Recession may drag till end of year

Illustration: graafika: Silver Alt

In opening quarter of 2014, gross domestic production of Estonia fell 1.9 percent. The trend may well continue throughout the year.

The first quarter drop in our economy was not much of a surprise. As early as beginning of March, Postimees wrote of the possibility. The only one predicting a recession for first quarter was the SEB bank economist Ruta Arumäe. Other macroanalysts thought that domestic consumption would compensate the drop in export that hit in last quarter of 2013, and the beginning of 2014.

Somewhat surprising, still, the steepness of the fall – 1.9 percent. The last time our economy was in decline was at the end of the crisis i.e. 1^st quarter of 2010.

At an Estonian Banking Association roundtable two weeks ago, participated by leading Estonian analysts, the LHV economist Heido Vitsur noted that precise predictions were next to impossible.

«Before 2008 they used to miss by two percent, no big deal, and everyone was cool,» said Mr Vitsur. Nearly two percent of decline is still so different from positive growth that this the economists ought to have foreseen – indeed, the export had been in shrinking for the third quarter running and the drops weren’t small.

As assessed by analysts, the recession was caused by weakness of external environment, decrease of investments, and warm weather. 

«Economic development has been weaker than forecast by Eesti Pank in December, as the situation on foreign markets has been even less favourable than was expected. On top of that, 1^st quarter was strongly impacted by short-time one-off factors such as the warmer-than-usual weather which hampered energy production, and drop of investments by governmental sector,» said central bank economist Kaspar Oja.

«The GDP drop this quarter was foreseeable as during the entire previous quarter economy was dominated by negative news. Even so, a drop that deep was an unpleasant surprise,» Mr Vitsur told BNS, yesterday.

«The sole comfort would be that a part of the decline, by essence, was not negative towards the economy as a whole and the wellbeing of the households.  Namely, heat bills were smaller due to warmer winter,» he added.

But at the abovementioned roundtable and in comments issued yesterday, Ms Arumäe’s understanding of the future radically differed from the others. According to Ms Arumäe, there will be no significant recovery of external demand this year.  

«Good if a slightest recovery happens the next year,» predicted the economist. For this year, Ms Arumäe foresees an economic growth of 0.5 percent, while warning that this is the positive extreme based on the assumption that in the second half of the year external demand will recover. «Highly likely that the entire year may end in minus,» she assured BNS.

The analysts of other banks are much more optimistic. The Swedbank chief economist Tõnu Mertsina says we will have 1.8 percent economic growth this year.

«According to our forecast, this year will see the same export growth as in 2013 i.e. about 2 percent, and economic growth ought to gradually improve,» said Mr Mertsina.

«Even though Finnish economy should exit recession by the end of the year, domestic demand in Finland will still remain weak. Overall, however, external demand is showing signs of recovery, which ought to increase export options for our enterprises,» he added.

At Swedbank estimation, domestic demand was strong in first quarter. «In our estimation, rapid growth of real wages continued in first quarter, keeping private consumption strong, which in turn supported growth of retailing. Only a few companies, probably, are increasing investments, and that is not broad-based enough. From the low level last year, investments grew only moderately this quarter, according to initial estimates,» commented the bank.

Nordea bank chief economist Tõnu Palm has repeatedly stated that they believe in the recovery of global demand. The US economy is indeed gradually recovering and Europe is also overcoming its crisis.

«All we are expecting is a gradual recovery of external demand as supported by the eurozone towards the end of the year. The economies of the other Baltics are also being cooled by the more modest export and investments. In short perspective, economy is overshadowed by Ukraine-related risks, postponing the recovery,» Mr Palm told BNS.

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Comment

Aivar Reinap, deputy editor-in-chief, Postimees

At the start of the year, Estonia was hit by recession. Simply put, this means less production and shrinking income i.e. problems entrepreneurs. If enterprises earn less on sales, this may eventually lead to loss of jobs and lay-offs.

On the other hand, price rise was next to nonexistent at the beginning of the year. Electricity prices are down, electricity and heat consumption has been lower due to the warm winter i.e. a win for the consumer. According to finance ministry data, wages have risen nearly eight percent over the year; thus, the larger income allows for more consumption at the lower prices.

The uncertain times in economy and possible loss of job makes people postpone larger purchases and rather save money. During the year, the volume of deposits has increased by almost a year, while loan balance stays at last year level. No one dares to invest, opting rather to gather reserves for the bad times. 

The poor economic situation of our largest economic partner Finland is already felt here. The uncertain political situation behind the Eastern border, bringing us Extra US soldiers, is also affecting companies and consumers alike. No wonder, then, that the Russian transit flows tend to dry up, in times like these, and export opportunities may decrease. 

All told: uncertain times continue. But, over these past five years, crises have toughened our enterprises and people. Active and successful people are able to turn situations like these to their advantage – in the good times, anybody can succeed; but the hard times separate the men from the boys. Having a job, consumers have no reason to worry. Good employees are not fired even in times of crisis as, due to the smallness of our labour market, it is afterwards difficult to find people to hire.

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Electricity production shrunk

The warmer-than-average winter dropped both production and consumption of electricity.

