The Estonian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Elina Allikalt No. 3 • 31 May 2011Economy blooming despite sketchy labour marketdevelopments Economic growth reached a very strong 8% in the first quarter, according to the flash estimate. This was primarily founded on better-than-expected developments in the export sector, as well as increased investment activity. Inflation reported 5.4% growth in April, being strongly affected by increasing commodity prices in the world market. Inflation is expected to slow due to several domestic market reasons, but developments in the global market will remain the main force behind price growth. The unemployment rate increased slightly to 14.4% in the first quarter due to a rise in activity. In contrast, employment growth was measured at a strong 6.8%. Nominal gross wage growth strengthened, supported by a sharp increase in bonuses and premiums; real wages, on the other hand, are continuously declining, allowing competitiveness to improve further but the weak financial situation of households to linger.Economic growth is strengthening Details behind the first-quarter growth will befurther… released on 9 June. Depending on these data, we will update our economic forecast for this year,The flash GDP estimate for the first quarter, which currently stands at 4.5%.released earlier this month, surprised us with 8%annual growth. This is much higher then any market Economic growthexpectations. Quarterly growth was measured at a 12%healthy 2.1%, being slightly slower compared to theprevious quarter (2.3%). 8%Although details behind the first-quarter growth 4%have not been given yet, we believe there have 0%been underexpectations on two fronts. First, 2006 2007 2008 2009 2010 2011although exports (mostly of manufacturing -4%production) have been the main driver of economic -8%recovery so far, its additional pickup was moresignificant than expected (estimated annual growth -12%of more than 50%). Second, the willingness andreadiness of enterprises to resume investment -16%activity were probably underestimated, as improved -20%confidence allowed previously delayed investments quarterly growth, s.a. annual growthto be put into action; also, production capacitieshave risen to levels that require additionalinvestments to remain competitive. Of course, there ...but so is inflation.might have been some one-off reasons ininvestments as well. On the spending side, Annual inflation has been stubbornly holding abovegovernment consumption resumed growth after 5% since November 2010; the latest data show thatmany austerity years, while the recovery in private consumer prices gained an additional 0.7% inconsumption probably slowed temporarily. monthly comparison in April, with annual growth 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 3 • 31 May 2011reaching 5.4%. Inflation continues to be strongly Price growth expectationfounded on growing food prices, which in April 12% 80increased 2% compared to March and 12.3% 10%compared to April last year, explaining more than 60half of the annual inflation (see chart). Other major 8% 40contributors were housing costs, transport, and 6%alcohol and tobacco; the first two are affected by 20high energy commodity prices in the global market 4%and the latter by excise hikes. As most of the 0 2%inflation has been imported, the base inflation -20remains much lower, at 2.2% in April. 0% 2007 2008 2009 2010 2011 -2% -40Contributions to annual consumer price growth(percentage points) -4% -60 CPI, annual growth (ls) 12 other price trend expectations, retail sector (rs) transport housing price trend expectations, consumers (rs) 10 alcohol, tobacco Sources: SE, DG ECFIN f ood CPI 8 Unemployment fall pauses while employment continues to grow 6 Monthly registered unemployment figures had 4 suggested that the unemployment rate in the first quarter would remain roughly on the same level as 2 in the fourth quarter of last year. Labour Force 0 Survey results, however, reported a slight increase, 2007 2008 2009 2010 2011 from 13.6% to 14.4%. Nevertheless, this increase -2 can be fully attributed to another pickup in activity, which continues to be high (67.1% in the first -4 Source: SE, Swedbank quarter). Nonactivity declined the most among students and pensioners, who are now more willing to enter the labour market as the conditions andLooking forward, there seem to be factors in place outlook have improved. Supporting this aresupporting both slowing inflation as well as further employment figures that showed a strong 6.8%price growth. On one hand, many commodities increase in annual comparison in the first quarter. Inhave been falling somewhat or holding steady for contrast, however, long-term unemployment isseveral months in the global market (including growing, making up 57% of total unemployment infood), inflation expectations have stabilised (see the first quarter, with half of these being out of workchart), the private consumption and labour market for more than two years.recovery remains rather strangled, and the highbase effect will have its impact on growth rates in Labour market indicatorsthe second half of the year – all pointing to slowing 25% 70%inflation. Also, transport costs declined in April(-0.2% in monthly comparison), and a further fall is 20%expected in coming months as fuel prices are 15% 65%decreasing. However, on the other hand, electricityprices are set to grow in August (by 6% on 10%average), in turn pressuring other prices through 5% 60%higher production costs. Also, despite somefavourable trends in the global commodity markets, 0%their spillover to the local market has historically 2004 2005 2006 2007 2008 2009 2010 2011proved to be rather slow; further developments in -5% 55%the world market pose the biggest risk to future -10%inflation. -15% 50%Our inflation forecast for this year currently points to employ ment, annual growth (ls) unemploy ment rate (ls)3.8%; this will be revised upwards when the activ ity rate (rs) Source: SEupdated forecast is released. 