Eesti Pank Economic Statement 10 December 2014

Eesti Pank Economic Statement 10 December 2014

Key points of the presentation

10.12.2014 Eesti Pank Economic Statement 2

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

10.12.2014 3

The global economy is growing more slowly than expected

• Several institutions including the IMF, ECB and European Commission have adjusted their outlooks for the global and euro area economies downwards

Eesti Pank Economic Statement

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013 2014 2015 2016

European Commission IMF ECB

Global economic growth

* Global growth without the euro area

Sources: IMF, European Commission, European Central Bank

-10%

-5%

0%

5%

10%

15%

2006 2008 2010 2012 2014 2016

Japan Russia China USA

Source: IMF WEO, October 2014

Growth in large economies

Euro area growth is accelerating slowly

4

• Inflation in the euro area has fallen more than expected in 2014 and will remain subdued in future

Eesti Pank Economic Statement10.12.2014

HICP inflation, %

Sources: Eurostat, European Central Bank

Economic growth q/q, %

2013 2014 2015 2016

1.4 0.5% 0.7% 1.3%

2013 2014 2015 2016

-0.4% 0.8% 1.0% 1.5%

An accommodative monetary policy is helping growth pick up in the euro area

5

• Given low inflation, interest rates are expected to remain low• The Governing Council of the European Central Bank cut monetary policy interest rates in September

to their lowest ever levels, and deposit rates for commercial banks have been negative since June• Standard and non-standard monetary policy measures have lowered the loan interest rates for the

non-financial sector


0.0%

0.4%

0.8%

1.2%

1.6%

2011 2012 2013 2014 2015 2016

3-month EURIBOR

Source: European Central Bank

The change in the euro exchange rate has affected trading conditions in the euro area, including Estonia

6

• The Russian rouble has fallen by about 40% against the euro since the start of the year, which has made Estonian exports less competitive on price in Russia

• The US dollar has appreciated against the euro, which has slowed the fall in prices of motor fuels

Eesti Pank Economic Statement10.12.2014Source: Bloomberg

80

90

100

110

120

130

140

150

01

.20

14

02

.20

14

03

.20

14

04

.20

14

05

.20

14

06

.20

14

07

.20

14

08

.20

14

09

.20

14

10

.20

14

11

.20

14

12

.20

14

Euro exchange rate against foreign currencies (January 2014 = 100)

US dollar British pound Swedish krona Russian rouble

The forecast assumes that demand will grow slowly, but will see a stable acceleration in export markets especially

7

• The main restriction on export capacity in the years ahead will be weak demand in Finland and Russia• The trade sanctions imposed by Russia have not significantly harmed the economy as a whole


-1%

0%

1%

2%

3%

4%

5%

2012 2013 2014 2015 2016

USA Germany Latvia & Lithuania Russia Finland Sweden other

Source: European Central Bank

Foreign demand growth

Prices of commodities have fallen on global markets because of weak demand


• Future transactions for oil at the time of writing suggested the oil price will remain below 90 dollars a barrel

• The volatility of the oil price could affect inflation strongly in either direction• Prices for food and industrial commodities are forecast to remain close to their current levels

Sources: Ecowin, European Central Bank

20

30

40

50

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

crude oil price (euros per barrel) annual average priceCrude oil price (Brent)

Cheaper energy means that the consumer basket is cheaper this year than last

9

• Prices will start to rise again from the start of 2015• Food price inflation will accelerate in 2015 and 2016 when excise rates rise• Low inflation will help increase the real purchasing power of households


-0.1%0.8%

2.1%

-1%

0%

1%

2%

3%

4%

5%

6%

2011 2012 2013 2014 2015 2016

core inflation energy food CPI

Sources: Statistics Estonia, Eesti Pank

Consumer price index change

Core inflation is being reduced by cheaper communications and free higher education


• Prices for domestic goods and services will be raised by rising wage costs• Core inflation will fall temporarily in 2015 as the real estate market calms and rents

rise more slowly


-4%

-2%

0%

2%

4%

6%

2009 2010 2011 2012 2013 2014 2015 2016

communications education tourism and recreation transport rent services inflation

Service price inflation

Wage growth has slowed but will remain above 5%

11

• Wages will rise in 2015 among other things because of a rise in the minimum wage and the start of wage agreements in various sectors

• Employment will be brought down by the reduction in the working age population and labour shortages will put ever more of a limit on production


-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

employment growth growth rate of the average monthly gross wage

Wage and employment growth


Finding employees will become ever harder


• There will be 15,000 fewer people of working age in Estonia in two years than there are now and in five years there will be 30,000 fewer

• Competition between companies for employees will become fiercer

900,000

910,000

920,000

930,000

940,000

950,000

960,000

970,000

980,000

990,000

1,000,000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Population forecast for the working age population

Source: Statistics Estonia

Unemployment will barely fall

13

• The problem in unemployment is structural: a quarter of companies say* their biggest challenge is that the skills of the labour force do not match their needs


* Estonian Institute for Economic Research

0%

4%

8%

12%

16%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% o

f th

e la

bo

ur

forc

e

24 months and more 12 to 23 months 6 to 11 months

less than 6 months unemployment rate

Unemployment


The disposable income of households will continue to rise at the same rate as in the preceding years


