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Eesti Pank Economic Statement 12 December 2013
 

Eesti Pank Economic Statement 12 December 2013

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    Eesti Pank Economic Statement 12 December 2013 Eesti Pank Economic Statement 12 December 2013 Presentation Transcript

    • Eesti Pank Economic Statement 12 December 2013
    • Key points of the presentation • The external environment • Review of the Estonian economy and forecast for the coming years • Economic policy implications 12.12.2013 Eesti Pank Economic Statement 2
    • The economy has grown in the euro area for two consecutive quarters • Inflation expectations for the forecast period are in line with the goal of price stability, which in the euro area means annual inflation of below, but close to, 2% over the medium term. Growth and inflation in the euro area euro area GDP growth, q-o-q (right scale) euro area inflation, y-o-y euro area GDP growth, y-o-y 4% 2% 2% 1% 0% 0% -2% -1% -4% -2% -6% -3% 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Eurostat 12.12.2013 Eesti Pank Economic Statement 3
    • Low interest rates are supporting the recovery in the euro area economy • • Low price pressures mean that financial markets expect interest rates to remain very low Forward guidance from the European Central Bank in July said that monetary policy interest rates will remain low for an extended period of time 3-month ERIBOR June forecast 2013 December forecast 2013 2.0% 1.5% 1.0% 0.5% 0.0% 2011 2012 2013 2014 2015 Source: ECB 12.12.2013 Eesti Pank Economic Statement 4
    • The oil price will fall over the next two years • • Market expectations are for the oil price to fall to 97.5 USD in 2015 Cheaper oil will be a major factor in slowing inflation Oil price, dollars per barrel June forecast 2013 December forecast 2013 120 115 110 105 100 95 90 2011 2012 2013 2014 2015 Source: ECB 12.12.2013 Eesti Pank Economic Statement 5
    • The euro is stronger against the US dollar than it was in the summer • • The euro will be stronger than was previously forecast throughout the forecast horizon The strengthening of the euro against the US dollar will slow inflation USD and euro exchange rate June forecast 2013 December forecast 2013 1.45 1.40 1.35 1.30 1.25 1.20 2011 12.12.2013 2012 2013 2014 Eesti Pank Economic Statement 2015 Source: ECB 6
    • The acceleration in euro area growth that started this year will continue in 2014 • • Economic activity in the euro area will recover only slowly, as it will take time for imbalances to be eliminated Inflation has fallen by more than expected, price pressures are subdued, the risks are more towards a rise Euro area economic growth Euro area inflation HICP growth forecast range, December 2013 forecast range, June 2013 point forecast, December 2013 economic growth forecast range, December 2013 forecast range, June 2013 point forecast, December 2013 3% 3% 2% 2% 1% 1% 0% 0% -1% 2010 2011 2012 2013 2014 2010 2011 Source: Eurostat, ECB 12.12.2013 Eesti Pank Economic Statement 2012 2013 2014 Source: Eurostat, ECB 7
    • External demand has proved weaker for Estonia than was forecast in June • • Demand in Estonia’s export markets is lower in 2013 than in the previous year Growth in export markets will again be below the June expectations in the coming years External demand growth Sweden Russia Lithuania external demand growth, December forecast 2013 Finland Latvia other external demand growth, June forecast 2013 6% 4% 2% 0% -2% 2012 2013 2014 2015 Source: ECB 12.12.2013 Eesti Pank Economic Statement 8
    • The biggest impact on Estonian exports is from Finland, but Latvia, Lithuania and Russia have all had an effect • The downward correction in external demand growth is spread evenly across countries for 2014 and 2015 as import demand in Finland will also recover Difference in foreign demand growth compared with the June forecast (pp) Finland Russia Latvia Lithuania other difference in foreign demand growth 1 0 -1 -2 -3 2013 2014 2015 Source: ECB 12.12.2013 Eesti Pank Economic Statement 9
    • Several Estonian economic indicators started to diverge in 2013 • • The slowdown in growth on the production side was not broad-based as growth in value added created in sectors other than transport and storage accelerated The rapid rises in wages were accompanied by fast employment growth in the first half of 2013 despite the decline in the economy and the reduction in capital formation Growth of economic indicators employment real GDP average gross wage GDP at current prices 15% 10% 5% 0% -5% -10% 2010 12.12.2013 2011 2012 Eesti Pank Economic Statement 2013 Source: Statistics Estonia 10
