Long-awaited investment growth is starting to take off

Statistics Estonia revised second-quarter annual GDP growth 0.2 percentage points up to 0.8%. Regular revision of last four years was also published and led to changes in real growth rates of previous years. 2012-2014 GDP growth was revised down 0.9 to 0.1 percentage points whereas last year’s GDP growth was revised up by 0.4 percentage points to 1.4%.

Private consumption still contributed the most to GDP growth in the second quarter, although at a decelerating pace. Investments, which have had a negative influence on growth for the past two years, have started to improve. The recovery originates from private households, who invest into dwellings, as well as non-financial enterprises. The growth of non-financial enterprises’ investments has accelerated from 0.7% in the first to 5.5% in the second quarter. Compared to the second quarter of 2015, non-financial enterprises’ investments into transportation equipment have doubled. On the other hand, investments into machinery and equipment, the key to future growth, are still lagging.

Export and import growth of goods and services gained momentum in the second quarter. The growth of these has been very broad based with goods and services having almost equal growth rates. Import growth exceeded export growth and therefore the negative contribution from net exports to GDP increased.

ITC and agriculture sector had the largest positive and energy production the largest negative contribution to GDP growth in the second quarter of 2016. It is noticeable that the value added of transportation and storage activities has started to increase after being in a decline for three years. Also the value added in manufacturing sector has started to grow. As manufacturing sector makes up the largest piece of value added in the Estonian economy, it is assuring that the growth there is broad-based and more than half of the economic activities of manufacturing had positive growth rates.

According to our estimates, investments will continue to support GDP growth while the influence of private consumption will decrease. We expect the economy to grow 1.5% this year and 2.5% in 2017 due to increasing support from investments and export.

 

Source: Swedbank

Estonia has been an attractive tourist destination

Tourism: can the success be sustained?

• Estonia has been an attractive tourist destination
• Growth despite fewer visitors from Russia and Finland
• Challenges and opportunities in 2017

Estonia has been an attractive tourist destination
Estonia has been rather successful in attracting tourists. The number of tourists per person has been higher than in Latvia, Lithuania, Finland, or Sweden, or the European Union (EU) average. Estonia’s net occupancy rates are also above the European average. Local tourism has been more active in Estonia than in other Baltic countries, but more sluggish than in Finland or Sweden or the EU average, where higher living standards enable higher expenditure on leisure and entertainment, and longer distances mean greater need for accommodation services.

Growth despite fewer visitors from Russia and Finland
The number of domestic tourists (40% of clients) has increased substantially in recent years, offsetting smaller flows from Russia and Finland. During the first six months of 2016, the number of tourists from Russia stabilised, while the number of tourists from Finland started to grow again. The sector’s economic indicators also improved: turnover was 17% and profits 10% higher during the first six months of 2016 compared with the same period in 2015.

Challenges and opportunities in 2017
Next year will bring some challenges and opportunities for Estonia’s tourism sector. Estonia will raise the value-added-tax (VAT) on accommodation services, thereby accelerating the convergence of average prices with Western Europe. The recovery of the Finnish and Russian economies, the expected strengthening of the Russian rouble against the euro, and the EU presidency should support tourism flows next year. The number of nights spent by Estonian tourists could grow less quickly in 2017 as the Estonians’ purchasing power is forecast to grow more slowly than in 2016.

Source: Swedbank

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Nordea and DNB will be the second biggest bank in the Baltic states

  • The newly created bank will increase the volume of assets in the Estonian banking sector by around 40%
  • The new bank will be the second biggest in the Baltic states
  • The new bank could strengthen competition in the market for banking services for private clients in Estonia
  • Financial stability in Estonia will start to be affected by risks to the banking markets in Latvia and Lithuania

The merger of the Baltic operations of Nordea and DNB banks as a new independent Baltic bank with headquarters in Estonia and branches in Latvia and Lithuania will mean that the Latvian and Lithuanian banking markets will become more important in terms of risks to financial stability in Estonia.

Deputy Governor of Eesti Pank Madis Müller said that the creation of the second largest bank in the Baltic region is the biggest news in recent years in the Estonian financial market and could lead to increased competition in retail banking. “Danske recently withdrew from retail banking in Estonia, which did not have a good impact on competition. Meanwhile DNB bank has not been active in retail banking before now. I hope that the launch of the big, new universal bank focusing on the Baltic states will lead to stronger competition than there has been, especially in the market for banking services aimed at private clients. Competition is a force that drives development, and so this merger is good news.”

The Nordea and DNB banking groups unveiled their programme on Thursday, and it will see them set up a new and independent bank built on their existing Baltic operations, with its head office in Estonia and branches in Latvia and Lithuania. If the plan is approved by the different national authorities, it will create the second biggest bank in the Baltic states, and the volume of assets in the Estonian banking sector will increase by some 40% after the merger.

