Eesti Pank Economic Statement, 12 June 2013


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Eesti Pank economic policy statement & forecast 12/06/2013

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Eesti Pank Economic Statement, 12 June 2013

  1. 1. Eesti Pank Economic Statement12 June 2013
  2. 2. Key points of the presentation12.06.2013 Eesti Pank Economic Statement 2• The external environment• Review of the Estonian economy and forecastfor the coming years• Economic policy implications
  3. 3. 12.06.2013 3Confidence is higher in Estonia thanthe average for the euro area• Despite a temporary setback in April this year, confidence has increased inthe euro area since the end of 2012Source: European CommissionConfidence in Estonia and the euro areaEesti Pank Economic Statement607080901001101202006 2007 2008 2009 2010 2011 2012 2013Estonia euro area
  4. 4. 12.06.2013 4Inflation in the euro area has dropped below 2%Source: EurostatEuro area growth and inflation• Economic growth in the euro area has been negative for six consecutive quarters• Inflation expectations for the forecast period meet the target for price stability(inflation in the euro area of below but close to 2% over the medium term)Eesti Pank Economic Statement-6%-4%-2%0%2%4%euro area GDP growth, y-o-y euro area inflation, y-o-y
  5. 5. The economic forecast of the central banks of theeuro area for 2013 is more pessimistic than it wasin December 201212.06.2013 5Euro area real economic growthSource: Eurostat, European CentralBankEuro area inflation• Revival of the economy in the euro area has been postponed• Inflation has slowed as expected and price pressures remain subduedEesti Pank Economic Statement-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%2010 2011 2012 2013 2014economic growth, y-o-yforecast range, December 2012forecast range, June 2013point forecast, June 20130%1%2%3%2010 2011 2012 2013 2014forecast range, December 2012forecast range, June 2013growth, y-o-ypoint forecast, June 2013
  6. 6. Low interest rates support the recovery of theeconomy12.06.2013 6Three-month EURIBORSource: European Central Bank• Weak price pressures mean that markets expect the low interest ratesto remain in place• Interest rate expectations have changed very little from half a year agoEesti Pank Economic Statement0.0%0.5%1.0%1.5%2.0%2011 2012 2013 2014 2015June forecast 2013 December forecast 2012
  7. 7. The forecast for the oil price has not greatlychanged since December 201212.06.2013 7Oil price, US dollars/barrelSource: European Central Bank• Markets expect the oil price to fall to 95 US dollars in 2015• Cheaper oil will contribute significantly to slower inflationEesti Pank Economic Statement90951001051101151202011 2012 2013 2014 2015June forecast 2013 December forecast 2012
  8. 8. The euro has strengthened against the USdollar12.06.2013 8Exchange rate of the US dollar and the euroSource: European Central Bank• The strengthening of the euro against the dollar has lowered theforecast energy priceEesti Pank Economic Statement1.201.251.301.351.401.452011 2012 2013 2014 2015June forecast 2013 December forecast 2012
  9. 9. The Estonian economy is moving towards an equilibriumgrowth rate, the current slowdown is temporary12.06.2013 9Real Estonian economic growthSource: Statistics Estonia, Eesti Pank• GDP growth will accelerate in 2014 and 2015 supported by bothdomestic and external demand• The equilibrium growth rate for the Estonian economy in the coming years is around3.5% and this is driven by increased capital intensity and technological developmentEesti Pank Economic Statement-15%-10%-5%0%5%10%15%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015June forecast 2013 December forecast 2012
  10. 10. The credit supply has not tightenedin the last half year12.06.2013 10Loan interest ratesSource: Eesti Pank, European Central Bank• Competition conditions have allowed banks to preserve their return on assetsand equity at a time of very low interest rates by increasing interest margins• Domestic risks to the stability of the financial sector have decreased• The support of the banking sector for funding the private sector remains strongEesti Pank Economic Statement0%1%2%3%4%5%6%7%8%corporate loans 3-month EURIBOR housing loans
  11. 11. Investment activity remains high12.06.2013 11Loan stock growthSource: Eesti Pank• Low loan interest rates, favourable external financing, and an improvingeconomic climate will keep investment activity high in Estonia in thecoming years and this will be seen in loan growthEesti Pank Economic Statement-15%-10%-5%0%5%10%15%2008 2009 2010 2011 2012 2013 2014 2015total credit stock housing loans stock households other credit corporate credit
  12. 12. For Estonia’s economic growth to accelerate, externaldemand has to recover12.06.2013 12GDP, domestic demand and real growth in exportsSource: Statistics Estonia, Eesti PankEesti Pank Economic Statement-25%-20%-15%-10%-5%0%5%10%15%20%25%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015real GDP growth real domestic demand growth real growth in goods and services exports
  13. 13. Estonian export development dependson the situation in target markets12.06.2013 13Structure of Estonian exports by target market, 2012Source: Statistics Estonia• Around one third of exports of Estonian goods go to Sweden and Finland• The seven main target destinations received 84% of total exports in 2012Eesti Pank Economic Statement15.9%14.5%12.1%8.7%5.4%4.7%4.5%15.9%SwedenFinlandRussiaLatviaLithuaniaUSAGermanyother
  14. 14. Growth in external demand is moremodest than expected12.06.2013 14External demand growthSource: European Central Bank• External demand has grown more slowly than expected in the previous forecast• External demand growth will start to pick up this year• The biggest boost to exports will come from Sweden, Finland and RussiaEesti Pank Economic Statement-2%0%2%4%6%8%10%2011 2012 2013 2014 2015Sweden FinlandRussia LatviaLithuania GermanyUSA Denmarkother countries external demand growth, June 2013external demand growth, December 2012