    • Weak external demand has been partially offset by rapid growth in consumption • • Falling supplies of available labour and the mismatch between the qualifications of those not yet employed and the demands of the labour market created a loop of economic growth based on rapid growth in wages and domestic demand Companies focused on the domestic market were able to pass higher wage costs on to prices, so nominal GDP per employee rose while real productivity fell in the first half of 2013 Growth in wages and productivity average monthly gross wage GDP per emloyee at constant prices GDP per employee at current prices 15% 10% 5% 0% -5% 2010 2011 2012 2013 Source: Statistics Estonia, Eesti Pank 12.12.2013 Eesti Pank Economic Statement 11
    • Economic growth in 2013 is weaker than was forecast in June GDP growth at constant prices December forecast 2012 June forecast 2013 10% 8% 6% 4.2% 4% 3.9% 4.3% 2.6% 2.0% 2% 1.0% 0% 2010 2011 2012 2013 2014 2015 Source: Satistics Estonia, Eesti Pank 12.12.2013 Eesti Pank Economic Statement 12
    • The slowdown in economic growth this year is temporary • GDP growth will pick up in 2014 and 2015 as both domestic and external demand rise GDP growth by expenditure method household consumption (pp) government consumption (pp) change in inventories and statistical discrepancy (pp) gross fixed capital formation (pp) net-exports (pp) GDP growth at constant prices 15% 9.6% 10% 3.9% 5% 3.9% 2.6% 2.6% 1.0% 0% -5% 2010 12.12.2013 2011 2012 2013 Eesti Pank Economic Statement 2014 2015 Source: Statistics Estonia, Eesti Pank 13
    • Corporate investment is important for a recovery in growth • Fixed capital formation has fallen in 2013 but will start to increase with support from corporate investment, production resources are already being used at close to their historical average levels Capital formation, growth housing investments business investments government investments 50% 40% 30% 20% 10% 0% -10% -20% -30% 2010 2011 2012 2013 2014 2015 Source: Statistics Estonia, Eesti Pank 12.12.2013 Eesti Pank Economic Statement 14
    • Loan interest rates will remain close to their current levels • • The good financial position of banks and larger deposits will support lending Lending growth will accelerate but the volume of loans to the private sector will continue to fall as a share of GDP Credit stock growth and interest rates growth of loans interest rate of corporate loans interest rate of housing loans 8% 6% 4% 2% 0% -2% -4% -6% -8% 2008 12.12.2013 2009 2010 2011 2012 2013 Eesti Pank Economic Statement 2014 2015 Source: Eesti Pank 15
    • Wage growth will remain strong, employment will fall slightly • • • The decline in the working age population will slow employment growth even as unemployment falls Wage growth will remain strong as the public sector payroll will and the minimum wage will increase in 2014 and the minimum wage will rise again in 2015 Wage growth will come more into line with labour productivity as export opportunities improve Growth in wages and employment share of labour costs in GDP (right scale) employment growth growth rate of the average monthly gross wage 25% 52% 20% 50% 15% 48% 10% 46% 5% 44% 0% -5% 42% -10% 40% 2005 12.12.2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Statistics Estonia, Eesti Pank Eesti Pank Economic Statement 16
    • Unemployment is falling steadily • • The constant reduction in the number of long-term unemployed has been positive The unemployment gap will decrease during the forecast period as structural unemployment falls Unemployment rate less than 6 months 24 months and more 20% 6 to 11 months unemployment rate 12 to 23 months equilibrium rate of unemployment % of labour force 16% 12% 8% 12.12.2013 Eesti Pank Economic Statement 2… 2… 2… 2… 2… 2… 2… 2… 2… 2… 0% 2… 4% Source: Statistics Estonia, Eesti Pank 17
    • Inflation will remain moderate in the coming years • • • • Core inflation driven by domestic factors will pick up in the coming years The effect of higher electricity prices will pass out of the calculation in 2014 The inflation forecast assumes that global prices for oil and food commodities will fall A possible rise in oil prices and faster wage growth mean that upside risks dominate CPI growth core inflation household energy fuels food CPI 6% 5% 4% 2.9% 3% 2.9% 2.1% 2% 1% 0% -1% 2010 2011 2012 2013 2014 2015 Source: Statistics Estonia, Eesti Pank 12.12.2013 Eesti Pank Economic Statement 18
    • The general government budget will be in deficit throughout the forecast horizon • • The general government position will remain in structural surplus General government debt will grow more slowly than GDP during the years covered by the forecast and the debt burden will shrink Fiscal stance (% of GDP) structural budget balance cyclical component temporary measures nominal budget balance 4% 3% 2% 1% 0% -1% -2% -3% -4% 2010 2011 2012 2013 2014 2015 Source: Statistics Estonia, Eesti Pank 12.12.2013 Eesti Pank Economic Statement 19
    • Conclusions of the Economic Forecast 12.12.2013 Eesti Pank Economic Statement 20