If the head office of the big new bank is in Estonia and branches in Latvia and Lithuania, the stability of the financial sector in Estonia will start to be affected directly by events in banking in Latvia and Lithuania. “The size of the new bank means it will be systemically important for Estonia. The risks to Estonian banking will start to depend more on Latvia and Lithuania if the new bank has a lot of business there. If the creation of the new bank is approved, Eesti Pank will need to start paying more attention to the markets in Latvia and Lithuania when we analyse the risks to our financial stability, and additional capital buffers will need to reflect that”, said Mr Müller.

Both Nordea and DNB are among the leading banks in Scandinavia and as owners with equal voting rights, both have confirmed their readiness to provide additional funds for the Baltic bank if needed. Mr Müller said that having such strong ownership behind the bank is important for the stability of the Estonian financial sector.

The size of the balance sheet of the new bank means it will be supervised by the European Central Bank working together with the Financial Supervisory Authority.

Source: Bank of Estonia

The average interest rate on housing loans rose in July

  • The loan and lease portfolio continued to increase relatively quickly in July, growing by 5% over the year
  • The average interest rate on loans has risen slightly in recent months
  • The volume of deposits was 7.3% larger in July than a year earlier

The loan and lease portfolio of Estonian companies and households grew relatively quickly in July, as it had in the preceding months, to be 5.3% larger than a year earlier. The total volume of loans and leases increased during the month by almost 100 million euros to 16.6 billion euros.

The yearly growth in the corporate loan and lease portfolio was 5.8% in July. Long-term loans of 199 million euros were granted in July and more than one third of them went to companies in real estate and construction.

Household borrowing activity remained at a similar level to that of the preceding months. The value of new housing loans issued in July was 88 million euros, and the total portfolio grew by 4.4% over the year. The volume of car leases also increased in July at the same rapid rate as previously, growing by 16.4% over the year.

The average interest rate on loans has risen in recent months. EURIBOR, which is the base interest rate for a majority of loans, has fallen further, leading to lower interest income for the banks. This has allowed banks to increase their interest margins on new loans in order to maintain their income. The average interest rate on housing loans issued in July was 2.4% and the average interest rate on long-term corporate loans was 2.5%.

The volume of loans that are long-term overdue is small and remained at the same level as in previous months. There were 195 million euros of loans in the portfolio that were more than 60 days overdue in July, which is 1.3% of the loan portfolio.

The total deposits of companies and households stood at 11 billion euros in July, which is 7.3% more than a year ago. The average wage has continued to rise relatively quickly, which has led household deposits to grow stably in volume. Corporate deposits were 7.6% larger in July than a year earlier.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

Wage growth slowed in local government administration

  • The growth rate of gross monthly wages slowed a little, especially in local government administration
  • Given that productivity declined in the second quarter, growth in the average wage remained strong
  • The Structure of Earnings survey indicates that the wage level in Estonia was second behind that of Slovenia among the Central and East European countries in 2014

Data from Statistics Estonia show that the average gross monthly wage was up 7.6% in the second quarter of 2016. This is slightly slower than the yearly growth rate of 8.1% in the previous quarter.

Wage growth slowed most in state and local government administration, but the trend of accelerating wage growth was noticeable in Estonian-owned private companies. Data from the Tax and Customs Board showed similar developments. Growth in the average declared wage paid out in the second quarter was slightly slower than it was in the first quarter of 2016 or the second quarter of 2015. This was because of a deceleration in the rapid growth in wages paid out by government institutions.

The average wage is again rising notably faster than productivity. The flash estimate from Statistics Estonia puts GDP growth at 0.6% in the second quarter while the number of people in employment grew faster, meaning that productivity fell. The impact of rising wages on labour costs per unit of output has also increased significantly in manufacturing, which is Estonia’s main exporting sector. Over the long term, such a development will harm the competitiveness of manufacturing in foreign markets.

The results of the 2014 Structure of Earnings survey were released recently[1] and show wages by gender, education and occupation. Surveys using the same methodology are carried out in most European countries, meaning that Estonian data can be compared with those of other countries. The 2014 survey showed that the wage level in Estonia was second behind that of Slovenia among the Central and East European countries in that year. The average wage was about one third higher in Estonia than in Latvia or Lithuania, while wages in Finland and Sweden were about three times higher than those in Estonia in 2014.


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.

See a better graph on Bank of Estonia website

Author: Orsolya Soosaar, Economist at Eesti Pank

Estonian average salary is 1,163 euros or 6.91 euros per hour

According to Statistics Estonia, in the 2nd quarter of 2016, the average monthly gross wages and salaries were 1,163 euros and the average hourly gross wages and salaries were 6.91 euros. Compared to the 2nd quarter of 2015, the average monthly gross wages and salaries increased by 7.6% and the average hourly gross wages and salaries by 4.5%. In the 2nd quarter, the annual growth of average monthly gross wages and salaries was slightly slower than in the 1st quarter of 2016.

