Peeter Luikmel. Features of Estonian Economy

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18 September 2012
Lecture to senior officials of the European Commission

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Peeter Luikmel. Features of Estonian Economy

  1. 1. Features of Estonian Economy Peeter Luikmel Eesti PankLecture to senior officials of the European Commission 18 September 2012Autor – Esitluse nimetus
  2. 2. Brief statistics: a small and open economy• GDP about 16 billion EUR in (nominal, estimate for 2011)• GDP per capita, PPP adjusted is 65% of EU average• Population ca 1,34 million, labour force is ca 700 000 (agriculture 5%, industry 34%, services 61%);• Average monthly gross salary 839 EUR (2011)• Unemployment: 10,2% (Q2 2012)• Budget balance: (+1%, 2011)• Country rating: A1 (Moodys), AA- (S&P) 2
  3. 3. Introduction: Where we are? 6% Lithuania 5% Estonia Ireland Poland Turkey Hungary Average GDP growth 1996-2011 Latvia 4% 3% 2% Germany 1% 0% 0 5000 10000 15000 20000 25000 30000 35000 40000 GDP pps per capita 1995-2010 average, Europe
  4. 4. High growth was boosted by rapid credit growth Loan growth (yoy, in national currency) 70% 60% 50% 2004 2005 40% 2006 30% 2007 2008 20% 10% 0% Poland Romania Bulgaria Hungary Lithuania Slovak Czech Latvia Estonia Republic Republic Source: IMF International Financial Statistics Database
  5. 5. But there are also other reasons for rapid growth The link between the level of education and GDP growth appears to be stronger in case of transition countries Source: EBRD Transition Report 2008
  6. 6. Tax environment is different across the region CY MT LU CZ ES SE FI PT BE DK NL SICorporate income tax IE BGas % of GDP IT UK RO FR SK PL HU LV AT LT EL EE DE 0 1 2 3 4 5 6 7 8 Source: Taxation Trends in the European Union (2009)
  7. 7. Fall in GDP during the crisis wasimpressive as the previous boom Fall in GDP volume 2009 Q2 vs 2008 Q2 Czech Lithuania Latvia Estonia Slovenia Romania Hungary Republic Slovakia Bulgaria Poland 5 0 -5 -10 -15 -20 -25 Source: Eurostat
  8. 8. Internal imbalances and vulnerabilities have declined compared to the boom years140120100 Households savings/disposable income, %80 Current account/GDP, % 15%6040 10%20 5% 0 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0% Real compensation per employee, index Productivity per labour, 2005=100 60% -5% 50% 40% -10% 30% 20% 10% -15% 0%-10% -20%-20% 2005 2006 2007 2008 2009 2010 2011 2012 2013-30%-40%-50% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Private sector credit growth Private consumption, nominal growth Source: Bank of Estonia, Statistics Estonia Investments, nominal growth
  9. 9. Productivity has improved fast inEstoniaEuropean enterprises have delivered jobs, productivity, and exports(performance of European subregions and benchmark countries, 1995–2009) EFTA 1.3 1.4 50.2 EU15 1.3 1.0 49.4 EU12 0.4 3.0 57.5 Estonia 0.3 5.7 71.2 Latvia 0.1 4.2 43.4 Lithuania -0.3 4.3 54.8 EU candidates 0.6 3.6 31.2 Eastern partnership -0.1 6.6 38.7 United States 1.2 1.6 11.2 Japan -0.1 1.2 13.4 China 1.0 7.8 26.7 East Asia 1.7 2.0 64.0 Latin America 2.4 0.4 23.2 -1 0 1 2 3 0 2 4 6 8 0 20 40 60 80 Employment growth, percent Productivity growth, percent Exports, percentage of GDP, 2009 Source: World Bank 11
  10. 10. The key for successful recovery from crisis isflexibility of economy Share of collective bargaining agreements is low Perhaps not the best from the workers’ perspective but certainly good for making necessary adjustments in economy during crises 1.200 1.000 0.800 0.600 0.400 0.200 0.000 Share of firms having firm-level bargaining agreements Share of firms having higher level bargaining agreements Source: Wage Dynamics Network, ECB (2009)
  11. 11. Labour market has recovered faster thanexpected Source: Statistics Estonia
  12. 12. Favorable employment recoveryThe pattern of recovery by field of activity • The rebound in employment was based on industry • Domestic employment in construction fell sharply during the crisis, has not significantly grown yet Source: Statistics Estonia
  13. 13. Despite recent fall in economic activity,the recovery in Estonia has started fast Estonian annual economic growth rate, % Source: Statistics Estonia
  14. 14. Manufacturing of Baltic countries hasrevovered to pre-crisis levels
  15. 15. Trade with Sweden and Finland constitutesabout 1/3 of our goods exports Share of trade partners in Estonian exports, % (2011) Source: Statistics Estonia
