The Estonian economy is sailing with a tailwind

  • The current rate of growth in the economy cannot be maintained for long
  • The growth in corporate investment and profits is a positive change
  • There is increased upwards pressure on labour costs
  • There is a danger of overheating in the construction sector, which may pass on into the rest of the economy

Growth in the Estonian economy was fast in the first half of 2017, and in the second quarter it reached almost 6%. Growth was given a boost by an improvement in the external environment which encouraged exports, but the biggest driver was still domestic demand. Such strong growth is a positive point in the economy, but various indicators show that the Estonian economy is exceeding its long-term sustainable level and growth will soon slow. Production capacity has for some time been used more intensively than usual by companies, and there is heavy pressure on labour costs to rise because of labour shortages, while a rise in the number of vacancies indicates even greater stresses in the labour market than in the beginning of the year. There has also been a noticeable rise in producer prices and consumer prices of late. All of this together indicates that the current rate of economic growth cannot be maintained for long.

There is however no reason to think at the moment that the economy is overheating on a broad basis, because the picture is quite different in different sectors. The acceleration in economic growth has partly been due to improved performance in oil shale production and in energy, sectors that were earlier facing difficulties, where it is more accurate to talk about a recovery in output volumes. Most sectors have seen some growth. The growth cycle has been very strong in the trade sector and there is a threat of overheating in construction, which is running at almost maximum capacity. Cyclical peaks are more noticeable in construction, because increased demand for construction services from companies, households and the general government all coincide.

Having been in the doldrums in the past few years, corporate investment increased in the first half of this year, giving hope that potential growth may pick up again, having earlier suffered. It is worth noting that in the second quarter companies were able to increase their profits despite the substantial rise in labour costs. This was possible partly because inflation has increased in foreign markets and it has been easier to raise the prices of products. Whether the growth in profits will continue depends, however, on how the productivity of companies increases in the near future. If investment continues to increase, it may be assumed that productivity will also increase.

Household spending on residential property and real estate investment has been boosted by rapid growth in incomes. Employee compensation was up by more than 8% in the second quarter, and the average gross monthly wage by 6.8%. Household consumption has been quite restrained though, as deposits have increased more than consumption has. As income tax reform will be introduced at the start of next year, it was possible that the expectation of the rise in net taxes would cause consumption spending to rise already, as household confidence about the future is very strong. This has not happened though. Behaviour indicating a preference for gradual increases in spending is positive to note, as it helps in keeping economic growth more stable.

The data that are already available for the third quarter do not indicate any significant slowing down of growth, meaning that the economy continues to operate beyond its sustainable capacity. In this case state fiscal policy should focus on the need for balance in the economy, because overheating in some sectors could pass on into the rest of the economy. High volatility in economic growth, for which Estonia has stood out in Europe, has high social costs, leads to capital and labour resources being inefficiently allocated, increases uncertainty for companies and households, and reduces the credibility and long-term growth capacity of the economy.

Source: Bank of Estonia

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Borrowing by households increased in August

  • The growth in corporate borrowing has slowed a little in recent months
  • The number of new borrowers with housing loans has grown faster this year than previously
  • The deposits of companies and households were up 12% over the year

The loan and lease portfolio of Estonian companies and households again grew fast in August, though a little more slowly than before. The stock of loans and leases taken by companies and households from banks operating in Estonia stood at 17.7 billion euros at the end of August, which was 5.6% more than a year earlier. The growth in the loan portfolio has been smaller than before because of slower growth in corporate loans and leases, while the growth in loans to households has accelerated.

Growth in the corporate loan and lease portfolio slowed for the fourth consecutive month to 4.3% over the year in August. Corporate borrowing from abroad is also estimated to have grown relatively slowly in the first half of 2016, like it did last year. Corporate investment in real estate increased in the first half of 2017. In addition to using external funds, companies can also fund their investment from the significant financial buffers they built up earlier.

Borrowing by households increased again in August. Demand for loans from households has been supported by the continuing rapid growth in the average income of wage earners and by low interest rates. Activity increased in the real estate market and prices rose further. New housing loans worth 107 million euros were taken in August, which is one tenth more by value than a year earlier, and the housing loan portfolio increased by 6.4% over the year. The volume of new housing loans has increased this year primarily because the number of new borrowers has grown at a faster rate than before, rather than because the size of the average loan has increased. The portfolio of other loans and leases to households was increased by 29 million euros by the addition of the branch of TF Bank AB to the list of credit institutions. Without this, other household loans and leases would have increased by 8.2% in August rather than 10.7%. Demand for car leases remains strong, and in August the portfolio was some 15% larger than a year earlier. The stock of overdrafts and credit card loans was up in July and August by 4% over the year.

The average interest rate on new housing loans has risen this year. Demand for housing loans remains strong, allowing banks to raise their interest margins. The rise in interest rates may equally be due to higher credit risk for the new housing loan clients. Competition is tighter in the corporate loan market and demand weaker, and the average interest rate on new long-term corporate loans was similar in August to the average of the previous year. The average interest rate for new housing loans granted in August was 2.4%, and the average rate for long-term corporate loans was 2.3%.

