The Estonian Economy, No. 1 - June 21, 2012: More stable growth ahead

1. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Annika Paabut No. 1 • 21 June 2012
More stable growth ahead
 The economic growth in the first quarter was supported by strengthening
domestic demand, especially investments growth. As export growth
continued to slow, the main contribution to value added shifted from
manufacturing to more domestically oriented sectors like construction and
retail.
 Despite falling consumer confidence, private consumption has shown strong
growth rates, supported by continuously improving labour market conditions.
Expenditures on durables have grown the most, while that on necessities has
been rather sluggish.
 Investment growth will be strong this year. The public sector investment
projects are financed by increasing EU funds and CO2 quota sales revenues.
In addition, many manufacturing companies are facing capacity constraints
which induce their investment activity, especially at the end of the year.
GDP growth slowing expectedly The main contributors to growth of value added
were domestically oriented sectors like construction
In 1Q of 2012 GDP (seasonally adjusted)
and ICT sectors. Since the end of 2010 the
decelerated to 3.7% y-o-y from 5.1% in 4Q 2011.
importance of the retail sector in growth has
Domestic demand was expectedly the main
increased as well. This all in all shows a strong
contributor to the growth – exports growth has
recovery of the domestic demand – solid growth in
slowed and imports growth accelerated turning net
private consumption and investments. At the same
exports contribution to the negative side. Domestic
time, the slowdown of value added growth stems
demand is mainly fuelled by the investments growth
very much from the manufacturing sector – the
that reached almost 17%. Private consumption
growth of exported volumes in electronics
grew by solid 3.2% in 1Q.
manufacturing started to increase with double-digit
Contributions to GDP annual growth
rates already in 2010 and it continued throughout
(constant prices, seasonally adjusted) 2011 as well. In 1Q this year the contribution of the
20%
manufacturing was negative (-1 pp) and the main
reason behind the slower growth in manufacturing
15%
is, again, electronics sector.
10%
All in all, we expect continuing growth in value
5%
added in construction sector, retail sector as well as
0% in real estate related activities. The latter is
-5% 2008 2009 2010 2011 2012 expected as the activity in real estate market is
-10% expected to increase by the end of the year.
Construction sector growth will be supported, on the
-15%
one hand by the governments planned investments
-20%
financed by EU fund and/or revenues from CO2
-25% quota sales and on the other hand, as shown in a
Net export
Gov ernment consumption
Inv estments
Priv ate consumption
Source: Eurostat GDP
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Annika Paabut, +372 6 135 440. Elina Allikalt, +372 6 131 989.

2. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 1 • 21 June 2012
1
survey of manufacturing companies , the private however, positive growth rates during the first four
sector is expected to increase their investments as months of the 2012 compared to the same period
well (mainly in the second half of the year) as many last year.
of manufacturing entrepreneurs are expecting
increase in turnovers. Retail sector will continue to Contributions to goods export annual growth
benefit from recovering confidence of residential (current prices)
households and continually increasing inflow of 40% Other
tourists from neighbouring countries.
30% Vehicles
Contributions to GDP growth by economic activity
20% Machinery ,
15%
Other equipment
10% Base
10%
Real estate, metals
renting etc
0% Wood, -
5% Transporta-
2008 2009 2010 2011 2012 products
tion, storage
-10% 4 Mineral
0% Retail months products
2009 2010 2011 2012
-20% Food
-5% Construction
-30% Total
-10% Manuf ac-
Source: Statistics Estonia
turing
-15% Agriculture
Exports of goods and services grew slower than
-20% GDP imports – in 1Q 2012 exports annual growth in real
Source: Statistics Estonia terms was 6.8% and imports 9.9%. The slowdown
of exports volumes was expected due to the high
comparison base as well as increasing uncertainty
in destination countries economies. In addition, the
Mixed signals in external balance overall economic environment in the world is not
Exports volumes have despite shaky external supporting fast growth in exports – even though the
environment shown rapid growth during the last outlook for near future of the main export partners
couple of years – in 2010 and 2011 the volume has improved somewhat the short term downward
increased by more than 20% in annual terms. The risks have risen. Imports growth is going hand in
first quarter of this year may describe with a hand with recovery of domestic demand and
considerably lower growth rates – due to historically slowing exports growth; during the last couple of
high volumes seen last year, the growth cannot years the exports growth determined that of imports
continue with similar rates without causing a and private consumption did not affected it much.
bubble. The other explanation stems from the Now, the situation has changed – thriving private
structure of the exports. The main group of consumption is inducing demand for imported
exported goods is still machinery and equipment goods. In the near future, as imports growth will
(see graph) that in turn is related to the fast growth outpace that of exports, the contribution of net
seen in the manufacturing of electronics since the export to growth will be negative.
middle of 2010. Mineral products exports are by
Export growth is expected to slow during this year
nature transit – Estonia has no such natural
and pick up again during next as the overall
resources and therefore all the needed products are
economic activity in the neighbouring countries will
brought in, remanufactured and exported again.
increase. In addition, in recent past the export
Other largest groups of goods that are exported
growth was mainly determined by rapid growth of
include food industry products and wood and wood
export sales in one sector (electronics), but this and
products manufacturing as well as production of
next year we expect the export sales in other
furniture. Latter three branches have shown,
sectors to contribute more. The four months
average exports sales of the electronics sector is
approximately 14% lower than a year ago, but
higher than average volume sold during the whole
1
year (in first half of the last year the foreign demand
Conducted by Swedbank; covered more than 200 industrial for electronic sector was at all time highest). We
companies with turnover more than EUR 4 million. expect export volumes in this sector to remain at
https://www.swedbank.ee/static/pdf/toostusettevotted_eng.pdf
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3. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 1 • 21 June 2012
the current level or slightly increase. The overall decelerated due to seasonal reasons.
