Eesti Pank Economic Statement 12 June 2013 · 6/12/2013 · Eesti Pank Economic Statement 12 June 2013. Key points of the presentation 12.06.2013 Eesti Pank Economic Statement 2

Eesti Pank Economic Statement 12 June 2013

Key points of the presentation

12.06.2013 Eesti Pank Economic Statement 2

• The external environment • Review of the Estonian economy and forecast for the coming years • Economic policy implications

12.06.2013 3

Confidence is higher in Estonia than the average for the euro area • Despite a temporary setback in April this year, confidence has increased in

the euro area since the end of 2012

Source: European Commission

Confidence in Estonia and the euro area

Eesti Pank Economic Statement

60

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011 2012 2013

Estonia euro area

12.06.2013 4

Inflation in the euro area has dropped below 2%

Source: Eurostat

Euro 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)


-6%

-4%

-2%

0%

2%

4%

2005 2006 2007 2008 2009 2010 2011 2012 2013

euro area GDP growth, y-o-y euro area inflation, y-o-y

The economic forecast of the central banks of the euro area for 2013 is more pessimistic than it was in December 2012

12.06.2013 5

Euro area real economic growth

Source: Eurostat, European Central Bank

Euro area inflation

• Revival of the economy in the euro area has been postponed • Inflation has slowed as expected and price pressures remain subdued


-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

2010 2011 2012 2013 2014

economic growth, y-o-y forecast range, December 2012 forecast range, June 2013 point forecast, June 2013

0%

1%

2%

3%

2010 2011 2012 2013 2014

forecast range, December 2012 forecast range, June 2013 growth, y-o-y point forecast, June 2013

Low interest rates support the recovery of the economy

12.06.2013 6

Three-month EURIBOR

Source: European Central Bank

• Weak price pressures mean that markets expect the low interest rates to remain in place

• Interest rate expectations have changed very little from half a year ago


0,0%

0,5%

1,0%

1,5%

2,0%

2011 2012 2013 2014 2015

June forecast 2013 December forecast 2012

The forecast for the oil price has not greatly changed since December 2012

12.06.2013 7

Oil price, US dollars/barrel


• Markets expect the oil price to fall to 95 US dollars in 2015 • Cheaper oil will contribute significantly to slower inflation


90

95

100

105

110

115

120

2011 2012 2013 2014 2015


The euro has strengthened against the US dollar

12.06.2013 8

Exchange rate of the US dollar and the euro


• The strengthening of the euro against the dollar has lowered the forecast energy price


1,20

1,25

1,30

1,35

1,40

1,45

2011 2012 2013 2014 2015


The Estonian economy is moving towards an equilibrium growth rate, the current slowdown is temporary

12.06.2013 9

Real Estonian economic growth

Source: Statistics Estonia, Eesti Pank

• GDP growth will accelerate in 2014 and 2015 supported by both domestic and external demand

• The equilibrium growth rate for the Estonian economy in the coming years is around 3.5% and this is driven by increased capital intensity and technological development


-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


The credit supply has not tightened in the last half year

12.06.2013 10

Loan interest rates

Source: Eesti Pank, European Central Bank

• Competition conditions have allowed banks to preserve their return on assets and 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 strong


0%

1%

2%

3%

4%

5%

6%

7%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

corporate loans 3-month EURIBOR housing loans

Investment activity remains high

12.06.2013 11

Loan stock growth

Source: Eesti Pank

• Low loan interest rates, favourable external financing, and an improving economic climate will keep investment activity high in Estonia in the coming years and this will be seen in loan growth


-15%

-10%

-5%

0%

5%

10%

15%

2008 2009 2010 2011 2012 2013 2014 2015

total credit stock housing loans stock households' other credit corporate credit

For Estonia’s economic growth to accelerate, external demand has to recover

12.06.2013 12

GDP, domestic demand and real growth in exports



-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

real GDP growth real domestic demand growth real growth in goods and services exports

