1. Eesti Pank Economic Statement
12 December 2013

2. Key points of the presentation
• The external environment
• Review of the Estonian economy and forecast
for the coming years
• Economic policy implications
12.12.2013
Eesti Pank Economic Statement
2

3. The economy has grown in the euro area for
two consecutive quarters
•
Inflation expectations for the forecast period are in line with the goal of price
stability, which in the euro area means annual inflation of below, but close to,
2% over the medium term.
Growth and inflation in the euro area
euro area GDP growth, q-o-q (right scale)
euro area inflation, y-o-y
euro area GDP growth, y-o-y
4%
2%
2%
1%
0%
0%
-2%
-1%
-4%
-2%
-6%
-3%
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Eurostat
12.12.2013
Eesti Pank Economic Statement
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4. Low interest rates are supporting the recovery
in the euro area economy
•
•
Low price pressures mean that financial markets expect interest rates to
remain very low
Forward guidance from the European Central Bank in July said that monetary
policy interest rates will remain low for an extended period of time
3-month ERIBOR
June forecast 2013
December forecast 2013
2.0%
1.5%
1.0%
0.5%
0.0%
2011
2012
2013
2014
2015
Source: ECB
12.12.2013
Eesti Pank Economic Statement
4

5. The oil price will fall over the next two years
•
•
Market expectations are for the oil price to fall to 97.5 USD in 2015
Cheaper oil will be a major factor in slowing inflation
Oil price, dollars per barrel
June forecast 2013
December forecast 2013
120
115
110
105
100
95
90
2011
2012
2013
2014
2015
Source: ECB
12.12.2013
Eesti Pank Economic Statement
5

6. The euro is stronger against the US dollar than
it was in the summer
•
•
The euro will be stronger than was previously forecast throughout the
forecast horizon
The strengthening of the euro against the US dollar will slow inflation
USD and euro exchange rate
June forecast 2013
December forecast 2013
1.45
1.40
1.35
1.30
1.25
1.20
2011
12.12.2013
2012
2013
2014
Eesti Pank Economic Statement
2015
Source: ECB
6

7. The acceleration in euro area growth that started
this year will continue in 2014
•
•
Economic activity in the euro area will recover only slowly, as it will take time for
imbalances to be eliminated
Inflation has fallen by more than expected, price pressures are subdued, the
risks are more towards a rise
Euro area economic growth
Euro area inflation
HICP growth
forecast range, December 2013
forecast range, June 2013
point forecast, December 2013
economic growth
forecast range, December 2013
forecast range, June 2013
point forecast, December 2013
3%
3%
2%
2%
1%
1%
0%
0%
-1%
2010
2011
2012
2013
2014
2010
2011
Source: Eurostat, ECB
12.12.2013
Eesti Pank Economic Statement
2012
2013
2014
Source: Eurostat, ECB
7

8. External demand has proved weaker for
Estonia than was forecast in June
•
•
Demand in Estonia’s export markets is lower in 2013 than in the previous year
Growth in export markets will again be below the June expectations in the coming years
External demand growth
Sweden
Russia
Lithuania
external demand growth, December forecast 2013
Finland
Latvia
other
external demand growth, June forecast 2013
6%
4%
2%
0%
-2%
2012
2013
2014
2015
Source: ECB
12.12.2013
Eesti Pank Economic Statement
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9. The biggest impact on Estonian exports is from
Finland, but Latvia, Lithuania and Russia have all had an
effect
•
The downward correction in external demand growth is spread evenly across
countries for 2014 and 2015 as import demand in Finland will also recover
Difference in foreign demand growth compared with the June forecast (pp)
Finland
Russia
Latvia
Lithuania
other
difference in foreign demand growth
1
0
-1
-2
-3
2013
2014
2015
Source: ECB
12.12.2013
Eesti Pank Economic Statement
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10. Several Estonian economic indicators
started to diverge in 2013
•
•
The slowdown in growth on the production side was not broad-based as growth in value
added created in sectors other than transport and storage accelerated
The rapid rises in wages were accompanied by fast employment growth in the first half of
2013 despite the decline in the economy and the reduction in capital formation
Growth of economic indicators
employment
real GDP
average gross wage
GDP at current prices
15%
10%
5%
0%
-5%
-10%
2010
12.12.2013
2011
2012
Eesti Pank Economic Statement
2013
Source: Statistics Estonia
10

