Autor – Esitluse nimetus

Features of Estonian Economy

Peeter Luikmel

Eesti Pank

Lecture to senior officials of the European Commission

18 September 2012

• GDP about 16 billion EUR in (nominal,

estimate for 2011)

• GDP per capita, PPP adjusted is 65% of EU

average

• Population ca 1,34 million, labour force is

ca 700 000 (agriculture 5%, industry 34%,

services 61%);

• Average monthly gross salary 839 EUR

(2011)

• Unemployment: 10,2% (Q2 2012)

• Budget balance: (+1%, 2011)

• Country rating: A1 (Moodys), AA- (S&P)

Brief statistics: a small and open economy

2

Introduction: Where we are?

0%

1%

2%

3%

4%

5%

6%

0 5000 10000 15000 20000 25000 30000 35000 40000

Ave

rage

GD

P g

row

th 1

99

6-2

01

1

GDP pps per capita 1995-2010 average, Europe

Lithuania

Estonia

Latvia

Ave

rage

GD

P g

row

th 1

99

6-2

01

1

GDP pps per capita 1995-2010 average, Europe

Estonia

Latvia

PolandHungary

Turkey

Ireland

Germany

High growth was boosted by rapid credit growth

Loan growth (yoy, in national currency)

Source: IMF International Financial Statistics Database

0%

10%

20%

30%

40%

50%

60%

70%

Poland Romania Bulgaria Hungary Lithuania Slovak

Republic

Czech

Republic

Latvia Estonia

2004

2005

2006

2007

2008

But there are also other reasons for rapid growth

Source: EBRD Transition Report 2008

The link between the level of education and GDP growth appears to be stronger in case of transition countries

Corporate income tax

as % of GDP

Tax environment is different across the region

0 1 2 3 4 5 6 7 8

DEEE

EL

LTAT

LVHU

PL

SKFR

ROUK

IT

BGIE

SINL

DKBE

PT

FISE

ESCZ

LU

MTCY

Source: Taxation Trends in the European Union (2009)

Fall in GDP volume 2009 Q2 vs 2008 Q2

Fall in GDP during the crisis was

impressive as the previous boom

Source: Eurostat

-25

-20

-15

-10

-5

0

5

Lithuania Latvia Estonia Slovenia Romania Hungary Czech

Republic Slovakia Bulgaria Poland

Internal imbalances and vulnerabilities have declined

compared to the boom years

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Households savings/disposable income, %

Current account/GDP, %

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Private sector credit growth Private consumption, nominal growth

Investments, nominal growth

0

20

40

60

80

100

120

140

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real compensation per employee, index Productivity per labour, 2005=100

Source: Bank of Estonia, Statistics Estonia

Productivity has improved fast in

Estonia

European enterprises have delivered jobs, productivity, and exports

(performance of European subregions and benchmark countries, 1995–2009)

11

1.3

1.3

0.4

0.3

0.1

-0.3

0.6

-0.1

1.2

-0.1

1.0

1.7

2.4

1.4

1.0

3.0

5.7

4.2

4.3

3.6

6.6

1.6

1.2

7.8

2.0

0.4

50.2

49.4

57.5

71.2

43.4

54.8

31.2

38.7

11.2

13.4

26.7

64.0

23.2

EFTA

EU15

EU12

Estonia

Latvia

Lithuania

EU candidates

Eastern partnership

United States

Japan

China

East Asia

Latin America

-1 0 1 2 3 0 2 4 6 8 0 20 40 60 80

Employment growth, percent Productivity growth, percent Exports, percentage of GDP, 2009

Source: World Bank

The key for successful recovery from crisis is

flexibility of economy

0.000

0.200

0.400

0.600

0.800

1.000

1.200

Share of firms having firm-level bargaining agreements

Share of firms having higher level bargaining agreements

Share of collective bargaining agreements is low

Perhaps not the best from the workers’ perspective but certainly good for making

necessary adjustments in economy during crises

Source: Wage Dynamics Network, ECB (2009)

