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Eesti Pank Economic Statement 11 June 2014

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Eesti Pank Economic Statement 11 June 2014

  1. 1. Eesti Pank Economic Statement 11 June 2014
  2. 2. Key points of the presentation 11.06.2014 Eesti Pank Economic Statement 2 • The external environment • Review of the Estonian economy and forecast for the coming years • Economic policy implications
  3. 3. 11.06.2014 3 Activity is increasing in the global economy as a whole, the outlook for growth in advanced countries is improved • Structural problems and imbalances are restricting growth in developing markets • Markets expect the oil price to fall to close to 98 dollars in 2016 Eesti Pank Economic Statement -10% -5% 0% 5% 10% 15% 2006 2008 2010 2012 2014 2016 euro area Japan China USA Output growth of larger economies Source: IMF WEO, April 2014 0.0 0.5 1.0 1.5 2.0 2.5 2007 2008 2009 2010 2011 2012 2013 2014 food industrial commodities energy Source: HWWI Commodity price indices* (January 2007=1) * last observation 16.05.2014
  4. 4. Growth is starting to recover in the euro area 4 • Euro area growth is accelerating slowly • Inflation has fallen more than expected in the first half of 2014, price pressures will remain subdued in future Eesti Pank Economic Statement11.06.2014 HICP inflation, % Sources: Eurostat, European Central Bank Quarterly economic growth, % 2013 2014 2015 2016 1.4 0.7% 1.1% 1.4% 2013 2014 2015 2016 -0.4% 1.0% 1.7% 1.8%
  5. 5. Growth is picking up in the euro area with support from low interest rates 5 • Weak price pressures mean that financial markets expect interest rates to remain very low • The Governing Council of the ECB lowered the monetary policy interest rate in June, setting a negative interest rate for deposits from commercial banks Eesti Pank Economic Statement11.06.2014 0.0% 0.5% 1.0% 1.5% 2.0% 2011 2012 2013 2014 2015 2016 December forecast 2013 June forecast 2014 3-month EURIBOR Source: European Central Bank
  6. 6. The growth in demand in Estonia’s main export markets is getting faster 6 • Growth in external demand has proved weaker than was forecast in December • The main restriction on export capacity in the years ahead will be weak demand in Finland and Russia Eesti Pank Economic Statement11.06.2014 -1% 0% 1% 2% 3% 4% 5% 2012 2013 2014 2015 2016 Lithuania Latvia Russia Finland Sweden other external demand growth Source: ECB External demand growth 0% 1% 2% 3% 4% 5% 6% 2012 2013 2014 2015 2016 Finland Russia Germany other countries Latvia 2013 October 2014 April Change in external demand growth Sources: IMF WEO, Statistics Estonia, Eesti Pank
  7. 7. Different markets have different effects on the Estonian economy 7 • Goods exports to Scandinavia contain a much higher proportion of Estonian production output, and economic developments there have a larger impact on Estonia Eesti Pank Economic Statement11.06.2014 0 500 1000 1500 2000 2007 2009 2011 2013 2007 2009 2011 2013 2007 2009 2011 2013 2007 2009 2011 2013 2007 2009 2011 2013 Estonian exports of goods from other countries of Estonian origin Sources: Statistics Estonia, Eesti Pank Estonian exports of goods in current prices to main destination countries EURmillion Russia Finland Sweden Latvia Lithuania
  8. 8. The strengthening of the euro has significantly affected trading conditions in Estonia 8 • Since the start of 2013 the euro has appreciated by 23% against the Russian rouble, 4% against the US dollar and 5% against the Swedish krona • Estonian exports have become relatively more expensive and imports cheaper – this has slowed inflation but harmed price-based competitiveness Eesti Pank Economic Statement11.06.2014 0.95 1.00 1.05 1.10 1.15 1.20 1.25 2013 2014 Swedish krona US dollar Russian rouble Source: Eurostat Euro exchange rate (January 2013 = 1)
  9. 9. Unemployment will decline slowly 9 • The decline in unemployment has stalled • High structural unemployment poses a problem for the development of the economy Eesti Pank Economic Statement11.06.2014 0% 4% 8% 12% 16% 20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 %oflabourforce 24 months and more 12 to 23 months 6 to 11 months less than 6 months unemployment rate natural rate of unemployment Unemployment rate Sources: Statistics Estonia, Eesti Pank
  10. 10. Wage growth is slowing 10 • The decline in the working age population will lead to a fall in employment • Structural unemployment and the shrinking population have steadily improved the position of workers in wage negotiations Eesti Pank Economic Statement11.06.2014 40% 42% 44% 46% 48% 50% 52% -10% -5% 0% 5% 10% 15% 20% 25% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 share of labour costs in GDP (right scale) employment growth growth rate of the average monthly gross wage Growth in wages and employment Sources: Statistics Estonia, Eesti Pank