2 (5)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 3 • 31 May 2011Despite growing slightly in quarterly terms, the increases were seen in construction (23%), ICTunemployment rate has gone down substantially (40%), recreation and entertainment (39%), andfrom the crisis-high level of nearly 20% in the first transport and storage (7%). In contrast, aquarter a year ago to 14.4% this year. The number continuous decrease in employment was seen inof unemployed has fallen across the board, but the different services mostly related to the public sector,most among youth (-54% in annual terms), among for example education (-12%), administrative andmen (-38%), in the Tallinn region (-39%), and support service activities (-19%) and publicamong short-term unemployed (-50%). The decline administration and defence (-3%).in the number of unemployed has been lesspronounced among 50+-year-olds (-1%) and Change in employmentamong women (-10%; even growing in the rural (thousands; annual change)areas); this is partially explained by the fact that 60unemployment never grew above average levels in otherthese categories. Nevertheless, as stated above, 40the number of long-term unemployed is public serv icescontinuously growing-- by 10% in the first quarter, 20including by 45% of those who have been out of tradework for at least two years. This trend, together with 0 transport,the steadily rising number of discouraged people, 2007 2008 2009 2010 2011 storageemphasises once again the need to focus on labour -20 cons-market policies in order to intensify retraining, tructionincrease incentives for employers to hire long-term -40 manuf ac-unemployed, and avoid discouragement to rise to turingproblematic levels. These developments also pose -60 totalan additional risk factor to the labour marketoutlook, as the work force is seen to be declining -80 Source: SEdue to both the aging population and emigration.Unemployment rate by duration Registered unemployment and vacancies 20% 60% 4,000 16% 18% 16% 50% 3,500 14% 14% 3,000 12% 40% 12% 10% 2,500 8% 30% 10% 6% 2,000 4% 20% 8% 1,500 2% 0% 10% 1,000 6% 2004 2005 2006 2007 2008 2009 2010 2011 > 24 months 500 4% 12-23 months 2009 2010 2011 6-11months < 6 months new unemploy ed v acancies share of long-term unemploy ment (rs) Source: SE unemploy ment rate (rs) Source: EUIFThe strong employment growth, measured at 6.8% Registered unemployment and vacancy data fromin the first quarter, was partially supported by the the Estonian Unemployment Insurance Fund hasbase effect, as employment reached its lowest level provided us with more optimism regarding thein this cycle during the first quarter of last year. second-quarter labour market outcome. RegisteredHowever, while employment growth in the fourth unemployment fell from 10.2% on average in thequarter was founded merely on the manufacturing first quarter to 9.6% in April and further to below 9%sector, figures for the first quarter are showing a (estimated) in May. The number of vacancies, atmuch broader employment recovery. Similar to the same time, is at the highest level in three years,economic growth structure, manufacturing is still the and the number of new unemployed has fallen todriving force of employment growth, reporting a the lowest level over the same period. Employment22% increase in the first quarter; other notable expectations have been strongly positive this year 3 (5)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 3 • 31 May 2011for all sectors (see chart). However, further Wage growth differed considerably among sectors;significant improvement in the labour market, the data might also be temporarily affected byespecially after the seasonal job period ends, is changes in the structure of wage earners, 1 thus notvery dependent on the scale of actual structural giving a full picture of the current situation. Wageunemployment, as well as the success of the growth was the strongest in different small sectorsapplied labour market policies--especially like energy production (19% annual growth), miningconsidering that labour demand will strengthen (18%), and agriculture and forestry (9%). Wagefurther as more domestic-oriented sectors are growth in the manufacturing sector, which has beenexpected to continue recovering. Our current the main driver of economic recovery, slowed in theunemployment forecast stands at 13.5% on first quarter (from 5.9% in the fourth quarter toaverage for this year. 5.3%) and even turned slightly negative in real terms (-0.1%); while employment growth was veryEmployment expectations in coming months strong in this sector, the negative wage growth can(balance of increase/decrease answers) indicate exporters wish to continuously increase competitiveness and keep production costs low. 40 Average wages fell the most in administrative and support service activities (-4%). In an expected 20 event, the ICT sector overtook the financial activities sector in regards to the highest hourly 0 wage paid in the economy, reaching EUR 8.1, or 2006 2007 2008 2009 2010 2011 66% higher than the average in the first quarter. -20 Average gross wage -40 (annual growth) 25% -60 20% -80 industry construction 15% retail serv ices Source: DG ECFIN 10%Real wage growth continuously negative 5%Average gross wages continued to increase in thefirst quarter in nominal terms: monthly wages grew 0%4.5% in annual comparison (reaching EUR 792), 2005 2006 2007 2008 2009 2010 2011while hourly wages grew slower, by 2.3% -5%(EUR 4.87). This almost twofold difference in -10%growth rates can be explained by the pickup in Monthly wage Hourly wageirregular bonuses and premiums payments, which Monthly wage, real growth Hourly wage, real growthwere up by 58%; as finances of companiesimprove, they find additional ways to reward and Real wage growth is expected to turn positivemotivate their employees. With bonuses and during the second half of this year. This growth,premiums excluded, the monthly wage growth however, will at first be more concentrated inreached 3.2%. Despite growing nominal wages, specific sectors that are strongly export orientedinflation was high as well, resulting in a negative and/or are experiencing a wider shortage of labour.real growth rate of -0.9% for monthly wages and Wage growth will broaden to the rest of the-2.9% for hourly wages; this reflects the economy later as the more domestic-orientedcontinuously deteriorating financial situation of sectors recover. Much of these expectations, ofhouseholds and their purchasing power as real course, are dependent on future inflation trends.wages have now been declining for more than twoyears in a row. 1 For example, increasing working hours and more full- time employment for those already employed. Also, the difference in wage levels of new employees vs. those who were downsized previously. 4 (5)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 3 • 31 May 2011Financial situation of households There are already early signs of strengthening(balance of better/worse answers) wage pressures due to high inflation, which pose a 20 risk to economic recovery and competitiveness. Also, talk of the need to raise the minimum wage 10 (currently at EUR 278.02) is intensifying; however, we believe a small increase will not significantly 0 worsen developments in the labour market and 2006 2007 2008 2009 2010 2011 economy. -10 -20 -30 -40 ov er last 12 months ov er next 12 months Source: DG ECFIN 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 5 (5)