The average monthly gross wages and salaries were 1,141 euros in April, 1,129 euros in May and 1,220 euros in June. Higher monthly gross wages and salaries in June were mainly due to an increase in irregular bonuses and premiums and holiday leave pay.

Irregular bonuses and premiums decreased 8.3% per employee compared to the 1st quarter of 2016 but increased 15.6% per employee compared to the 2nd quarter of 2015. Irregular bonuses and premiums affected the increase in average gross monthly wages and salaries by 0.3 percentage points. Without irregular bonuses and premiums, the average monthly gross wages and salaries increased year-over-year by 7.3% in the 2nd quarter, with annual growth remaining on the same level as in the 1st quarter (7.2%).

Real wages, which take into account the influence of the change in the consumer price index, increased faster (8.3%) than the average monthly gross wages and salaries in the 2nd quarter of 2016 compared to the 2nd quarter of 2015 due to the continued decrease in consumer prices. Compared to the same quarter of the previous year, real wages have been increasing since the second half of 2011.

The average monthly gross wages and salaries were the highest in information and communication and financial and insurance activities. Compared to the 2nd quarter of 2015, the average gross monthly and hourly wages and salaries increased in almost all economic activities (except mining and quarrying). The largest increase of monthly and hourly wages and salaries occurred in real estate activities (23.5%). A higher than average annual growth was also recorded in administrative and support service activities (13.5%), accommodation and food service activities (12.6) and in information and communication (11.5%). The annual growth of monthly gross wages and salaries was the fastest in the Estonian private sector (9.4%) and the lowest in state institutions (5.5%).

In the 2nd quarter of 2016, by county, the average monthly gross wages and salaries were the highest in Harju, Tartu, Viljandi and Lääne counties and the lowest in Põlva, Ida-Viru and Valga counties. The annual growth of average monthly gross wages and salaries was the fastest in Tartu and Pärnu counties and the slowest in Ida-Viru county.

According to the Wages and Salaries Statistics Survey, the number of employees converted to full-time units decreased by 1.8% compared to the 1st quarter of 2016 and by 1.5% compared to the 2nd quarter of 2015. The bigger than average year-over-year decrease in the number of employees in full-time units occurred in mining and quarrying and in other service activities, while the largest year-over-year increase occurred in financial and insurance activities and in professional, scientific and technical activities.

In the 2nd quarter of 2016, the average monthly labour costs per employee were 1,568 euros and the hourly labour costs were 10.32 euros. Compared to the 2nd quarter of 2015, the average monthly labour costs per employee increased 7.5%.

Average monthly labour costs per employee and monthly gross wages and salaries and net wages and salaries, 1st quarter 2014 – 2nd quarter 2016 (euros)

Read more from Statistics Estonia

Estonian construction volumes increased in Q2

According to Statistics Estonia, in the 2nd quarter of 2016 compared to the same quarter of the previous year, the total production of Estonian construction enterprises in Estonia and foreign countries increased 4%.

In the 2nd quarter of 2016, the production value of construction enterprises amounted to 525 million euros, of which the production value of building construction was 354 million euros and the production value of civil engineering was 171 million euros. Compared to the 2nd quarter of 2015, the volume of building construction increased 16% and the volume of civil engineering decreased 13%.

The domestic construction market was still influenced the most by a fall in civil engineering volumes, while building construction continued to grow. Compared to the same period of the previous year, there was a growth in new building construction as well as in repair and reconstruction work in building construction.

The construction volume of Estonian construction enterprises in foreign countries increased about a third compared to the 2nd quarter of 2015, influenced mainly by the construction of buildings. Construction volumes in foreign countries accounted for 12% of the total volume of construction in the 2nd quarter of 2016.

According to the Register of Construction Works, in the 2nd quarter of 2016, the number of dwelling completions was 1,325, i.e. 598 dwellings more than in the same period a year ago. More than a half of the completed dwellings were situated in blocks of flats. The majority of completed dwellings were situated in Tallinn.

There is still a demand for new high-quality dwellings in a good location. In the 2nd quarter of 2016, building permits were granted for the construction of 1,817 dwellings, which is 6% more than in the 2nd quarter a year ago. The most popular type of building was a block of flats.

The number of completed non-residential buildings was 243 with a useful floor area of 192,000 square metres – this consisted primarily of new accommodation, commercial and storage premises. Compared to the 2nd quarter of 2015, both the useful floor area and the volume of completed non-residential buildings increased.

Diagram: Construction volume index and its trend

Source: Statistics Estonia