The Estonian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby 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 constructionIn 1Q of 2012 GDP (seasonally adjusted) and ICT sectors. Since the end of 2010 thedecelerated to 3.7% y-o-y from 5.1% in 4Q 2011. importance of the retail sector in growth hasDomestic demand was expectedly the main increased as well. This all in all shows a strongcontributor to the growth – exports growth has recovery of the domestic demand – solid growth inslowed and imports growth accelerated turning net private consumption and investments. At the sameexports contribution to the negative side. Domestic time, the slowdown of value added growth stemsdemand is mainly fuelled by the investments growth very much from the manufacturing sector – thethat reached almost 17%. Private consumption growth of exported volumes in electronicsgrew by solid 3.2% in 1Q. manufacturing started to increase with double-digitContributions 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: 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 1 • 21 June 2012 1survey of manufacturing companies , the private however, positive growth rates during the first foursector is expected to increase their investments as months of the 2012 compared to the same periodwell (mainly in the second half of the year) as many last year.of manufacturing entrepreneurs are expectingincrease in turnovers. Retail sector will continue to Contributions to goods export annual growthbenefit from recovering confidence of residential (current prices)households and continually increasing inflow of 40% Othertourists from neighbouring countries. 30% VehiclesContributions 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, theMixed signals in external balance overall economic environment in the world is notExports volumes have despite shaky external supporting fast growth in exports – even though theenvironment shown rapid growth during the last outlook for near future of the main export partnerscouple of years – in 2010 and 2011 the volume has improved somewhat the short term downwardincreased by more than 20% in annual terms. The risks have risen. Imports growth is going hand infirst quarter of this year may describe with a hand with recovery of domestic demand andconsiderably lower growth rates – due to historically slowing exports growth; during the last couple ofhigh volumes seen last year, the growth cannot years the exports growth determined that of importscontinue 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 privatestructure of the exports. The main group of consumption is inducing demand for importedexported 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 netseen 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 yearnature transit – Estonia has no such natural and pick up again during next as the overallresources and therefore all the needed products are economic activity in the neighbouring countries willbrought in, remanufactured and exported again. increase. In addition, in recent past the exportOther largest groups of goods that are exported growth was mainly determined by rapid growth ofinclude food industry products and wood and wood export sales in one sector (electronics), but this andproducts manufacturing as well as production of next year we expect the export sales in otherfurniture. 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 whole1 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). Wecompanies with turnover more than EUR 4 million. expect export volumes in this sector to remain athttps://www.swedbank.ee/static/pdf/toostusettevotted_eng.pdf 2 (4)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 • 21 June 2012the 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 increasedcalculation, stem from other sectors like food and hand in hand with private consumptionwood industries as well as manufacture of expenditures pointing on fading fears ofmachinery and equipment and electrical equipment. unemployment and future hardship and strongerAccording to the previously mentioned survey1, the confidence in households’ financial situation in themost of manufacturing companies is planning to near future.increase their turnover during this year. Mostoptimistic ones were firms in food industry – 95% of Private consumption and consumer confidencefirms in food manufacturing are expecting higher (left scale: annual growth; right scale: points)turnovers than previous year. The average 20% 20expectation of the annual increase amounted 15%according to the survey 10.3%. At the same time, 10all those companies are facing limitations in 10% 0capacity utilisation – only 26% of enterprises 5%studied are ready to increase their turnover without 0% -10additional 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 -302013 as the economic activity in the neighbouring -15%countries (the main export destination countries) will -20% -40increase. Nevertheless, overall estimation of Real wage Food pricesexports 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 ECFINneed to overlook our forecast already in near future.Shadow economy decreasing, consumptionexpenditures in line with wage bill growth Wage bill and employment growth, and consumer confidencePrivate consumption has showed strong growth (left scale: annual growth; right scale: points)already since the last quarter of 2010. Growth 20% 10continued throughout the 2011 and reached the 15%annual rate 4.4% (consumption of residential 0 10%households). In the subcategories of goodspurchased, most importantly, the fastest growth is 5% -10observed in durable goods purchases. This, all in 0%all, reflects the grown confidence of households and -5% 2008 2009 2010 2011 2012 -20fading 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 -30been rather sluggish pointing on rapidly growing -20%food prices (in 2011 prices of food products and -25% -40non-alcoholic beverages in Estonia grew by Priv ate consumption Nominal wage bill9.7% 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 ECFINof constrained budgets. The average real wagecontinued to grow third quarter in a row – in1Q 2012 average real wage grew by 2.4%. Despite the crises years, shadow economy has according to recently published survey conductedHowever, private consumption has shown strong by Estonian Economic Research Institute2growth 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 householdspurchasing power. This phenomenon may beexplained by the favourable developments in labourmarket – job creation started already at thebeginning of last year and has continuing withsurprisingly strong rates throughout the year 2011. 2 www.ki.ee „Shadow economy 2011“ (Varimajandus 2011, inIn the beginning of 2012, employment growth Estonian) 3 (4)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 • 21 June 2012preferred goods and services that are cheaper and Investments of enterprisesthey 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, 700on 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 300what the taxes are not paid or buy them more -20%frequently than high income earners. 200 -40% 100Investments about to grow 0 -60%Investments growth started already in 1Q of 2011 2007 2008 2009 2010 2011 2012and continued throughout the year. In 1Q 2012 the Buildings Construction Vehicles Computersannual 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 Estoniaseasonal. As mentioned before, manufacturers areexpecting higher turnovers, but face limitations of grow faster at the end of the year, as during the firstcapacity utilisations – majority of firms are not able half uncertainties are still high, on account of whichto increase their turnover without investments. private enterprises tend to use the wait-and-seeAccording 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 startplanning 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 politicalinvestments). uncertainties in the EMU countries, which in turnWe 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 privateto 6.3%. This year the public sector investments are sector investment activity to increase during theincreasing considerably – they are financed by EU second half of the year.funds and/or by revenues from CO2 quota trade. Inaddition, we expect private sector investments to Annika PaabutSwedbankEconomic 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)