  16. 16. Structure of exports Structure of exports in 2010, by SITC OTHER Food, drinks and tobacco Raw materials Mineral fuels, lubricants and related materials Chemicals and related products, n.e.s. Other manufactured goods Machinery and transport equipment 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Finland Estonia Latvia Lithuania
  17. 17. Turnover of exports is well correlated withour main trading partners Source: Eurostat
  18. 18. Medium term perspective: substantial cost advantage is still on our side[average gross wages in euros] Source: national statistics offices
  19. 19. Banking sector has survived the crisis, initial loan lossprovisions were made higher than the actual outcome Profits of Estonian Banking Sector, M EUR Source: Bank of Estonia
  20. 20. Banks’ loan and leasing portfolio has declined18% from the peak in 2008 Lending stock 18 16 14 12 EUR billion 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011 2012 other household loans housing loans corporate loans
  21. 21. Residential real estate market recovering after thebust: prices and volumes have been increasing Number of transactions with apartments in Tallinn and median price 1 800 1800 1 600 1600 1 400 1400 1 200 1200 1 000 1000 800 800 600 600 400 400 200 200 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 number of transactions(l.s) median price (EUR/m2, r.s) Data: Land Board
  22. 22. Affordability in Tallinn residential real estate market hasremained relatively good 3,0 2,5 2,0 1,5 1,0 0,5 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2004 2005 2006 2007 2008 2009 2010 2011 Tallinn price/gross wages Helsinki price/Finland gross wages Riga price/gross wage *affordability – average price per m2 / monthly average gross wage
  23. 23. Due to the fiscal surpluses in earlier years and conservative fiscalpolicy Estonian government debt to GDP ratio is moderate Debt/GDP, % (2010) Source: Eurostat
  24. 24. Fiscal developments in 2011• The surplus of the general 3,0% government balance increased to 1% of GDP, the outcome was 2,0% better than projected: 1,0% – quite favourable macro conditions – some large CO2 emission trade % of GDP 0,0% related investment projects where -1,0% postponed -2,0%• The debt burden remained at very -3,0% low level, close to 6% of GDP -4,0% 2006 2007 2008 2009 2010 2011 GG balance without CO2 emission trade• The general government retained GG balance its position of a net-lender
  25. 25. Estonian inflation has been higher due to the larger shareof energy and food in Estonian consumer basket,the impact of introduction of Euro remains moderate (approx. 0,3 pp) Source: Statistics Estonia
  26. 26. The global economy is facingunfavourable conditions in 2012• Growth will slow in most regions and global trade along with it• Global inflation is under control, though monetary policy continues to be lenient• Additional support by monetary policy is more restricted this time• The euro-area economic situation is not easy, but the current difficulties can be overcome – Growth impetus is waning, because some euro-area economies have to make adjustments that have so far been postponed – Problems springing from general government debt and imbalances will not disappear before their root cause is eliminated – It is essential to avoid economic damage arising from uncertainty 28
  27. 27. Estonian economys resistance to deterioration inthe external environment has improved • Vulnerability has decreased – The current account is in surplus now – Expectations are more subdued – The private sectors debt burden has shrunk • The restoration of profits has also reduced vulnerability • Reduction in the gap between wages and productivity has improved economic competitiveness • Unemployment has declined and problems with employment structure have eased 29
  28. 28. Conclusions 30
  29. 29. The current complicated situationincludes also opportunities • Monetary policy supports the economy in both Estonia and the euro area – The monetary policy of euro-area central banks creates favourable conditions for companies to use investment opportunities – Eesti Pank provides to banks operating in Estonia monetary policy loans with interest rate of 0,75% • The sufficient capitalisation of banks operating in Estonia and the improved loan-to-deposit ratio provide a good basis for financing households and companies 31
  30. 30. Economic forecast by key indicators 2012 2013 2014Nominal GDP (EUR bn) 17.0 18.1 19.4GDP, chain-linked volume change (%) 2.6 3.6 4.1HICP inflation (%) 3.9 3.2 2.7Budget balance (% of GDP) -1.5 -0.5 0.0 Source: Eesti Pank
  31. 31. Thank you! http://www.eestipank.ee info@eestipank.ee 33

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