Labour market has recovered faster than

expected

Source: Statistics Estonia

Favorable employment recovery

The pattern of recovery by field of activity

• The rebound in employment was based on industry

• Domestic employment in construction fell sharply during the crisis, has not significantly

grown yet

Source: Statistics Estonia

Despite recent fall in economic activity,

the recovery in Estonia has started fast

Estonian annual economic growth rate, %

Source: Statistics Estonia

Manufacturing of Baltic countries has

revovered to pre-crisis levels

Trade with Sweden and Finland constitutes

about 1/3 of our goods exports

Share of trade partners in Estonian exports, % (2011)

Source: Statistics Estonia

Structure of exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Finland Estonia Latvia Lithuania

OTHER Food, drinks and tobacco

Raw materials Mineral fuels, lubricants and related materials

Chemicals and related products, n.e.s. Other manufactured goods

Machinery and transport equipment

Structure of exports in 2010, by SITC

Turnover of exports is well correlated with

our main trading partners

Source: Eurostat

Medium term perspective: substantial cost advantage is still on our side

[average gross wages in euros]

Source: national statistics offices

Banking sector has survived the crisis, initial loan loss

provisions were made higher than the actual outcome

Source: Bank of Estonia

Profits of Estonian Banking Sector, M EUR

Banks’ loan and leasing portfolio has declined

18% from the peak in 2008

0

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010 2011 2012

EU

R b

illi

on

Lending stock

other household loans housing loans corporate loans

Residential real estate market recovering after the

bust: prices and volumes have been increasing

0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2004 2005 2006 2007 2008 2009 2010 2011 2012

Number of transactions with apartments in Tallinn and median price

number of transactions(l.s) median price (EUR/m2, r.s)Data: Land Board

Affordability in Tallinn residential real estate market has

remained relatively good

*affordability – average price per m2 / monthly average gross wage

0,5

1,0

1,5

2,0

2,5

3,0

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2004 2005 2006 2007 2008 2009 2010 2011

Tallinn price/gross wages Helsinki price/Finland gross wages

Riga price/gross wage

Due to the fiscal surpluses in earlier years and conservative fiscal

policy Estonian government debt to GDP ratio is moderate

Debt/GDP, % (2010)

Source: Eurostat

Fiscal developments in 2011

• The surplus of the general

government balance increased to

1% of GDP, the outcome was

better than projected:

– quite favourable macro conditions

– some large CO2 emission trade

related investment projects where

postponed

• The debt burden remained at very

low level, close to 6% of GDP

• The general government retained

its position of a net-lender

-4,0%

-3,0%

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

2006 2007 2008 2009 2010 2011

% o

f G

DP

GG balance without CO2 emission trade

GG balance

Estonian inflation has been higher due to the larger share

of energy and food in Estonian consumer basket,

the impact of introduction of Euro remains moderate (approx. 0,3 pp)

Source: Statistics Estonia

The global economy is facing unfavourable conditions in 2012

28

• Growth will slow in most regions and global trade along with it

• Global inflation is under control, though monetary policy continues to

be lenient

• Additional support by monetary policy is more restricted this time

• The euro-area economic situation is not easy, but the current

difficulties can be overcome

– Growth impetus is waning, because some euro-area economies

have to make adjustments that have so far been postponed

– Problems springing from general government debt and imbalances

will not disappear before their root cause is eliminated

– It is essential to avoid economic damage arising from uncertainty

Estonian economy's resistance to deterioration in the external environment has improved

29

• Vulnerability has decreased – The current account is in surplus now

– Expectations are more subdued

– The private sector's debt burden has shrunk

• The restoration of profits has also reduced vulnerability

• Reduction in the gap between wages and productivity has improved economic competitiveness

• Unemployment has declined and problems with employment structure have eased

Conclusions

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The current complicated situation includes also opportunities

31

• Monetary policy supports the economy in both Estonia

and the euro area

– The monetary policy of euro-area central banks creates

favourable conditions for companies to use investment

opportunities

– Eesti Pank provides to banks operating in Estonia monetary

policy loans with interest rate of 0,75%

• The sufficient capitalisation of banks operating in

Estonia and the improved loan-to-deposit ratio provide

a good basis for financing households and companies

Economic forecast by key indicators

2012 2013 2014

Nominal GDP (EUR bn) 17.0 18.1 19.4

GDP, chain-linked volume change (%) 2.6 3.6 4.1

HICP inflation (%) 3.9 3.2 2.7

Budget balance (% of GDP) -1.5 -0.5 0.0

Source: Eesti Pank

Thank you!

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