The Estonian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Elina Allikalt Nr. 7 • 28 November 2011 Export growth to slow substantially Economic recovery after the recent recession was strongly led by the export and manufacturing sectors. After a period of high double-digit growth rates, slower growth is inevitable, however, due to the high base effect. More weight will be put on the slowdown by global uncertainties and the already- evident weaker external demand. Due to high global uncertainties, which could result in a larger drop in export demand than currently expected, negative export growth cannot be ruled out. However, the impact of such a scenario will be more subdued as regards domestic demand.The rapid economic recovery seen since mid-2009 Growth rates slowing sharplyhas been heavily dependent on the export and After an initial pickup in global confidence andmanufacturing sectors. External demand, which export demand, some slowing signs were visibledropped off sharply in 2008, started recovering already in 2010, and a broader drop in confidencethanks to higher confidence in the Estonian has been seen this year. Weaker external demand,economy and producers, as well as cost-adjustment resulting in a falling global purchasing managersmeasures taken during the downturn that made index (PMI) since mid-2011, was evident inproduction more competitive. The initial pickup in Estonia’s September manufacturing output figures.external demand was seen in subcontracting- Output declined by 12% (seasonally adjusted) fromrelated sectors, but other sectors gradually August, affected by a 48% fall in the mostly export-followed. The foreign trade balance shrank by two- targeted and subcontracting-dependentthirds in 2009, and gains in business confidence manufacture of computers, electronics, and opticalwere among the largest in the EU. products; annual growth in this sector slowed to just 6%, compared with the more than 200% averageManufacturing sector(left scale: annual growth; right scale: points) growth reported during this year. While part of this sharp decline can be explained by the large base 80% 40 effect, or could be seasonal and one-off,1 as 60% 30 monthly figures can be very volatile in Estonia, this nevertheless points to the falling number of order 40% 20 books from the high levels seen in recent years. 20% 10 Nevertheless, despite falling growth rates, export 0% 0 demand still remained the driving force behind 2007 2008 2009 2010 2011 manufacturing: the more than 70% of production -20% -10 exported in September is a share similar to that seen throughout the year. Although domestic sales -40% -20 growth has stabilised recently, manufacturing -60% -30 output will remain more dependent on external -80% conf idence, s.a (r.s.) -40 production export sales Source: SE, DG ECFIN domestic sales 1 This can include possible expiration of large contract(s) or even disruptions in the supply chain i.e. those products being imported to Estonia for manufacturing subcontracting purposes. Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000. E-mail: email@example.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.
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 7 • 28 November 2011demand, as the domestic demand recovery has Estonia is the only rare-earth metal producerbeen rather fragile. outside Asia.Manufacturing survey: Electrical and optical equipment Despite this sharp correction in manufacturing data,sector exports still held up well in September, with 30% annual growth reported (in nominal terms). Positive 80 growth was seen in all product categories--the 60 highest in machinery and equipment, with 43%; however, growth in this category has slowed (see 40 chart). Nevertheless, much lower growth rates are 20 to be reported in following months, due to both the large base effect and weaker external demand, 0 already evident in the manufacturing data. 2007 2008 2009 2010 2011 -20 Export of goods -40 (annual nominal growth) 180% -60 -80 conf idence current production export orders production expectations 120% Source: EKI labour expectationsManufacturing production(index Dec 2008=100, seasonally and working-day adjusted) 60% 220 total 800 f ood products wood, -products 200 metals 700 0% chemicals 180 electronics (rs) 600 2008 2009 2010 2011 160 500 -60% 140 400 Source: SE machinery and electrical equipment total 120 300 Manufacturing confidence 100 200 60 7 80 100 40 60 0 6 2008 2009 2010 Source: SE 20 5Production in other important export-oriented 0sectors, like the manufacture of metals and food 2006 2007 2008 2009 2010 2011 4and wood products, continues to grow, both in -20monthly and annual terms. Exports of food productshave been successful, thanks to Estonian 3 -40production’s good price-quality value in markets(especially outside the EU) where demand has New orders in recent months -60 2risen while the production by local producers has Export expectations Source: DG ECFIN Months of production assured (rs)been insufficient to meet that demand. The higherexternal demand for wood products is mostly basedon the recovering construction sector in the Nordic According to our current forecast, export growth willcountries, where