As loan growth has been faster, so the deposits of companies and households have grown more and more. The deposits of companies and households were almost 12% larger in August than a year earlier at a total of 21.4 billion euros. The sales revenues of companies have risen this year, and this can be seen in the growth of deposits. Corporate deposits were up 15% on a year earlier, and those of households were up around 9%, which was due to the rapid rise in incomes.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

Foreign trade increased faster in Estonia than in the euro area

  • The surplus on the current account of the Estonian balance of payments in 2016 was the largest since independence was regained
  • Foreign trade picked up last year as both exports and imports increased
  • Estonia is one of the few EU member states to owe less to other countries than is owed to it

According to adjusted figures, the surplus on the current account of the Estonian balance of payments in 2016 was the largest since independence was regained, amounting to 0.4 billion euros or around 2% of GDP. Exports and imports of both goods and services grew notably faster than in the euro area as a whole, as the turnover of goods and services increased by less than 1% in the euro area, but by over 4% in Estonia. As exports of goods grew faster than the imports, the deficit on the goods account narrowed to 0.8 billion euros. The surplus on services decreased slightly over the year to 1.6 billion euros.

Estonia was a net lender to the rest of the world again in 2016 as the outflow of capital exceeded the inflow by 0.4 billion euros. Capital mainly moved through portfolio investment, with the largest part of investments going into foreign securities and fund shares.

Estonia is one of the few member states of the European Union to owe less to other countries than is owed to it, and at the end of 2016 the rest of the world owed Estonia 21.5 billion euros while Estonia’s debt was 19 billion euros. This means that Estonia’s external assets exceeded external liabilities by 2.5 billion euros. The same case applies only in Bulgaria, the Czech Republic, Denmark, Belgium and Germany while the other European Union members have larger debts to the rest of the world than they have invested there.

The current account balance and trade in goods and services

Net external debt (debt liabilities minus debt assets) as a ratio to GDP in 2016 %

Eesti Pank publishes the balance of payments yearbook each autumn for the previous year. The balance of payments yearbook contains a detailed analysis of the three main documents containing external sector statistical data – the balance of payments, the international investment position and the gross external debt – at national and sectoral levels illustrated with tables and figures. The time series are of up to ten years. This year’s yearbook will contain a comparison of the Estonian external sector with other European countries for the third time.

Source: Bank of Estonia

Harvesting is halfway to completion

According to Statistics Estonia, by 15 September, 57% of the sown area of cereals, 47% of the sown area of rape and turnip rape, and 49% of the area under potatoes had been harvested in Estonia.

By the same time last year, 91% of the sown area of cereals, 49% of the sown area of rape and turnip rape and 50% of the area under potatoes had been harvested.

Due to unfavourable weather conditions, ripening and harvesting of crops were delayed by many weeks. As a consequence, 77% of winter crops and only 45% of summer crops have been harvested. Among winter crops, 78% of winter wheat and 76% of rye, and from spring crops, 63% of barley, 51% of oats and 19% of spring wheat have been harvested. 92% of winter rape and winter turnip rape and only 8% of spring rape and spring turnip rape have been harvested. Of legumes, only 24% has been harvested.

According to preliminary data, in 2017, cereals were grown on 330,700 hectares in Estonia, of which 57% has been harvested for grain. One hectare of the harvested area gave on average 4,537 kilograms of cereals, with the average yield per hectare being 4,389 kilograms for rye, 4,777 kilograms for wheat, 4,584 kilograms for barley and 3,196 kilograms for oats. A part of cereals sown for grain will be harvested for green fodder. Legumes were grown on 65,800 hectares and yield per harvested hectare was 2,670 kilograms.

Rape and turnip rape were grown on 73,700 hectares. Most of winter rape and winter turnip rape has been harvested, while most of spring rape and spring turnip rape has not been harvested yet. One hectare of the harvested area gave on average 2,953 kilograms of rape seeds and turnip rape seeds.

Potatoes were grown on 5,400 hectares, of which 49% has been harvested. One hectare of the harvested area gave on average 19,025 kilograms of potatoes.

The statistics are based on the Estonian Agricultural Registers and Information Board (ARIB) land use data and statistical questionnaire “Yields (as of 15 September)”, the deadline of which was 15 September 2017. Statistics Estonia published the summary of the preliminary data in seven working days. For the statistical activity “Crop production”, the main representative of public interest is the Ministry of Rural Affairs, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting this statistical activity.

Source: Statistics Estonia

The Dwelling Price Index continued to increase in 2Q

According to Statistics Estonia, in the 2nd quarter of 2017, the Dwelling Price Index changed by 0.3% compared to the 1st quarter and by 4.8% compared to the 2nd quarter of 2016.

Compared to the previous quarter, the prices of apartments increased by 0.1% and the prices of houses by 0.8%.