  15. 15. The current account remains close to balance12.06.2013 15Current account as a ratio to GDPSource: Statistics Estonia, Eesti Pank• The current account position will improve during the forecast horizonmainly due to a shrinking of the deficit in the trade account• Net export growth will be supported by a rise in external demand and animprovement in trade termsEesti Pank Economic Statement-30%-25%-20%-15%-10%-5%0%5%10%15%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015goods services revenues current transfers current account position
  16. 16. The labour market continues to improve12.06.2013 16Unemployment rateSource: Statistics Estonia, Eesti Pank• The share of long-term unemployed falls as unemployment in general declines• The unemployment rate has reached a level of balance• It becomes ever more important to make the labour force more efficientEesti Pank Economic Statement0%2%4%6%8%10%12%14%16%18%20%%oflabourforceless than 6 months 6 to 11 months 12 to 23 months24 months and more unemployment rate equilibrium rate of unemployment
  17. 17. Wage growth remains strong,growth in employment slows12.06.2013 17Wage and employment growthSource: Statistics Estonia, Eesti Pank• The shrinking of the working age population will slow employmentgrowth even as unemployment falls• Wage growth has been built on increased productivity• Wage growth will accelerate in the years ahead as economic activityincreasesEesti Pank Economic Statement-10%-5%0%5%10%15%20%25%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015growth rate of the average monthly gross wage employment growth
  18. 18. Inflation will slow in the coming years12.06.2013 18Consumer Price Index (CPI) growthSource: Statistics Estonia, Eesti Pank• Core inflation dependent on domestic factors has remained low• Higher electricity prices are affecting inflation in 2013• The inflation forecast assumes global-market prices for oil and for food commodities will fallEesti Pank Economic Statement-2%0%2%4%6%8%10%12%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015core inflation household energy fuels food CPI
  19. 19. The general government budget is forecast toreach nominal balance in 201412.06.2013 19Budget positionSource: Statistics Estonia, Eesti Pank• The general government budget position remains in structural surplus• General government debt will grow more slowly in the forecast horizonthan GDP and the debt level will decreaseEesti Pank Economic Statement000000002005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015%ofGDPstructural budget balance cyclical component temporary measures nominal budget balance
  20. 20. Conclusions of the Economic Forecast12.06.2013 20Eesti Pank Economic Statement
  21. 21. The Estonian economy will continue on itsbalanced course• The Estonian economy is more balanced since the crisis than it was before• The balance sheets of households and companies have significantlyimproved, the loan burden has fallen as a ratio to GDP• Stabilisation of the economy is also shown by the near balance in thecurrent account deficit and the general government budget• Growth will accelerate in 2014 with support from revitalised domestic andexternal demand to near its potential• Consumer price inflation will remain subdued throughout the forecasthorizon12.06.2013 21Eesti Pank Economic Statement
  22. 22. Possible risksThe more balanced post-crisis economy has become less vulnerable, though boththe public and the private sectors need to consider possible risks• A recovery in external demand is still not certain and this may pose a risk to theexporting sector• The combined effect of low interest rates and increasing confidence may beoverly optimistic consumption behaviour and inflated property prices• Access to cheap lending must not lead to an underestimate of risks or anoverestimate of loan servicing capacity• The oil price could rise if global demand increases, and this could raise inflation• Structural unemployment and labour shortages, partly due to emigration, couldcause excessive wage growth pressure and accelerated inflation and this coulddamage the competitiveness of exports12.06.2013 22Eesti Pank Economic Statement
  23. 23. The government still has an important role inmaintaining the credibility of the economy• Achieving balance in the general government budget by 2014, as calledfor in the national budget strategy, will increase trust in the economy• A nominal surplus in the budget in 2015 will be important for the stateto increase its reserves, which can be used to rebalance the economyin the event of the negative risks being materialised• Active labour market measures to reduce structural unemployment arerequired to ensure long-term economic growth12.06.2013 23Eesti Pank Economic Statement
  24. 24. Challenges for future developmentThe shrinking of the working age population will have an increasingimpact on the labour market• In the next few years there may for the first time be a drop inemployment even while unemployment is simultaneously falling• The importance of labour force participation and the efficient use oflabour will increase• Limited labour resources mean that the main way to ensure a movetowards higher value added production is to increase the supply ofcapital for labour and to improve the qualifications of employees12.06.2013 24Eesti Pank Economic Statement
  25. 25. Key indicators for the Eesti Pankeconomic forecast12.06.2013 252012 2013 2014 2015GDP (billion euros) 17.0 17.9 19.2 20.7Change in GDP at constant prices (%) 3.2 2.0 4.2 4.3CPI inflation (%) 3.9 3.0 2.5 2.7Unemployment rate (%) 10.2 9.2 8.8 8.5Change in average gross wages (%) 5.9 5.1 6.4 7.4Budget balance (% of GDP) -0.3 -0.3 0.0 0.2Economic forecast in figuresSource: Statistics Estonia, Eesti PankEesti Pank Economic Statement