  11. 11. There is a strong link between labour costs and rising prices for services 11.06.2014 Eesti Pank Economic Statement 11 • Estonian consumer prices were about 72% of the European Union average in 2013 • The gap is larger in the closed sector, or service sector, where Estonian prices are about 60% of the EU average -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% -10% -5% 0% 5% 10% 15% 20% 25% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 annual growth in average gross wages service price inflation without communications (right scale) Sources: Eurostat, Statistics Estonia Wage growth and service price inflation
  12. 12. Inflation will rise but will remain moderate in the coming years 12 • Core inflation will rise as prices rise faster for services and imported products • The inflation forecast assumes a fall in the world oil price • Higher excise taxes will raise food price inflation Eesti Pank Economic Statement11.06.2014 0.8% 2.4% 2.7% -1% 0% 1% 2% 3% 4% 5% 6% 2011 2012 2013 2014 2015 2016 core inflation household energy fuels food CPI Sources: Statistics Estonia, Eesti Pank CPI growth
  13. 13. Economic growth in 2014 will be less than expected 13Eesti Pank Economic Statement11.06.2014 • Growth in 2015 will be close to the earlier forecasts • In 2015 nominal GDP will be about 500 million euros lower than was previously forecast 0.7% 3.9% 3.6% 0% 2% 4% 6% 8% 10% 2010 2011 2012 2013 2014 2015 2016 Real economic growth in Estonia Sources: Statistics Estonia, Eesti Pank 12.9 13.4 13.9 10 11 12 13 14 15 2010 2011 2012 2013 2014 2015 2016 June forecast 2014 December forecast 2013 Estonian GDP at constant prices (EUR billion) Sources: Statistics Estonia, Eesti Pank
  14. 14. Economic growth will pick up this year 11.06.2014 Eesti Pank Economic Statement 14 • The negative contribution of the energy sector will fade in the second quarter • The negative contribution of transportation and storage will also be reduced from the second quarter due to the change in comparison base • The economy will be boosted by the steady recovery in external demand, which has been the biggest restraint on higher production -3% -2% -1% 0% 1% 2% 3% 4% Q1 Q2 Q3 Q4 Q1 2013 2014 net production taxes trade manufacturing transportation and storage construction energy other GDP at market prices GDP growth by sector Source: Statistics Estonia 0 200 400 600 800 1000 1200 1400 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 land, air and water transport support activites for transportation and storage transportation and storage Sales income, EUR million Source: Statistics Estonia
  15. 15. Nominal economic growth has been strong 15Eesti Pank Economic Statement11.06.2014 • Wage growth has diverged from productivity growth and has fuelled growth in the nominal size of the economy, household incomes and state budget revenues, but has started to hinder price-based competitiveness • Further economic development can only be supported by faster real growth 0% 5% 10% 15% 20% 25% 0% 2% 4% 6% 8% 10% 12% 14% 2010 2011 2012 2013 2014 2015 2016 GDP deflator growth nominal GDP growth real GDP growth growth of average monthly gross wage Growth in GDP and GDP deflator Source: Eesti Pank
  16. 16. The share of economic growth coming from investment will increase 16 • Corporate investment will pass its low point in 2014, which has mainly been caused by uncertainty about the future • Private consumption will continue to grow quickly throughout the forecast horizon Eesti Pank Economic Statement11.06.2014 0.7% 3.9% 3.6% -4% -2% 0% 2% 4% 6% 8% 2012 2013 2014 2015 2016 household consumption (pp) gross fixed capital formation (pp) government consumption (pp) net exports (pp) stocks (pp) GDP growth at constant prices GDP growth by expenditure method Sources: Statistics Estonia, Eesti Pank
  17. 17. Credit growth will accelerate, but the loan burden in the economy will be reduced 17 • The good financial position of the banks and increasing deposits will support the supply of credit • Loan interest rates will remain low to the end of the forecast horizon Eesti Pank Economic Statement11.06.2014 -15% -10% -5% 0% 5% 10% 2010 2011 2012 2013 2014 2015 2016 corporate credit growth household credit growth Source: Eesti Pank Credit growth
  18. 18. The general government budget will be in deficit throughout the forecast horizon 18 • Eesti Pank estimations show the budget will also be in structural deficit Eesti Pank Economic Statement11.06.2014 -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2010 2011 2012 2013 2014 2015 2016 structural budget balance nominal budget balance Fiscal stance (% of GDP) Sources: Statistics Estonia, Eesti Pank
  19. 19. Conclusions from the economic forecast 19Eesti Pank Economic Statement11.06.2014