Compared to the 2nd quarter of 2016, the prices of apartments have increased by 5.1% and the prices of houses by 4%. Compared to the 2nd quarter of the previous year, the prices of apartments increased by 5% in Tallinn, by 7.7% in areas bordering Tallinn with Tartu and Pärnu cities, and by 0.4% in the rest of Estonia.

The Dwelling Price Index expresses the changes in square metre prices of transactions made by households for the purchase of dwellings. The Dwelling Price Indices have been compiled for apartments and houses (detached, semi-detached and terraced houses).Dwelling price index, 1st quarter 2005 – 2nd quarter 2017

In the 2nd quarter of 2017, the Owner-Occupied Housing Price Index changed by -1.7% compared to the 1st quarter and by 3% compared to the 2nd quarter of 2016.

The Owner-Occupied Housing Price Index expresses the changes in the prices of the acquisition of dwellings new to the household sector and other goods and services that households purchase in their role as owner-occupiers. The index consists of four parts: the acquisition of dwellings, other services related to the acquisition of dwellings, major repairs and maintenance, and insurance connected with dwellings.

The Owner-Occupied Housing Price Index is published on the base 2010 = 100. The time series starts from the 1st quarter of 2005; major repairs and maintenance are included from the 1st quarter of 2007 and insurance connected with dwellings is included from the 1st quarter of 2012.

For the statistical activity “Dwelling price index and owner-occupied housing price index”, the main representative of public interest is the Ministry of Finance commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia

Inflation was at its fastest for four years in July

  • The rise in the excise on beer increased the price level by 0.4 percentage points in July
  • Inflation stood at 3.6% in July according to Statistics Estonia and half of it was due to a 6.4% rise in food prices.

Core inflation, which shows price changes for manufactured goods and services, accelerated in July to 1.8%, mainly because of higher services prices.

The rise of food commodities prices on global markets, which started in mid-2016, has been passed into Estonian consumer prices to a significant extent. Prices for dairy products have risen especially fast, as the producer prices of butter continue to set new records on the EU market. Other food prices, especially those for fruit and vegetables, have however stabilised over the past months, as commodities prices are growing somewhat more slowly. Higher excise taxes caused a 21% price increase for the beer sold in shops, which affected the consumer price index in July by 0.4 percentage points.

The inflation in most euro area countries remained low in July at 1.3%. Rapid economic growth has not started to impact prices yet, as some euro area countries are underutilising their production capacity and inflation is also being held back by the appreciation of the euro. Since April, the euro has risen 8.5% against the US dollar. The strengthening of the euro has not caused fuel prices at filling stations to change much, although the price of a barrel of crude oil on global markets has risen from 46 US dollars to 52 in two months. The rise in the exchange rate of the euro is encouraging the prices of imported manufactured goods to fall, but it also slows down the growth of euro area exports.

Eesti Pank forecasts that inflation will continue to move at a fast pace until the end of the year. Prices should increase more slowly in the first half of next year, but still faster than the euro area average.

Inflation in the euro area remains low and rapid economic growth has yet to affect prices

Inflation in Estonia and euro area
Author: Sulev Pert, Economist at Eesti Pank

Spending by inbound visitors up by 20 mEUR in Q2

There were close to 1.8 m visitors from abroad, an increase of 7% when compared with Q2 of 2016.  While the number of visitors from Finland remained stable, accounting for one-third of the total, the trips made by residents of other EU Member States increased by one-tenth.

Residents of Russia made 210 000 visits to Estonia, representing a 3% rise over the past year. The number of tourists from the US increased by a quarter and there were more visitors from Spain (a 40% rise), Latvia (15%) and the UK (27%). Trips from Poland and Belarus have, by contrast, fallen.

The number of visitors staying overnight was up 5%, compared with Q2 of 2016. The average length of stay was the same as a year earlier at 4 days. Same-day visitors accounted for around a half (49%) of the total inbound visitors and their number increased by 9% compared to a year ago.

Visitors from abroad spent an estimated total of 415,000,000 euros, which was 20,000,000 euros more than a year ago.

In the second quarter of 2017, residents of Estonia made around 1,000,000 visits to foreign countries, which was 13% more than a year earlier1.80% of the visits were made to other EU Member States. There was a notable increase in the number of visits to Belgium and Greece. The number of trips to CIS countries increased by one-fifth: there were 75% more visits to Ukraine compared to a year ago. As usual, Finland was the top destination, with 170,000 visits, which, however, represented a 8% decline from a year ago. Trips to Norway also fell by 11%.

Outbound overnight visits increased by 13%, while their average length remained at 3.5 days. Same-day visits accounted for 14% of the total, showing a 9% increase.

Visitors from Estonia spent an estimated total of 300,000,000 euros, which was 20,000,000 euros more than in Q2 of 2016.


The number of trips abroad and the number of visits abroad are not the same, as one trip abroad may include visits to several countries.

The movement of travellers has a noticeable effect on the exports and imports of travel services in the Estonian balance of payments. The balance of payments statistics for the second quarter of 2017 will be published on September 7.

Source: Bank of Estonia