Economic Forecast for 2014

Ardo HanssonEesti Pank

Äriplaan 2014Nokia kontserdimaja, Tallinn

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• The crisis is showing signs of retreating, but the recovery is not equal around the world

• Low economic growth in Estonia is overshadowing a picture of strong manufacturing activity

• Future growth in Estonia will increasingly be determined by how the current shortage of human resources is handled

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The current state of the economic space around us

• A revival in economic activity is discernible in the euro area– The economic decline ended after six months, the longest period of

recession in the history of the single currency– The exit from the crisis has been driven by the measures taken by the

institutions of the European Union• The initial positive signs do not give grounds for excessive confidence

– Financial capacity has shrunk as the private and public sectors reduce their debt levels and improve their balance sheets

– Eliminating the imbalances that have built up over years will take time• The recovery has not happened equally around the world

– The position of developed countries has strengthened while developing countries are plagued by growing pains

– At the end of summer several organisations lowered their growth forecasts for developing countries

4

The global economy is becoming more active

Sources: IMF, WEO Spring 2013,* European Central Bank Autumn Projection, ** Eesti Pank June Forecast

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Economic growth (%)

Emerging economies WorldEuro area *Advanced economiesEstonia**

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The reforms already passed are bearing fruit

Source: European Commission

• Budget deficits are falling in Europe and in other areas• The European Commission forecasts that this will continue

Budget balance Budget balance

GermanySpain

GreeceItaly

PortugalCyprus

United Kingdom Japan USA Euro area

% o

f GD

P

% o

f GD

P

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Estonia is well-placed on the map of European growth

Allikas: Euroopa Komisjon

20142013 GROWTH IN EUROPEAN COUNTRIES

Source: European Commission

• Among the main trading partners it is the performance of Finland that is causing concern

negative0% - 1%1% - 2%2% - 3%3% or more

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There are structural problems facing the economy of Finland, Estonia’s main trading partner

0

1

2

3

4

5

6

1975 1980 1985 1990 1995 2000 2005 2010

Paper production ElectronicsShare of GDP, %

Allikas: Suomen Tilastokeskus, Soome Pank 24877

• The paper and electronic production that has been important for Finland has disappeared

Sources: Finnish statistical office, Finnish central bank

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The Finnish economy is weighed down by growth in labour costs

• Labour costs have grown rapidly in the last decade and this has reduced the competitiveness of the economy

Source: Eurostat

Austria Denmark Euro area Germany

Finland Netherlands SwedenNominal ULC, change over 2005, %, euros

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Rapid rises in labour costs can also be felt in Estonia

Source: Statistics Estonia, Eesti Pank calculations

• Labour costs are carried over into end product prices, especially in the services sector• Average gross wages grew by 8.5% in the second quarter of 2013 while prices for services other

than communications rose by 4.2% in August• It is harder for manufacturing firms that face foreign competition to meet the wage pressure

and raise prices as this would lower competitiveness

Average gross wage (%, y-o-y), left axis Price of services (%, y-o-y), right axis

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Estonian wages are under pressure from labour shortages

Source: European Commission

• Companies consider demand to be the main factor restricting production, but the importance of labour shortages has increased

• Manufacturing companies do not consider financing conditions to be an obstacle to development

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Tööstusettevõtete toodangu kasvu piiravad faktorid

piiranguid pole ebapiisav nõudlus tööjõu puudusmaterjali/seadmete puudus muud finantsprobleemid

Factors that limit industrial production

No limitsLack of materials

Insufficient demandOther

Lack of labour supplyFinancial problems

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Unused buffers still remain

• There are about 60 thousand under-utilised people who have not yet found work• For this resource to be used will probably demand more flexible working conditions• The reservation wage, the minimum wage for which the currently unemployed are

prepared to take a job, has risen sharply, by between 11.4% and 15.4% depending on education

Source: Statistics Estonia

Under-employed and non-actives who wish to work but have not searched for it

Thou

sand

s

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Rising labour costs are starting to lift core inflation

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-2%

0%

2%

4%

6%

8%

10%

12%alusinflatsioon majapidamiste energia toiduained kütused tarbijahinnaindeks

Sources: Statistics Estonia, Eesti Pank

• Core inflation has so far remained low as prices for communications services continue to fall and prices for manufactured goods have risen slowly

• The impact from energy price rises will be notably smaller next year than this, having supplied one percentage point, or about one third, of inflation in 2013.

core inflation household energy food fuel CPI inflation

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The low economic growth in Estonia has been strongly affected by one area of economic activity

Sources: Statistics Estonia, Eesti Pank calculations

• Economic growth fell in the second quarter to 1% but the deceleration was not broad based• Excluding transport and warehousing, the rest of the economy grew by 2.4%• Value added grew by 3.4% if transport and warehousing are excluded, and growth has

accelerated

GDP growthGDP growth without transportation and storageGrowth of value added without transportation and storage

Economy without transportation and storage

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A rise in economic activity is to be expected in the coming years

Sources: Statistics Estonia, Eesti Pank calculations

• Economic growth will reach 4% next year, which is near to the long-term level expected for Estonia

Estonian economic growth, y-o-y forecast

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The European economy is recovering only gradually

• Our economic environment has changed and there is no reason to expect surprising leaps of growth anywhere in the world

• The moderate recovery in economic activity in the euro area will continue as interest rates remain low, allowing the central bank to keep rates down

• The European Central Bank has confirmed that interest rates may remain at their current levels or lower in the short term

• The positive impact of other economic policies has started to be felt; the fiscal position of the euro area has improved and competitiveness has increased, even in countries with difficulties

• The current signs of recovery in the euro area are fragile and the earlier risks are still there

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Estonia needs to focus on its strengths but further development will require an awareness of weak points

• Estonia is at a very different stage of development to where it was in the past decade and growth of 3-4% could be achieved next year

• Estonia still has the potential to grow faster than the rest of the euro area• Growth was surprisingly weak in Estonia in the first half of the year, but

there is not a broad-based foundation for this• Estonia’s advantage over other European countries is that it has exited the

crisis without a burden of debt and the national debt continues to be the smallest in Europe; this provides stability to the tax system

• Estonia’s development will be affected more than ever by human factors, as the number of people living in Estonia is falling and so is the working age population

• The central question in increasing output in the coming years will be not only the size of labour resources but also their deployment

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2012 2013 2014 2015

GDP (billion euros) 17.0 17.9 19.2 20.7

GDP change in constant prices (%) 3.2 2.0 4.2 4.3

CPI inflation (%) 3.9 3.0 2.5 2.7

Unemployment (%) 10.2 9.2 8.8 8.5

Average gross monthly wage change (%) 5.9 5.1 6.4 7.4

Budget balance (% of GDP) -0.3 -0.3 0.0 0.2

Key indicators from the economic forecast

Sources: Statistics Estonia, Eesti Pank

Key indicators from the Eesti Pank June Forecast