1. Estonian economy: Recent Trends and Their Impact on
Private Consumption
Maris Lauri
29th October 2009

2. Improving confidence – improving consumption?
• Consumer confidence is Consum ption and consum er confidence
improving
– Fears were too big 20% 20
15%
• Confidence is still weak 10%
10
5% 0
• Consumption growth is not just 0%
-10
over the corner -5%
Apr-01 Jan-04 Oct-06 Jul-09
-10% -20
-15%
-30
-20%
-25% -40
consumption, y oy (ls) conf idence (rs)
Source: Statistics Estonia, EKI
© Swedbank 2

3. Factors affecting consumption besides confidence
• Incomes
– Wages the most important factor
• Saving propensity
• Spending preferences
• Income short-term outlook is poor
• Families prefer saving
© Swedbank 3

4. Labour market – grim situation with signs of hope
Unemployment: fears and reality
Weaknesses 80
• Production is not growing, except 60
40
some companies 20
• Failures are expected to overcome into 0
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
-20
bankruptcies -40
Positive unemployment expectations (balance) job-seekers, th
• The increase of the number of
unemployed has slowed Employment and activity
• The number of layoffs declines 10% 68%
• Unemployment fears have diminished 5%
66%
However 0%
64%
Employment growth starts some time -5% 03(I) 04(I) 05(I) 06(I) 07(I) 08(I) 09(I)
after production growth in a economy -10%
62%
-15% 60%
No of employed, yoy (ls) activity rate, % (rs)
© Swedbank 4

5. Wage incomes are strongly down – maybe over 20%
• Companies are cutting spending,
Annual growth of employment
that includes wages
and wages
– Wage payments down already in
2008 (bonuses) 8% 25%
– Less working hours 6%
– Layoffs 4%
20%
• Companies are now increasing 2% 15%
working hours, but public sector 0%
10%
spending cuts are yet to come -2%
03(I) 03(IV 04(III) 05(II) 06(I) 06(IV 07(III) 08(II) 09(I)
• Cost cutting has strengthened -4%
5%
companies cost advantage, so the -6% 0%
production and export is -8%
recovering -10%
-5%
• After some time growth in -12% -10%
employment, then in wages
employment (ls) gross monthly wage (rs)
© Swedbank 5

6. Other incomes
• Social transfers
– It is decided not to cut pensions
– Maternity/paternity leave payment increased for 2010
– More people will apply for social support, but other allowances may be
cut
• Income from business etc continues to fall
• Property sale
– Prices are down, but volumes of sales may increase
– E.g. residential real estate sales growing
© Swedbank 6

7. Decision making in families
• Main factor is incomes, which are declining
• Hence spending declines
• Saving propensity has grown
• Other income?
Household loan stock, bln kroons
140
120
100
80
60
40
20
0
Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09
other mortgages
© Swedbank 7

8. Families try to increase savings
• Demand deposits indicate Household deposit stock, bln kroons
readiness to spend 70
• Time deposit is saving 60
50
– Short-term (up to 3 months) – 40
30
uncertainty 20
10
– Longer terms (up to 1 year) – for 0
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
bigger purchases, uncertainty
demand time
Kroon and foreign currency deposits Structure of time deposits
100% without date
over 1 year
80% 6%
14%
60% up to 3
months
40%
33%
20%
up to 1 year
0%
34% up to 6
2007 2008 2009
months
13%
© Swedbank 8

9. Household consumption continues to decrease
• Spending is cut according to importance
– Capital goods – housing, cars etc – very big cuts
– Big purchases – very big cuts, “emergency” purchases
– Leisure time, cultural spending etc – substantial cuts in low and medium
income families, choices depending on preferences etc
– Clothing, footwear, every-day services – big cuts, only for clear purpose,
cheaper products
– Food, heating, electricity, transport (work/school), medicine – small cuts,
substitution, lower quality
• If demand starts to grow again, then the consumption will
resume in opposite direction
© Swedbank 9

10. Price decline helps consumption
• Declining prices is reaction to Annual growth of CPI
weaker demand 20%
• Estonian consumer expects
deflation to continue 15%
• Price decline is also affected
10%
– Competition
– External prices (import, export) 5%
– Administrative decision (taxes)
0%
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
-5%
-10%
total foodstuffs industrial goods services
© Swedbank 10

11. When demand will recover?
• Seasonal factors makes situation worse in winter
– Increase of unemployment after seasonal works end
– Growing heating bills
– Less unemployed persons to receive unemployment insurance
payment (period ends)
• Global economic situation has stabilised, some growth =>
exporting sector improving slowly
• In Estonia investments – mostly on support of EU funds (more
work, more income)
• Spring might bring better developments
© Swedbank 11

12. Thank you!
© Swedbank 12