11. Weak external demand has been partially
offset by rapid growth in consumption
•
•
Falling supplies of available labour and the mismatch between the qualifications of those
not yet employed and the demands of the labour market created a loop of economic growth
based on rapid growth in wages and domestic demand
Companies focused on the domestic market were able to pass higher wage costs on to
prices, so nominal GDP per employee rose while real productivity fell in the first half of 2013
Growth in wages and productivity
average monthly gross wage
GDP per emloyee at constant prices
GDP per employee at current prices
15%
10%
5%
0%
-5%
2010
2011
2012
2013
Source: Statistics Estonia, Eesti Pank
12.12.2013
Eesti Pank Economic Statement
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12. Economic growth in 2013 is weaker than was
forecast in June
GDP growth at constant prices
December forecast 2012
June forecast 2013
10%
8%
6%
4.2%
4%
3.9%
4.3%
2.6%
2.0%
2%
1.0%
0%
2010
2011
2012
2013
2014
2015
Source: Satistics Estonia, Eesti Pank
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Eesti Pank Economic Statement
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13. The slowdown in economic growth
this year is temporary
•
GDP growth will pick up in 2014 and 2015 as both domestic and
external demand rise
GDP growth by expenditure method
household consumption (pp)
government consumption (pp)
change in inventories and statistical discrepancy (pp)
gross fixed capital formation (pp)
net-exports (pp)
GDP growth at constant prices
15%
9.6%
10%
3.9%
5%
3.9%
2.6%
2.6%
1.0%
0%
-5%
2010
12.12.2013
2011
2012
2013
Eesti Pank Economic Statement
2014
2015
Source: Statistics Estonia, Eesti Pank
13

14. Corporate investment is important for a
recovery in growth
•
Fixed capital formation has fallen in 2013 but will start to increase with support
from corporate investment, production resources are already being used at close
to their historical average levels
Capital formation, growth
housing investments
business investments
government investments
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
2010
2011
2012
2013
2014
2015
Source: Statistics Estonia, Eesti Pank
12.12.2013
Eesti Pank Economic Statement
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15. Loan interest rates will remain
close to their current levels
•
•
The good financial position of banks and larger deposits will support lending
Lending growth will accelerate but the volume of loans to the private sector
will continue to fall as a share of GDP
Credit stock growth and interest rates
growth of loans
interest rate of corporate loans
interest rate of housing loans
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
2008
12.12.2013
2009
2010
2011
2012
2013
Eesti Pank Economic Statement
2014
2015
Source: Eesti Pank
15

16. Wage growth will remain strong,
employment will fall slightly
•
•
•
The decline in the working age population will slow employment growth even as
unemployment falls
Wage growth will remain strong as the public sector payroll will and the minimum
wage will increase in 2014 and the minimum wage will rise again in 2015
Wage growth will come more into line with labour productivity as export
opportunities improve
Growth in wages and employment
share of labour costs in GDP (right scale)
employment growth
growth rate of the average monthly gross wage
25%
52%
20%
50%
15%
48%
10%
46%
5%
44%
0%
-5%
42%
-10%
40%
2005
12.12.2013
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Statistics Estonia, Eesti Pank
Eesti Pank Economic Statement
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17. Unemployment is falling steadily
•
•
The constant reduction in the number of long-term unemployed has
been positive
The unemployment gap will decrease during the forecast period as
structural unemployment falls
Unemployment rate
less than 6 months
24 months and more
20%
6 to 11 months
unemployment rate
12 to 23 months
equilibrium rate of unemployment
% of labour force
16%
12%
8%
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Eesti Pank Economic Statement
2…
2…
2…
2…
2…
2…
2…
2…
2…
2…
0%
2…
4%
Source: Statistics Estonia, Eesti Pank
17