• Disposable income will be boosted in 2015 by a cut in income tax and a rise in pensions and child benefit

• Wage growth will accelerate in 2016 as economic activity increases

6.0% 6.3%5.3%

-2%

0%

2%

4%

6%

8%

2012 2013 2014 2015 2016

wage effective tax rate employment

social transfers other income statistical discrepancy

Growth in household disposable income


The share of economic growth coming from investment will increase

15

• Corporate investments have been low throughout 2014, partly because of the uncertainty about demand growth


1.9%

2.1%

3.3%

-4%

-2%

0%

2%

4%

6%

8%

2012 2013 2014 2015 2016

household consumption (pp) gross fixed capital formation (pp) government consumption (pp)

net-exports (pp) stocks (pp) GDP growth at constant prices

Economic growth and its demand components


Funding conditions for investment remain good

16

• The good financial position of the banks and increasing deposits will support lending• Loan interest rates will remain low throughout the forecast horizon• Credit growth will accelerate, but households and companies will continue to reduce

their loan burdens


-12%

-8%

-4%

0%

4%

8%

2010 2011 2012 2013 2014 2015 2016

total loan stock housing loans corporate loans

Source: Eesti Pank

Growth in the loan stock

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013 2014 2015 2016

3-month EURIBOR housing loans corporate loans

Sources: Eesti Pank, European Central Bank

Loan interest rates

Economic growth is picking up slowly in Estonia

17Eesti Pank Economic Statement10.12.2014

• The shrinking population means that GDP will grow more slowly than GDP per capita

• The economy will reach its long-term sustainable growth rate by 2016

1.9%2.1%

3.3%

2.3% 2.4%

3.5%

0%

1%

2%

3%

4%

5%

2012 2013 2014 2015 2016

GDP growth GDP per inhabitant growth

Real economic growth in Estonia


The general government budget will remain in deficit

18

• Tax changes next year and higher pensions and child benefits will widen the budget deficit further

• Eesti Pank calculations show the budget will also be in structural deficit as spending will grow faster than the long-term potential growth of the economy


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2010 2011 2012 2013 2014 2015 2016

structural budget balance nominal budget balance

Budget position (% of GDP)


Conclusions from the Economic Forecast


The recovery in global economic activity is uncertain

• Global growth has been modest this year and growth in the euro area has been sluggish

• The outlook for growth in the euro area will be improved by an accommodative monetary policy, a reduced need for budget consolidation, lower limits on credit and a fall in the exchange rate for the euro

• There are long-term problems for growth in several important export markets for Estonia

• The poor outlook for Russia and the depreciation of the rouble affect the Estonian economy little; sanctions have not noticeably harmed the Estonian economy yet


Economic growth is picking up slowly in Estonia

• The Estonian economy has done relatively well this year, and in future growth will pick up slowly

• Consumers have not yet felt the effect of the weak economic climate

• Wages and private consumption will grow at the forecast speed if economic growth allows companies to regain profitability

• Certainty about the recovery of growth in foreign demand is important if investment activity is to increase

• The Estonian economy is in a different phase of development from ten years ago and the sustainable growth rate is 3–4%


The key issue for economic growth is new sources of growth

• The shrinking working age population will make it ever harder to find employees, and pressure on wages will not ease

• It is getting ever harder for companies with low productivity to cope

• The shortage of labour resources makes investment in increasing efficiency important

• Expansion into new markets would lead to opportunities for export growth and would support economic growth

• Deflation in the short-term will not cause any major problems for the Estonian economy


Risks to Estonian economic growth

• The Estonian economy has become more balanced and better protected against risks

• The risks from real estate prices are smaller than they were six months ago

• The risks from excessive growth in labour costs have eased a lot

• It is forecast that the economic impact of the crisis between Russia and Ukraine will diminish, assuming the conflict does not worsen

• Uncertainty about growth in the economic environment around Estonia has increased

• Overall the risks to economic growth are on the downside


The general government needs to be guided by long-term sustainability

• The funding of the Estonian state is good by international comparison

• Rapid growth in wages and private consumption has improved the state finances despite the weakness in the economic climate

• The government budget will be in deficit in 2014, and the deficit will widen further next year

• To escape from a structural budget deficit the government may need to raise taxes or restrain spending in future

• The difference in growth rates in wages in the public and private sectors will need to be reduced for wage pressures to be lowered


Key indicators for the Eesti Pank economic forecast

25


Eesti Pank Economic Statement

Economic forecast by key indicators

2013 2014 2015 2016

GDP at current prices (EUR billion) 18.74 19.52 20.44 21.64

GDP change at constant prices (%) 1.6 1.9 2.1 3.3

GDP growth per person employed (%) 0.4 2.0 2.7 4.0

CPI inflation (%) 2.8 -0.1 0.8 2.1

Unemployment rate (%) 8.6 7.7 7.9 7.7

Average gross monthly wages, change (%) 7.8 5.4 5.4 6.0

Budget balance (% of GDP) -0.5 -0.3 -0.6 -0.4

10.12.2014

Economy & Finance

Eesti Pank Economic Statement 10 December 2014