increase in export sales will, according to our Nevertheless, nominal wage bill has increased
calculation, stem from other sectors like food and hand in hand with private consumption
wood industries as well as manufacture of expenditures pointing on fading fears of
machinery and equipment and electrical equipment. unemployment and future hardship and stronger
According to the previously mentioned survey1, the confidence in households’ financial situation in the
most of manufacturing companies is planning to near future.
increase their turnover during this year. Most
optimistic ones were firms in food industry – 95% of Private consumption and consumer confidence
firms in food manufacturing are expecting higher (left scale: annual growth; right scale: points)
turnovers than previous year. The average 20% 20
expectation of the annual increase amounted 15%
according to the survey 10.3%. At the same time, 10
all those companies are facing limitations in 10%
0
capacity utilisation – only 26% of enterprises 5%
studied are ready to increase their turnover without
0% -10
additional investments. 2007 2008 2009 2010 2011 2012
-5%
According to our forecast, export volumes are -20
-10%
expected to grow by 3.1% in 2012 and 7.1% in
-30
2013 as the economic activity in the neighbouring -15%
countries (the main export destination countries) will -20% -40
increase. Nevertheless, overall estimation of
Real wage Food prices
exports volume growth might in light of the
Priv ate consumption Consumer conf idence (r.s.)
mentioned survey be too conservative – we might
Source: Statistics Estonia, DG ECFIN
need to overlook our forecast already in near future.
Shadow economy decreasing, consumption
expenditures in line with wage bill growth Wage bill and employment growth, and consumer
confidence
Private consumption has showed strong growth (left scale: annual growth; right scale: points)
already since the last quarter of 2010. Growth 20% 10
continued throughout the 2011 and reached the
15%
annual rate 4.4% (consumption of residential 0
10%
households). In the subcategories of goods
purchased, most importantly, the fastest growth is 5%
-10
observed in durable goods purchases. This, all in 0%
all, reflects the grown confidence of households and -5% 2008 2009 2010 2011 2012
-20
fading fears of future hardship due to loss of a job -10%
of household member(s). At the same time the
-15%
consumption expenditures on necessities have -30
been rather sluggish pointing on rapidly growing -20%
food prices (in 2011 prices of food products and -25% -40
non-alcoholic beverages in Estonia grew by Priv ate consumption Nominal wage bill
9.7% y-o-y, the average CPI growth reached Real wage bill Employ ment
Consumer conf idence (r.s.)
5% y-o-y) and more and more households suffering
Source: Statistics Estonia, DG ECFIN
of constrained budgets. The average real wage
continued to grow third quarter in a row – in
1Q 2012 average real wage grew by 2.4%. Despite the crises years, shadow economy has
according to recently published survey conducted
However, private consumption has shown strong by Estonian Economic Research Institute2
growth rates despite fall in confidence at the end of decreased during the 2011 from 9% to 8% of GDP.
last year and the quite modest increase in real According to this survey 13% of households
purchasing power. This phenomenon may be
explained by the favourable developments in labour
market – job creation started already at the
beginning of last year and has continuing with
surprisingly strong rates throughout the year 2011. 2
www.ki.ee „Shadow economy 2011“ (Varimajandus 2011, in
In the beginning of 2012, employment growth Estonian)
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4. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 1 • 21 June 2012
preferred goods and services that are cheaper and Investments of enterprises
they do not care whether the taxes on the goods or (left scale: million EUR; right scale: annual growth)
services are paid. 52% of households prefer only 900 80%
legally produced goods and services and the rest 800
60%
may act both ways time to time. Illegal (i.e. those, 700
on which the taxes are not paid) or barely illegal 600
40%
goods are most preferred in North-East Estonia and 500 20%
the least West-Estonia. Not surprisingly, the low
400 0%
income earners tend to buy goods and services on
300
what the taxes are not paid or buy them more -20%
frequently than high income earners. 200
-40%
100
Investments about to grow 0 -60%
Investments growth started already in 1Q of 2011 2007 2008 2009 2010 2011 2012
and continued throughout the year. In 1Q 2012 the Buildings Construction
Vehicles Computers
annual growth reached only 1% and the decline in Other equipment, machinery Land
Inv estments (r.s.)
construction investments might be by and large Source: Statistics Estonia
seasonal. As mentioned before, manufacturers are
expecting higher turnovers, but face limitations of grow faster at the end of the year, as during the first
capacity utilisations – majority of firms are not able half uncertainties are still high, on account of which
to increase their turnover without investments. private enterprises tend to use the wait-and-see
According to the previously mentioned survey1 strategy. However, the study mentioned before,
more than 50% of firms in manufacturing are suggests that private sector is more keen to start
planning to increase their investments this year (for investment activity than was assumed in April,
instance, 63% of food industry and 57% of heavy when our forecast was published. At the same time,
industry firms are planning to increase their the short term risks remain due to the political
investments). uncertainties in the EMU countries, which in turn
We expect investments to increase by 11.5% y-o-y may increase the cautiousness of firms planning
(real terms) and next year the growth will slow a bit their investments. Therefore, we expect private
to 6.3%. This year the public sector investments are sector investment activity to increase during the
increasing considerably – they are financed by EU second half of the year.
funds and/or by revenues from CO2 quota trade. In
addition, we expect private sector investments to
Annika Paabut
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
www.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720
monthly newsletter The Estonian Economy.
Annika Paabut +372 6 135 440
Elina Allikalt +372 6 131 989
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