Corporate and household debt has started to increase

  • Companies are still borrowing mainly from banks operating in Estonia
  • Household savings continued to increase faster than their debt liabilities in the first quarter
  • Growth in incomes and savings helps to reduce risks arising from credit growth

Corporate debt liabilities were 2.5% larger at the end of the first quarter of 2017 than a year earlier. Investment, which grew rapidly in the first quarter, was mainly financed from companies’ own funds and loans taken from banks operating in Estonia. The amount of foreign money brought in the country in the form of equity and debt capital increased modestly. Faster economic growth caused a slight decrease in the corporate debt burden, or the ratio of debt liabilities to GDP.

The loan liabilities of households increased almost at the same rate as their incomes. Rising wages, low unemployment and low interest rates on loans all encouraged increased demand for loans from households, and their loan liabilities increased by 6%. Both housing and consumption loans from banks and loans from other lenders have increased in volume.

Household savings have also grown quickly thanks to increased incomes and a high propensity to save. The volume of household deposits and cash was 9% larger than a year earlier. There was also growth of more than a quarter over the year in the value of tradeable securities held by households – which was supported by an increase in the price of securities in particular. Despite the rapid growth, the financial savings of Estonian households in relation to incomes are still below the European Union average.

The Estonian economy was still a net lender to the rest of the world in the first quarter: Estonian residents put more funds abroad than they took in from abroad. This means that in line with the trend of the past few years, Estonian residents save a lot and the level of investment in fixed assets is low in spite of the growth in the first quarter.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

The impact of sanctions on Russian and European economies

According to the working papers of Bank of Estonia: The conflict between Russia and Ukraine that started in March 2014 led to bilateral economic sanctions being imposed on each other by Russia and Western countries, including the members of the euro area. The paper investigates the impact of the sanctions on the real side of the economies of Russia and the euro area. The effects of sanctions are analysed with a structural vector autoregression. To pin down the effect we are interested in, we include in the model an index that measures the intensity of the sanctions. The sanction shock is identied and separated from the oil price shock by narrative sign restrictions. We nd a very high probability that Russian GDP declined as a result of the sanctions. In contrast to that, the effects of the sanctions on the euro area are limited to real effective exchange rate adjustments.

Read more from here ( 5/2017 Konstantin A. Kholodilin, Aleksei Netšunajev. Crimea and punishment: The impact of sanctions on Russian and European economies)

Exports of both goods and services increased in May

The flash estimate1 put the Estonian current account at 42 million euros in surplus in May 2017. The surplus on the goods and services account was 76 million euros, which was 7 million euros more than a year earlier. Goods exports were up by 12% over the year and imports by 10%, meaning the deficit on the goods account narrowed by 13 million euros to 85 million euros. The surplus on the services account was 161 million euros, which was 5 million euros less than at the same time a year earlier. Services exports grew by 5% and imports by 10%. The net outflow on the primary and secondary income accounts increased by 14 million euros to 34 million euros.

The current and capital accounts were in surplus by a total of 21 million euros, meaning that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more financial assets abroad than it received from there.

1The 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 of the 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. For more on the principles used in compiling the flash estimate, see

Source: Bank of Estonia 

Inflation remained high in June because of rising food prices

  • Estonia stands out among the euro area countries for the general rise in food prices
  • Inflation has been reined back by external factors, primarily the lower oil price
  • The low oil price means that inflation this year will remain close to 3%

Yearly growth in consumer prices stood at 2.9% in June according to Statistics Estonia. The growth in energy prices slowed to 2.6%, and food prices, including alcohol and tobacco, were up 6.1%. Core inflation was 1.3% over the year though.

Around half of the inflation in Estonia is driven by import prices, while the other half depends on domestic factors. Global market prices for oil and industrial commodities have fallen a little in recent months, but there has been no particular change in the price level of food. External factors, primarily the low oil price, have encouraged inflation to come down. Inflation in the euro area was slowed in June to 1.3% by the fall in energy prices, but core inflation remained low despite economic activity increasing. The latest data and survey results show growth remaining fast in the euro area economy, and this should start to pass through more strongly into inflation. The price stability goal of the European Central Bank is that inflation in the euro area should rise to close to, but just below, 2%.

Estonia stands out among the euro area countries for the general rise in food prices. Food prices were up over the year by 6.1% in Estonia in June, and by 1.4% in the euro area. Prices for dairy products and fruit were up more than 10% over the year in Estonia, though the price level of vegetables and fish products has fallen in recent months. Consumption has been aided by domestic factors, primarily wage growth and increased employment, though also by favourable financing conditions for loans. Despite that, the growth in retail sales volumes has been quite modest in recent months if car sales are excluded. Inflation started to fall for industrial products in June, partly because of seasonal factors, though core inflation points to a rise in services prices. Service price inflation was high in June at 2.8%. Communications and holiday travel, two groups that account for a large share of services, saw prices fall, but this was cancelled out by the rise in prices for the other groups of services. Without those two groups, prices for services were up more than 4%.

The low oil price means that inflation this year will remain close to 3%. Around one third of inflation will be due to tax rises this year.

