to escape from difficulties was aided by well-capitalised banks, consistent structural reforms and the desire to adapt economic policy quickly to changes in the economy. Unlike Estonia, several countries in the euro area were hindered in their reaction to the crisis by an excessively large financial sector.

Mr Hansson said that Estonia’s experience in the economic boom showed that a strong external anchor in the form of a credible fixed exchange rate arrangement might lead to policy complacency. The experience of the euro area during the economic crisis has proved that the economic policy of countries in a monetary union needs to be responsible and ready to react flexibly to economic changes.

The Ambrosetti Financial Markets Workshop on Friday and Saturday in Cernobbio, Italy, was attended by leading decision-makers from the world of financial and monetary policy. Ardo Hansson gave a presentation in the Saturday morning session on the Agenda for Europe.

For more information on the conference, see http://www.ambrosetti.eu/en/news/2014/financial-markets-workshop

See the presentation here

Source: Bank of Estonia

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