    • The euro area is exiting its recession • • • • • The economic decline that had lasted six consecutive quarters in the euro area ended, and growth will speed up again gradually in the coming years. Growth has been unequal across countries within the euro area, Estonia has been strongly affected by demand in Finland falling behind expectations. The economic indicators of countries that have entered the bailout programmes have improved, meaning that confidence about the further recovery in the euro area has improved and the threats to the outlook for growth are reduced. The recovery may well prove slow in the euro area as many countries still need to carry out additional reforms and to continue their policy of austerity. Monetary policy in the euro area will remain accommodative and supportive of growth for an extended period of time. 12.12.2013 Eesti Pank Economic Statement 21
    • The Estonian economy has moved somewhat further away from balance • • • • • Growth slowed in the Estonian economy in 2013, but this was not broadly based across sectors. Two of the risks identified in the June forecast have been realised in 2013 as wage growth has become unbalanced and the recovery in external markets has proved difficult. The simultaneous emergence of these features has presented a challenge to exporters. The average wage is 7.8% higher in 2013 than it was a year earlier even though production output per employee has fallen. Rapid wages have not yet presented an insurmountable challenge to companies focused on the domestic market as they have managed to pass wage costs on into prices, so profits have not suffered significantly. Growth in production, wages, incomes and the economy that is based on domestic demand cannot be sustainable in a small country where exporting companies are competing for the same supply of labour. 12.12.2013 Eesti Pank Economic Statement 22
    • Increased investments will be required for economic growth to recover and the tensions in the labour market to be eased • • • • The growth in external demand that started in 2013 and will accelerate in 2014 and 2015 will aid exports and so help the Estonian economy to pick up. For companies to make use of export opportunities they need to increase the growth in investments in fixed assets, which came to a stop in 2013. Capital formation will be supported by low interest rates on loans and good access to bank lending. Investments in increasing production capital and in the supply of capital to labour will help raise productivity and offset the rapid rises in wages and labour costs. 12.12.2013 Eesti Pank Economic Statement 23
    • Possible risks • • • • • Although the risks associated with the recovery in external demand are smaller than they were, the uncertainty about growth in Estonia’s export markets has not completely gone away. If there is inertia in wage rises, economic growth could be slower than forecast, and this could cause problems for companies in maintaining profitability, resulting in a rise in unemployment. Rapidly rising household incomes could combine with low interest rates to accelerate the growth in real estate prices, which are already rising fast. The oil price may rise as global demand increases, and this could push inflation up, reduce the real incomes of households and restrict consumption capacity. Structural unemployment and labour shortages, partly caused by emigration, may continue to provoke excessive wage pressures, higher inflation and a loss of competitiveness in the exporting sector. 12.12.2013 Eesti Pank Economic Statement 24
    • General government financing remains strong • • • The government’s decision to focus on the structural surplus may not be justified, given that different indicators give conflicting assessments of the economic cycle. Although the GDP gap is negative, rapid growth in employment, wages and private consumption indicate that the gap may be closing for the tax base. The repeated postponement of the target of nominal balance is a threat to strict fiscal discipline and does not allow the state to increase the reserves it would use to balance the economy if the downside risks should be realised. Unemployment remaining high even while fairly rapid wage growth is causing imbalances in the economy and restricting competitiveness shows that structural unemployment is high and needs to be reduced through active labour market measures. 12.12.2013 Eesti Pank Economic Statement 25
    • Key indicators for the Eesti Pank economic forecast Economic forecast in figures Nominal GDP at current prices (billion euros) Change in GDP at constant prices (%) CPI inflation (%) Unemployment rate (%) Change in average gross monthly wages (%) Budget balance (% of GDP) 2012 17.42 3.9 3.9 10.2 5.9 -0.2 2013 18.39 1.0 2.9 8.7 7.8 -0.2 2014 19.46 2.6 2.1 8.5 6.6 -0.3 2015 20.99 3.9 2.9 8.3 7.7 -0.1 Sources: Statistics Estonia, Eesti Pank 12.12.2013 Eesti Pank Economic Statement 26