Consumer prices down for the 10th month

• Deflation continued in March
• Cheaper motor fuels and food behind the drop in prices
• Inflation expected at around 0% in 2015 (-0.1% in 2014)

In March, consumer prices decreased by 0.6% compared with the previous year and increased by 0.6% compared with the previous month. Prices, especially energy and food prices, are expected to increase gradually during the second half of 2015. Inflation rate is expected to be around 0% in 2015 as a whole.

Volatile motor fuel prices have had the biggest impact on consumer prices recently. The prices of fuels increased by 4.6% in a month, but remained still 11.3% lower than in March last year. Global crude oil prices grew in euros compared with February due to the continued weakening of the euro exchange rate against the USD. There is abundant supply of crude on the market and recent negotiations with Iran will probably mean a gradual loosening of the current sanctions. Iran holds up to 10% of global oil stocks, while its production volumes have fluctuated between 3% and 5% of global oil supply during the last 30 years.

In addition to energy, food prices also fell in Estonia compared with last year. According to the FAO, global food prices have been on a declining path since April last year due to good crops and high stocks, but also because of stronger dollar against several leading food exporters’ currencies.

The EUR was 22% weaker against the USD in March, on average, compared with last year. According to the Central Bank of Estonia, around 1/3 of the imports of goods and services are paid in the USD in Estonia. As most of these goods and services are either raw materials or capital goods (and not consumer goods), the weaker euro is expected to lift Estonia’s inflation with a certain lag.

Source: Swedbank

The rapid rise in labour costs may restrict investment opportunities

The long-awaited acceleration in economic growth materialised in the second half of 2014, but unfortunately labour productivity grew more slowly than in the first half of the year. Growth accelerated mainly as additional labour was employed, while the contribution of capital to growth declined.

After a long period of sluggish economic growth the growth in labour costs started to slow down in the first half of the year, but accelerated again in the second half. Employment growth picked up in the second half of the year. Although the average wage grew notably more slowly in 2014 than in 2013, companies were able to recruit additional labour in the second half of the year at the cost of faster wage growth.

The shortage of labour due to long-term factors is preventing any reduction in wage pressure. Demographic processes mean that the number of working age people is falling by around 0.8% a year and in the coming years the smaller birth cohorts will be leaving higher education facilities. Although the net migration balance improved for the second consecutive year, Estonian employers are still having to compete in the labour market with foreign employers. The workers going abroad who get a relatively bigger wage boost by doing so are those who would be earning a relatively low wage in Estonia. Not only is the flow of new entrants to the labour market shrinking, but the utilisation of labour is already high: the share of the working age population that was employed climbed higher in the second half of 2014 than it was at the peak of the economic boom.

The faster rise in labour costs than in productivity raised the labour share in GDP, while profits decreased. This may threaten the competitiveness of exporting companies as it will put them under pressure to raise prices. If competition makes it impossible to raise prices, then their lower profitability may push companies to reduce employment in Estonia. Nominal unit labour costs have risen by 17.5% in the last three years, which is more than twice the 9% level where the alert mechanism of the European Commission’s assessment is triggered.

There was no increase in corporate financial difficulties in the second half of 2014 and early 2015. Redundancy payments remained at about the same level as in the previous years, as did the number receiving compensation because their employer had gone bankrupt, and the number of unemployed who had lost their job through redundancy or through their employer closing down. Companies are able for now to cover the rapid rise in labour costs from their own profit buffers, and this will probably be aided by expectations of a recovery in foreign demand and favourable financing conditions. The ability to increase labour costs at the expense of profits will inevitably be reduced in the longer term. Reduced profits also threaten the ability of companies to invest in higher productivity and in the human capital needed for more complex and higher-value work. The key question in the development of the Estonian economy is whether value added can be created with a smaller labour force than before but through increased human capital.

Source: Bank of Estonia

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

Estonian unemployment rate below EU average

Estonia’s seasonally-adjusted 6.2 percent unemployment rate is significantly below the EU 9.8 percent and euro area (EA) 11.3 percent average, reports Eurostat.

The average unemployment rate in both EU and EA are at its lowest in years. The total number unemployed people in the union in February was estimated at slightly below 24 million. Compared to a month before, the number decreased by 91,000.

Estonia registered one of the largest decreases in a year (8.4 percent to 6.2 percent between January 2014 and January 2015), alongside Ireland and Bulgaria.

The youth unemployment, although also below EU average (21.1 percent) was a much higher 13.9 percent in January 2015.

Estonia also stands out for having a higher unemployment rate for males (6.8 percent) than females (5.6 percent).

Source: ERR News via Estonian Review

Port of Tallinn might need 3rd cruise ship quay

While finding its quay capacity to be sufficient for the next five years, Port of Tallinn does not rule out the possibility that a third quay for cruise ships will have to be built in addition to the 421-meter quay Number 2 completed at the Old City Port last spring.

Ain Kaljurand, CEO of the state-owned port company, told BNS he believes that the present quays provide the company with sufficient capacity to accept all cruise ships that wish to come here in the next five years.

Tallinn is capable already now to accept all cruise ships that can enter the Baltic Sea.

“If necessary, we can build additional quay-meters, we haven’t locked ourselves out in that respect with what we’ve built so far,” Kaljurand said.

He said cruise operators have had good words to say about the investments made by Port of Tallinn in cruise ship quays.

“We have understood that this is necessary, as ships have become bigger and our previous infrastructure would not have enabled us to accept all ships and we would have had to refuse some arrivals. And when you refuse one arrival, a snowball effect will follow and at one point you have missed tens of ships perhaps just because you refused one ship,” he said.