18. Inflation will remain moderate in the coming years
•
•
•
•
Core inflation driven by domestic factors will pick up in the coming years
The effect of higher electricity prices will pass out of the calculation in 2014
The inflation forecast assumes that global prices for oil and food commodities will fall
A possible rise in oil prices and faster wage growth mean that upside risks dominate
CPI growth
core inflation
household energy
fuels
food
CPI
6%
5%
4%
2.9%
3%
2.9%
2.1%
2%
1%
0%
-1%
2010
2011
2012
2013
2014
2015
Source: Statistics Estonia, Eesti Pank
12.12.2013
Eesti Pank Economic Statement
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19. The general government budget will be in
deficit throughout the forecast horizon
•
•
The general government position will remain in structural surplus
General government debt will grow more slowly than GDP during the
years covered by the forecast and the debt burden will shrink
Fiscal stance (% of GDP)
structural budget balance
cyclical component
temporary measures
nominal budget balance
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
2010
2011
2012
2013
2014
2015
Source: Statistics Estonia, Eesti Pank
12.12.2013
Eesti Pank Economic Statement
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20. Conclusions of the Economic Forecast
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Eesti Pank Economic Statement
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21. The euro area is exiting its recession
•
•
•
•
•
The economic decline that had lasted six consecutive quarters in the euro area
ended, and growth will speed up again gradually in the coming years.
Growth has been unequal across countries within the euro area, Estonia has been
strongly affected by demand in Finland falling behind expectations.
The economic indicators of countries that have entered the bailout programmes
have improved, meaning that confidence about the further recovery in the euro area
has improved and the threats to the outlook for growth are reduced.
The recovery may well prove slow in the euro area as many countries still need to
carry out additional reforms and to continue their policy of austerity.
Monetary policy in the euro area will remain accommodative and supportive of
growth for an extended period of time.
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Eesti Pank Economic Statement
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22. The Estonian economy has moved
somewhat further away from balance
•
•
•
•
•
Growth slowed in the Estonian economy in 2013, but this was not broadly based
across sectors.
Two of the risks identified in the June forecast have been realised in 2013 as
wage growth has become unbalanced and the recovery in external markets has
proved difficult. The simultaneous emergence of these features has presented a
challenge to exporters.
The average wage is 7.8% higher in 2013 than it was a year earlier even though
production output per employee has fallen.
Rapid wages have not yet presented an insurmountable challenge to companies
focused on the domestic market as they have managed to pass wage costs on
into prices, so profits have not suffered significantly.
Growth in production, wages, incomes and the economy that is based on
domestic demand cannot be sustainable in a small country where exporting
companies are competing for the same supply of labour.
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Eesti Pank Economic Statement
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23. Increased investments will be required for
economic growth to recover and the tensions in
the labour market to be eased
•
•
•
•
The growth in external demand that started in 2013 and will accelerate in
2014 and 2015 will aid exports and so help the Estonian economy to pick up.
For companies to make use of export opportunities they need to increase the
growth in investments in fixed assets, which came to a stop in 2013.
Capital formation will be supported by low interest rates on loans and good
access to bank lending.
Investments in increasing production capital and in the supply of capital to
labour will help raise productivity and offset the rapid rises in wages and
labour costs.
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Eesti Pank Economic Statement
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24. Possible risks
•
•
•
•
•
Although the risks associated with the recovery in external demand are smaller
than they were, the uncertainty about growth in Estonia’s export markets has not
completely gone away.
If there is inertia in wage rises, economic growth could be slower than forecast,
and this could cause problems for companies in maintaining profitability, resulting
in a rise in unemployment.
Rapidly rising household incomes could combine with low interest rates to
accelerate the growth in real estate prices, which are already rising fast.
The oil price may rise as global demand increases, and this could push inflation up,
reduce the real incomes of households and restrict consumption capacity.
Structural unemployment and labour shortages, partly caused by emigration, may
continue to provoke excessive wage pressures, higher inflation and a loss of
competitiveness in the exporting sector.
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Eesti Pank Economic Statement
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25. General government financing remains strong
•
•
•
The government’s decision to focus on the structural surplus may not be justified,
given that different indicators give conflicting assessments of the economic cycle.
Although the GDP gap is negative, rapid growth in employment, wages and
private consumption indicate that the gap may be closing for the tax base.
The repeated postponement of the target of nominal balance is a threat to strict
fiscal discipline and does not allow the state to increase the reserves it would use
to balance the economy if the downside risks should be realised.
Unemployment remaining high even while fairly rapid wage growth is causing
imbalances in the economy and restricting competitiveness shows that structural
unemployment is high and needs to be reduced through active labour market
measures.
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Eesti Pank Economic Statement
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26. Key indicators for the Eesti Pank economic forecast
Economic forecast in figures
Nominal GDP at current prices (billion euros)
Change in GDP at constant prices (%)
CPI inflation (%)
Unemployment rate (%)
Change in average gross monthly wages (%)
Budget balance (% of GDP)
2012
17.42
3.9
3.9
10.2
5.9
-0.2
2013
18.39
1.0
2.9
8.7
7.8
-0.2
2014
19.46
2.6
2.1
8.5
6.6
-0.3
2015
20.99
3.9
2.9
8.3
7.7
-0.1
Sources: Statistics Estonia, Eesti Pank
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