According to Elering, electricity production decreased by 20 percent in January, by 19 percent in February, and by 21 percent in March – year-on-year. As to consumption of electricity, the decline figures were one, two and eleven percent, respectively. In January, the drop of production was substantiated by Elering by increase of electricity import and a drop of export. Export also shrunk in February. Due to warmer weather, consumption decreased the most in March. The March average temperature was 8.4 degrees higher than same time last year.

Good tax collection

Over the initial three months of 2014, close to €1.3bn of tax money has come in – a 7.8 percent increase year-on-year.

In the first quarter, nearly €101m of income tax was collected i.e. 15 percent more than in the same period of 2013. Of that, income tax of physical persons amounted to €19m, legal persons adding €82m.

Over the quarter, €402m of VAT was collected – 7 percent increase year-on-year. Excise harvest amounted to €190.5m, of which alcohol excise was €50m, tobacco excise €38m, and fuel excise €92.5m. Year-on-year, excise intake grew 5.4 percent.  

Domestic consumption boost

Domestic consumption i.e. retail sales grew seven percent in January, three in February, and five percent in March, year-on-year. 

In January, sales increased in all segments; in February and March, sales in specialised stores with emphasis on industrial goods dropped a bit.

In grocery stores, sales went up five percent in January, four in February and two in March. At the end of April, economy ministry underlined that over recent months Estonian retailing had grown three-four times the EU average, the trend to continue in months to come.

Construction slow to react

According to Nordecon CEO Jaano Vink, building contracts under negotiation or in drawings phase will probably not be halted at the 1^st quarter recession news.

«Hence the slower reaction of the construction sector to macroeconomic changes. If investors rather feel optimistic, recessions that last for a couple of quarters will not have much of an impact on the construction sector,» said Mr Vink. «Which will not mean that construction companies aren’t worried by what is currently happening in the economy,» underlined Mr Vink.

Price rise almost nonexistent

In January, monthly price rise amounted to 0.4 percent; year-on-year, price rise slowed to 1.1 percent. Inflation receded due to the receding impact of electricity market opening up last year.

Inflation is in decline since the summer of last year; in January, it dropped to the lowest levels of these past years.

In February, monthly price rise was 0.1 percent; year-on-year, inflation slowed to 0.6 percent. In February, inflation was most impacted by housing costs dropping due to warmer weather.

During March, prices increased 0.3 percent; year-on year inflation slowed to 0.2 percent. The slowing of inflation was enhanced by electricity becoming cheaper. At the beginning of the year, price pressure has weakened both in Estonia and the eurozone, bringing inflation extremely low.  

Railway transport down

Carriage of goods on Estonian Railways infrastructure amounted to 6.15 tonnes in 1^st quarter 2014 – 17.3 percent decrease year-on-year.

In the first quarter, 3.79 million tonnes of oil and oil products were carried, the volume down 26.5 percent year-on-year.

Of the goods moved in Estonia, transit answered for 77.4 percent i.e. 4.76 million tonnes. Over a year, transit volumes shrunk 18.6 percent. Year-on-year, container transport volume grew 20.7 percent.

Trade deficit

In 1^st quarter, export of goods shrunk eight percent and import by four percent year on year, trade deficit amounting to €362m (€262m in 2013).

Top export destinations, in March, were Sweden (17 percent), Finland (15 percent), and Russia (11 percent). Into Sweden, electrical devices, timber and wood products were exported in top quantities. Regarding Finland, it was electrical devices and various industrial products (including furniture and structures to be assembled); into Russia, mechanical machines were the leading article.

Imports mostly came from Finland (15 percent), Germany and Sweden (11 percent from both). From Finland, mineral products such as motor fuels were top import articles; from Germany mechanical devices and means of transport; from Sweden electrical devices and means of transport.

Real estate prices up

According to Eesti Pank data, average square metre price was more that 20 percent up year-on-year while amount of transactions increased 13 percent. Real estate executives say no boom is developing, purchasing power being the limit. Also, Euribors may start to rise.

«In the leading Tallinn and Tartu markets, price rise cooled in 1^st quarter, the second quarter bringing price expectations back to normality, thus definitely leading to slight increase of transactions,» predicted real estate group 1Partner housing expert Mihkel Oiderma.

Russian recession

For Russian economy, recession was forecast even before crisis in Ukraine. Last week, OECD lowered Russian growth expectation to minus 0.5 percent – a more than four times steeper drop that earlier predicted. A week before that, IMF had predicted 0.2 percent growth to Russia this year.

As assessed by Russian economy ministry, GDP dropped 0.5 percent in 1^st quarter; finance ministry thinks it’s also in decline this quarter. In the third quarter, a lot depends on what happens in Ukraine.

Recession in Finland

Finland has now been in recession for seven months running – the most persistent one in the last 150 years. According to Nordea Finland chief economist Aki Kangasharju, it will be eight to ten years until pre-crisis levels are reached.

Finnish economic problems are structural. Nokia no longer serves as a pillar and support, the growth potential thus smaller.

Finland’s export and investments have collapsed; listed companies keep issuing profit warnings. European Commission forecasts 0.2 percent growth for Finland this year, and 0.1 for the next. Of eurozone countries, only Cyprus is predicted a lower growth.