While it’s difficult to offer any forecasts as regards developments on the cruise market, right now this sector is in stable development and the Baltic Sea remains a popular destination, according to Kaljurand. Despite the sanctions and global crisis in a sense, there has been no sign of s setback,” he said.

He said executives of the port who recently arrived from the world’s largest cruise fair in Miami described the situation of the cruise market as quite the opposite to a crisis. “The Baltic Sea is generally very attractive for cruise operators and passengers. The Baltic Sea is made attractive first and foremost by St. Petersburg, without St. Petersburg we would definitely be marginal in terms of market share,” Kaljurand said.

Port of Tallinn expects 490,000 cruise tourists and 292 cruise ships to visit the Estonian capital in 2015. For the cruise port of Saaremaa Island six ship calls have been booked involving about 3,500 passengers. Pullmantur, which uses Tallinn as turnaround port, has cut the number of turnarounds here to three this year from five in previous seasons.

Source: BNS via Estonian Review

Production increased in manufacturing and energy production

According to Statistics Estonia, in February 2015, the production of industrial enterprises increased by 5% compared to February of the previous year. Production increased in manufacturing and energy production, but decreased in mining.

In February, the production in manufacturing increased 6% compared to the same month of the previous year. The growth in production volume was caused primarily by an increase in the manufacture of electronic and wood products, where production rose 24% and 14%, respectively. In February, among the branches of industry holding larger shares, the production rose in the manufacture of food and metal products and electrical equipment. Production growth was not broad-based – in February, more than half of the branches of industry did not achieve the volume of the previous year. Among the branches of industry holding larger shares, the volume of production fell in the manufacture of chemical products, building materials and plastic products.

71% of the whole production of manufacturing was sold on the external market in February. Compared to February 2014, export sales as well as domestic sales of manufacturing production rose about 3% according to unadjusted data.

In February 2015 compared to January 2015, the seasonally adjusted total industrial production increased by 2%, manufacturing production by 1%.

Compared to February 2014, the production of electricity increased by 8% and the production of heat by 1%.Diagram: Volume index and trend of production in manufacturing


Read more from Statistics Estonia

In February the retail sales of goods was 267 euros per inhabitant

According to Statistics Estonia, in February 2015 compared to February of the previous year, the retail sales of goods of retail trade enterprises increased 8% at constant prices. In January the retail sales increased 5% compared to the same month of the previous year, while in February the growth in retail sales accelerated.

In February 2015, the retail sales of goods of retail trade enterprises were 350.9 million euros, which was 267 euros per inhabitant.

The growth of retail sales in stores selling manufactured goods accelerated significantly compared to the previous months. In the previous three months (November–January), the retail sales of those stores showed a stable 7–8% growth year over year, whereas in February the growth was 13%. The acceleration of retail sales growth in stores selling manufactured goods was partly influenced by the very low reference base of February of the previous year.

In February, the retail sales via mail order or the Internet increased the most, with sales increasing 41% compared to February 2014. A higher than average increase occurred also in other specialised stores, such as stores selling computers and their accessories, photography supplies, books, sports equipment, games and toys etc. (20% growth) and in stores selling second-hand goods and in non-store retail sale (stalls, markets, direct sale) (19% growth).

The retail sales in grocery stores have been rather stable in recent months. In February, the retail sales of these stores increased 4% compared to February of the previous year.

The retail sales of automotive fuel increased 6% at constant prices compared to February 2014.

Compared to January, in February, the retail sales in retail trade enterprises decreased 7% at constant prices. According to the seasonally and working-day adjusted data, the retail sales stayed at the same level compared to the previous month.

In February, the turnover of retail trade enterprises was 416.8 million euros, out of which the retail sales of goods accounted for 84%. Compared to February 2014, the turnover increased 6% at constant prices. Compared to the previous month, this indicator decreased 6%.Diagram: Retail sales volume index of retail trade enterprises and its trend

The statistics are based on the questionnaire “Turnover”, the deadline of which was 15 March 2015, and on VAT declaration data from the Estonian Tax and Customs Board. Statistics Estonia published the monthly summary in 11 working days.

Source: Statistics Estonia

The quality of the loan portfolio of the banks continued to improve

Loans and leases were issued to Estonian companies and households moderately in February, which is common at the start of the year. The financing portfolio grew by relatively little over the month, and stood at 15.3 billion euros at the end of February.

The annual growth in the corporate loan and lease portfolio was 3.3% in February. The 704 million euros of new loans and leases to companies was around one tenth more than was issued in February last year. Financing in recent months has mainly been for companies in real estate, manufacturing and trade. Some 70% of the total value of long-term loans issued in February went to companies in these sectors.

The volume of new housing loans issued during the month was about the same as a year earlier. The annual growth in the portfolio was 2.9% in the first two months of the year. The volume of other household loans has remained the same for a long time now at 1.4 billion euros.

Average interest rates on loans have been affected in the second half of last year and the start of this by the decline in the 6-month EURIBOR, which is the base interest rate for most loans. The average interest rate for housing loans issued in February fell to 2.2%, while the average interest rate for corporate loans has remained at 2.5% in recent months.

The quality of the loan portfolio continued to improve in February. Loans overdue by more than 60 days were lower in volume than in January, accounting for 1.6% of the loan portfolio at the end of the month. The quality of loans to trading companies has declined slightly in recent months, though this has been offset by an improvement in the quality of other loans.

The annual growth of household and corporate deposits was 5.5% in February, similar to what it had been in the previous month.The growth in deposits was mainly driven by an increase in household deposits. There was little change in the volume of corporate deposits in February and annual growth in them remained at 2% for the second consecutive month. Non-resident deposits increased modestly in February and they remained at 21% of the total of corporate and household deposits.

Source: Bank of Estonia
Author: Mari Tamm, Financial Sector Policy Division of Eesti Pank


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