Estonian export development depends on the situation in target markets

12.06.2013 13

Structure of Estonian exports by target market, 2012

Source: 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 2012


15,9%

14,5%

12,1% 8,7%

5,4%

4,7%

4,5%

15,9% Sweden

Finland

Russia

Latvia

Lithuania

USA

Germany

other

Growth in external demand is more modest than expected

12.06.2013 14

External demand growth


• 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 Russia


-2%

0%

2%

4%

6%

8%

10%

2011 2012 2013 2014 2015

Sweden Finland Russia Latvia Lithuania Germany USA Denmark other countries external demand growth, June 2013 external demand growth, December 2012

The current account remains close to balance

12.06.2013 15

Current account as a ratio to GDP


• The current account position will improve during the forecast horizon mainly due to a shrinking of the deficit in the trade account

• Net export growth will be supported by a rise in external demand and an improvement in trade terms


-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

goods services revenues current transfers current account position

The labour market continues to improve

12.06.2013 16

Unemployment rate


• 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 efficient


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% o

f lab

our f

orce

24 months and more 12 to 23 months 6 to 11 months less than 6 months unemployment rate equilibrium rate of unemployment

Wage growth remains strong, growth in employment slows

12.06.2013 17

Wage and employment growth


• The shrinking of the working age population will slow employment growth even as unemployment falls

• Wage growth has been built on increased productivity • Wage growth will accelerate in the years ahead as economic activity

increases


-10%

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

growth rate of the average monthly gross wage employment growth

Inflation will slow in the coming years

12.06.2013 18

Consumer Price Index (CPI) growth


• 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 fall


-2%

0%

2%

4%

6%

8%

10%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

core inflation household energy fuels food CPI

The general government budget is forecast to reach nominal balance in 2014

12.06.2013 19

Budget position


• The general government budget position remains in structural surplus • General government debt will grow more slowly in the forecast horizon

than GDP and the debt level will decrease


0

0

0

0

0

0

0

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% o

f GD

P

structural budget balance cyclical component temporary measures nominal budget balance

Conclusions of the Economic Forecast

12.06.2013 20 Eesti Pank Economic Statement

The Estonian economy will continue on its balanced course

• The Estonian economy is more balanced since the crisis than it was before • The balance sheets of households and companies have significantly

improved, the loan burden has fallen as a ratio to GDP • Stabilisation of the economy is also shown by the near balance in the

current account deficit and the general government budget • Growth will accelerate in 2014 with support from revitalised domestic and

external demand to near its potential • Consumer price inflation will remain subdued throughout the forecast

horizon


Possible risks

The more balanced post-crisis economy has become less vulnerable, though both the 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 the exporting sector

• The combined effect of low interest rates and increasing confidence may be overly optimistic consumption behaviour and inflated property prices

• Access to cheap lending must not lead to an underestimate of risks or an overestimate 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, could

cause excessive wage growth pressure and accelerated inflation and this could damage the competitiveness of exports


The government still has an important role in maintaining the credibility of the economy

• Achieving balance in the general government budget by 2014, as called for in the national budget strategy, will increase trust in the economy

• A nominal surplus in the budget in 2015 will be important for the state to increase its reserves, which can be used to rebalance the economy in the event of the negative risks being materialised

• Active labour market measures to reduce structural unemployment are required to ensure long-term economic growth


Challenges for future development

The shrinking of the working age population will have an increasing impact on the labour market

• In the next few years there may for the first time be a drop in employment even while unemployment is simultaneously falling

• The importance of labour force participation and the efficient use of labour will increase

• Limited labour resources mean that the main way to ensure a move towards higher value added production is to increase the supply of capital for labour and to improve the qualifications of employees


Key indicators for the Eesti Pank economic forecast

12.06.2013 25

2012 2013 2014 2015

GDP (billion euros) 17.0 17.9 19.2 20.7

Change in GDP at constant prices (%) 3.2 2.0 4.2 4.3

CPI inflation (%) 3.9 3.0 2.5 2.7

Unemployment rate (%) 10.2 9.2 8.8 8.5

Change in average gross wages (%) 5.9 5.1 6.4 7.4

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

Economic forecast in figures



Documents

Eesti Pank Economic Statement 12 June 2013 · 6/12/2013 · Eesti Pank Economic Statement 12 June 2013. Key points of the presentation 12.06.2013 Eesti Pank Economic Statement 2