half of Estonias wood and wood reach higher than 20% this year, before slowing toproducts and up to one-third of its furniture exports around 3% next year, in real terms. Our globalare targeted. Also, wood export volumes are outlook does not forecast a new severe recession,affected by rising commodity prices. Exports of but exporting conditions will be more unfavourable.metals are largely based on niche production, as Still, we foresee that Estonia will be able to avoid negative export growth as the most important export markets will show more resistance than for 2 (4)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 7 • 28 November 2011example Southern Europe where the crisis is more Import growth forecast of Estonias main export partnersprofound. Other reasons for not expecting negative (real growth rates)export growth in the next two years include these 30% euro area Sweden Finland Russiatwo factors: Latv ia Lithuania 25%Despite unfavourable global conditions, we do not Germany Estonia - exportsee any negative export growth in our forecast 20%period, mainly for these two reasons: Export contracts are more long term. This 15% applies to both the mostly subcontracting contracts with Nordic countries and the 10% contracts of smaller manufacturers in other markets, including outside the EU (e.g., 5% Russia and the US). This is evident also in the confidence figures, which, despite the 0% falling number of new orders and weaker 2011 2012 2013 export expectations, are showing slightly Source: DG ECFIN increasing production assurance time (see chart). Overall confidence, which is falling, takes more into account the high level of What about negative export growth? uncertainties. As mentioned, our current forecast does not foresee negative export growth, going forward. The strong cost adjustment during recent However, uncertainties are continuously high, which years has brought gains in competitiveness is also evidenced by the increasing possibility of a and helped Estonian producers and risk scenario in our global outlook.2 The exporters to increase market shares. Thus, combination of a spiraling debt crisis, political the weaker economic growth and domestic standstill, and a hard-landing scenario for the demand in the EU and other export emerging economies could push the global partners can in a way be viewed as a economy, including Estonias main export partners, positive risk for the Estonian export sector – into a period of recession. Were this to occur, a assuming that economic agents will period of negative export growth3 is unavoidable. become increasingly price sensitive, Naturally, the length and extent of this period Estonia can use this as a competitive depend on the scale of the global recession. Still, advantage. we believe that negative export growth lasting onlyManufacturing survey: Current export demand one quarter could be weathered by the economy(balance of answers "above/below regular level," six-month quite well, without any major consequences for theaverage) overall growth rates. 30 Metal Since the Estonian economy is very dependent on 15 products export developments,4 a longer period of negative Furniture export growth would affect the rest of the economy 0 through a decline in job creation, investment 2007 2008 2009 2010 2011 -15 Food activity, consumption, and tax revenues. Thus, products domestic demand would unavoidably be weakened -30 Electr- onical -45 equipment Wood -60 2 Our latest global scenario is available in the Baltic Chemicals Sea Report, published on October 19, 2011. -75 3 Here we are concentrating only on exports of goods. -90 Estonia is a services net exporter and will continue as such, Source: EKI even in our risk scenario. This most likely means continuing positive export growth in current account terms. 4 In fact, this dependency has increased – exports’ share in the economy rose from 68% of GDP in 2007 to 79% in 2010. According to both our and the European Commission estimates, this share could reach around 90% this year and next. 3 (4)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 7 • 28 November 2011by negative export sector developments. Although Exports of goods and services in selected EU countries,the recovery in domestic demand has been rather 2010 (% of GDP)fragile thus far, it nevertheless is much lessimbalanced than it was during the boom years prior 120to the 2008 dropoff in exports. A standstill of a 100similar scale would have a substantial impact, butthe correction in the whole economy would be 80smaller and the economic agents better prepared. 60 40 20 0 Czech Rep Sweden UK Ireland Estonia Lithuania Poland EU27 Finland Spain France Greece Portugal Netherlands Denmark Slovakia Slovenia Latvia Hungary Germany Italy Source: Eurostat Elina AllikaltSwedbankEconomic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy firstname.lastname@example.org completeness of the report and cannot be held responsible for any error or omission in thewww.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 forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-8-5859 7720 monthly newsletter The Estonian Economy.Annika Paabut +372 6 135 440Elina Allikalt +372 6 131 989 4 (4)