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

Estonian job vacancy rates likely to increase further

Annual growth of vacancy rate second highest in the euro area 

In the first quarter of 2017, the rate of vacant jobs in Estonia was slightly above the euro area average, but the annual growth of the vacancy rate was the second highest among 19 countries. This raises the question of whether there is a boom in the labour market that could drive excessive wage growth and a possible loss in export competitiveness. In 2015, the vacancy rate in state-offered positions started to increase, and, since the beginning of 2016, the rate for private entities followed. Foreign-owned companies and the state have the highest job vacancy rates. As foreign entities pay up to 33% more and mainly produce complex products for export, there is a possible skills mismatch.

Beveridge curve suggests no major crisis yet 

Although the job vacancy rate has noticeably increased and shifted the curve upwards, there is no reason yet to believe that we are close to the next crisis. In 2007, wage growth was over 20%, while the job vacancy rate rose to 3.5%, much higher than the 2% we witnessed in the beginning of 2017. Currently, Estonia is situated in a cluster of countries experiencing low unemployment and a medium job vacancy rate.

Service-related activities take a hit 

A comparison of different sectors with their medium-term average level indicates that the situation in service-related activities, especially in administrative/support, accommodations, and food service activities, has worsened the most. The job vacancy rate for the total economy grew from 1.3% in 2010-2015 to 2% in the first quarter of this year.

Job vacancy rates likely to increase further

In Estonia, the unemployment level is rather low and below the natural rate of unemployment. At the same time, the labour force participation rate and employment rates are high. Therefore, all the existing resources have already been more or less utilised and the labour market is tight. In an economic upswing, job vacancy rates are liable to increase further.

Source: Swedbank

Read more here

EU ministers discussed the free movement of data

On June 17. in Tallinn, European Union’s Competitiveness and Information Technology Ministers discussed how to better exploit the potential of the European single market through the free movement of data.

“The digital solutions that we use daily in our home countries, for example to communicate with public authorities, should also be available in other countries. I’ve invited my colleagues to think about how to improve the user experience of the single market for both citizens and enterprises,” Kadri Simson, the Estonian Minister of Economic Affairs and Infrastructure said.

The free movement of data to authorities in other countries would mean, for example, that an architect would not need to apply for a business permit to design a house in another Member State. Data already submitted in one member state and verified by the authorities could be made available digitally to the competent authority in another country, which could then immediately identify which qualifications and rights the person had.

“Stimulating the cross-border provision of services has a positive effect on the economy as a whole. It supports the establishment and expansion of businesses and the creation of jobs, and gives consumers more choice at more affordable prices,” Simson explained.

The main objective of the Competitiveness Ministers is to identify obstacles that limit the free movement of data and find ways to move forward.

“For many European countries, the problem is how to create a clear and common legal framework for an EU-wide data economy,” Simson said.

Estonia aims to agree on a general approach for the introduction of e-services during its presidency.

Source: Estonian Ministry of Economic Affairs and Infrastructure

Domestic tourists were a third of customers at hotels in May

According to Statistics Estonia, 297,000 domestic and foreign tourists stayed in Estonian accommodation establishments in May 2017, which is 6% more than in May 2016.

197,000 foreign tourists and 100,000 domestic tourists used the services of accommodation establishments; their numbers increased 3% and 13%, respectively, compared to May of the previous year. 59% of the foreign tourists who used accommodation services came from the neighbouring countries – 84,000 tourists came from Finland, 20,000 from Russia and 13,000 from Latvia. Compared to May 2016, the number of tourists from neighbouring countries increased 3%. The number of Finnish tourists in accommodation establishments fell 4% but the number of Russian and Latvian tourists increased 23% and 36%, respectively, compared to the same month of the previous year. Compared to May 2016, there was also an increase in the number of tourists arriving from Lithuania, the United Kingdom and the United States, while fewer tourists arrived from Sweden, Germany and Norway. 136,000 foreign tourists, or 69% of the foreign tourists who used accommodation services stayed in the accommodation establishments of Tallinn. The second most popular destination was Pärnu city, accounting for 9% of all accommodated foreign tourists, followed by Tartu city, which accounted for 7% of the accommodated foreign tourists. Ida-Viru county and Saare county both accounted for 3% of the foreign tourists who used accommodation services. 71% of the foreign tourists were on a holiday and 22% on a business trip.

One-third of the customers of accommodation establishments were domestic tourists. 59% of them were on a holiday and 30% on a business trip. 29% of the domestic tourists stayed in the accommodation establishments of Harju county, 12% in Pärnu county, 14% in Tartu county and 9% in Ida-Viru county.

In May, 1,130 accommodation establishments offered services for tourists. 21,000 rooms and 49,000 beds were available for tourists. Compared to May of the previous year, there were 22 additional accommodation establishments with more than 1,000 rooms and 3,000 beds. 46% of the rooms and 36% of the beds were occupied. The average cost of a guest night was 40 euros, i.e. two euros more than in the same month of the previous year. The average cost of a guest night was 49 euros in Harju county, 33 euros in Tartu county, 32 euros in Pärnu county and 30 euros in Ida-Viru county.

 Read more from Statistics Estonia