  20. 20. Global economic activity will increase • Global economic growth has become steadily stronger, but in the coming years it will continue to rotate from developing markets to advanced markets. • Growth in the euro area has recovered as expected, reforms to improve competitiveness must be continued • Economies in the afflicted countries in the euro area have clearly revived • Growth rates are uneven across the euro area and Estonia has been strongly affected and will continue to be affected by the performance of Finland, which was worse than expected • Low price pressures mean that euro area monetary policy will remain accommodative and supportive of growth for a long time • The main impact so far on Estonia from the conflict between Ukraine and Russia has been a reduction in confidence, the effect on the economy as a whole has been small • The outlook for growth in Russia is weak, but this does not have a widespread impact on the Estonian economy as exports to Russia are mainly of products from other countries 20Eesti Pank Economic Statement11.06.2014
  21. 21. The decline in the Estonian economy at the beginning of the year was only temporary • Economic growth in Estonia will accelerate this year as the negative contributions of the energy sector and of transportation and storage will start to fade • The lack of demand, which has been the biggest barrier to increased production, will disappear as external demand improves steadily • Wage growth has remained strong at the start of this year and private consumption will keep domestic demand growing strongly this year and in the coming years • Good financing conditions will support the increase in investment activity this year, loan interest rates will remain low throughout the whole forecast period 21Eesti Pank Economic Statement11.06.2014
  22. 22. The key issue for economic growth is productivity • For the Estonian economy to continue developing, the state budget to remain good and household incomes to continue rising, real growth in the economy needs to accelerate, and this is dependent on the ability of companies to raise labour productivity • Making production more efficient is an important issue for economic growth, as the shortage of qualified labour and the resulting pressure on wages are not going to ease • Wage growth will slow somewhat, as the increase in the share of companies that are losing competitiveness, the fall in corporate profitability, and the slow growth in prices in foreign markets make it harder to pass wage costs into prices • It is getting ever harder for companies with low productivity to cope as labour moves to companies that create more value added • Economic growth, inflation abroad and tax rises will raise inflation in Estonia, but it will remain moderate throughout the forecast horizon 22Eesti Pank Economic Statement11.06.2014
  23. 23. Potential risks • The dangers related to the recovery in the global economy and the euro area are smaller than before, but growth in Estonia's main export markets and sources of risk are polarised • This economic forecast does not consider a deepening of the crisis between Russia and Ukraine, though this is a real danger that could delay the recovery in Estonian economic growth • To be able to cope with unexpected developments in export markets, companies will need to be flexible in the range and substitutability of their products and target markets • If household expectations for real estate purchases are too optimistic, a repeat of the fall in prices that accompanied the previous boom cannot be ruled out • Structural unemployment and labour shortages could delay an adjustment in the growth of wage costs in the short term at the expense of earlier profits, which would be followed by a sharper slowdown than forecast 23Eesti Pank Economic Statement11.06.2014
  24. 24. The public finances remain strong, but government targets are more relaxed than before • Growth in tax revenues and the assessment of the economic cycle have diverged significantly, so Eesti Pank finds that structural budget balance will not be achieved under current assumptions during the forecast horizon • Government budget targets should allow enough leeway that any unforeseen deterioration in circumstances should not necessitate unexpected changes in tax policy • The tax environment needs to be predictable for both companies and households • The appearance of wage pressures even while unemployment is relatively high indicates that structural unemployment is a problem. To address this, the government will need to continue with its active labour market policies, with support from regional, education and population policies • If wage growth slows in the private sector, the public sector needs to be ready for it to slow there too 24Eesti Pank Economic Statement11.06.2014
  25. 25. Key indicators for the Eesti Pank economic forecast 25 Sources: Statistics Estonia, Eesti Pank Eesti Pank Economic Statement Economic forecast by key indicators 2013 2014 2015 2016 Nominal GDP at current prices (EUR billion) 18.43 19.19 20.45 21.79 GDP change at constant prices (%) 0.8 0.7 3.9 3.6 CPI inflation (%) 2.8 0.8 2.4 2.7 Unemployment rate (%) 8.6 8.5 8.5 8.3 Average gross monthly wage, change (%) 7.8 6.0 6.2 6.7 Budget balance (% of GDP) -0.2 -0.6 -0.8 -0.3 11.06.2014

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