Basis – Statistics of Estonia, Ministry of Finance, Bank of Estonia, Estonian Institute of Economic Research, Tax and Customs Board 15.01.2017

 

Based on renewed data, the annual economic growth in Estonia in Q3 was 1.3% and in a quarterly comparison 0,2%. The growth was supported mainly by the added value in transport, trade and energy. The major hinders to economic growth were agriculture, forestry and fishing, construction and real estate activities. While real estate activities increased in current prices, the added value of this activity decreased in permanent prices due to a price increase. According to the Bank of Estonia, the added stimulation of economy with loan money could entail a larger pressure on salaries and a decrease in company investments. The investments that have decreased in three following years have decreased the growth potential of the following years. Both companies’ barometer surveys and forecasts indicate however a further growth in economic activity.

 

In Q3, current account surplus in Estonia was 289 million euros or 5.5% of GDP (3.3% in Q3 2015), reaching thus a record. Increase in surplus was ensured by the growth in the surplus of goods and services as well as a decrease in the net outflow of investment income. Based on the quick assessment of the Bank of Estonia, the current account of the balance of payments was positive by 76 million euros in November. Export of goods increased faster than import (export 8%, import 6%). The export increased the most to Finland and Germany, but decreased the most to the Netherlands and Latvia. Services export increased by 8% due to an increase in travel services and other services’ export, although the export of transport services is still experiencing a downturn. The sum of the current and capital account in November was 96 million euros, meaning that economic sectors invested more resources abroad than receiving from there. Export prices increased by 3% and import prices by 1% in November 2016.

 

Salary income and consumption that increased significantly in 2016 have benefited the income of tax profit; Estonian state budget incomes depend largely on workforce taxes. Income has been improved also by higher excise duty rate on alcohol, tobacco products and fuel. Increased tax income has been improved also by more efficient activities of the Tax and Customs Board, above all in relation to VAT and salary expenses. In 2016, the Tax and Customs Board collected taxes at the total of 6.26 billion euros or 100.1% of the amount planned in the state budget; compared to 2015, 5.5% more taxes were collected. The larger incomes than planned to the budget depend on an increase in average salary. In December, tax incomes amounted to 534.8 million euros, which was by 9.6% more than in the same month a year before.

 

Loan interest rates did not practically change in November – the average interest rates of new residential loans were at 2.3%. The interest rate that increased during some point has decreased in the recent years to the level of 2016. The development of interest rates has been shaped the most by the fact that the share of banks that offer residential loans is much larger than before. The volume of loans that have not been paid by deadline has remained small; at the end of November, the volume of loans that exceeded the payment deadline of more than 60 days amounted to 180 million euros, forming 1.2% of the loan portfolio.

 

The average interest rate of companies’ new long-term loans has been changing due to the fact that the risks of loan projects differ from month to month in case of companies when compared to households. The average interest rate of long-term loans issued to companies in November was 2.5%, which had increased by about 0.4% a month, differently from residential loans.

 

In the September session, ECB Governing Council decided to retain the interest rate of deposit facility at -0.40%, thus the environment of negative interest rates will remain. The council assumes that the base interest rates of ECB remain on the similar level during a longer time. The council confirms that monthly property purchases will be continued until the end of March 2017 or until the development of inflation has constantly adjusted to the inflation goal.

 

Companies’ loan and leasing portfolio has grown fast also in November, by 9.1% in an annual comparison. The lending capacity of majority of sectors has increased, while the leasing capacity of real estate companies has grown the fastest. In the first three quarters of 2016, companies’ lending from abroad decreased and the total debt did not change considerably. Loan and leasing portfolio of companies and households increased by a total of 7.4% in November in an annual comparison.

 

The deposits of companies and households in fast also in November – in an annual comparison by 8.6%. Companies’ deposits increased in a year by 9.7% and household deposits somewhat slower, 7.6%. In a month, the total volume of deposits increased by 149 million, to 11.5 billion euros.

 

Households’ loan growth has increased since Q2 2016. The annual growth of the household loan portfolio increased in November to 5%. New residential loans were issued at the value of 93 million euros, which is in the same volume as in the last couple of months, but by about 15% more than the same time a year ago. In November, the average value and number of contracts increased. The growth in the average value of contracts shows that the share of transactions with new apartments has increased.

 

The growth in other loans in households remained fast similarly to previous months mainly due to car leasing, the total volume of which increased by 16% in November. Of Estonian families, 41% has applied for a loan, that is, as much as two years ago and half of the loan obligations are related to real estate. During this year, loan is planned to be taken by about fifth of the families and the majority of them already have some type of a loan obligation.

 

According to Statistics Estonia, employment grew to 7.5% in Q3 2016, since the activity on the labour market increased while employment decreased. The number of the employed decreased by 1.2% in an annual comparison and mainly in the public sector. Most workplaces have been created since 2010 in the service sector, while in the industrial sector, employment has been smaller than before the crisis. A decrease in employment means that the growth of workforce costs that has exceeded economic growth should start to slow down.

 

In autumn 2016, the period of declining prices that lasted for more than two years ended and has caused quicker inflation. Despite fast growing labour force costs and the demand, growth in price level has been rather slow. The annual growth of prices increased in December according to Statistics of Estonia from 1.0% to 2.2%. Inflation of the harmonised consumption prices in the euro area reached at the same time 1.1%, which is still lower than the 2% goal of the European Central Bank. Due to the decline in prices in the first half of 2016 annual average inflation remained close to zero (0.1%). December price increase was marked by annual seasonal factors: fruits and vegetables becoming more expensive, discount for clothes and footwear, and also by about 30% more expensive plane tickets. Future price development depends mainly on the Estonian tax policy and the development of oil price on the global market, thus the increase in prices in 2017 will be quicker in Estonia than on the euro area on the average. For 2017, the Bank of Estonia estimates the consumer price index to be 2.8 %.

 

According to the Statistics of Estonia, the growth in the average gross wages slowed down in Q3 2016 from the first half year’s 7.8% to 7.1% in annual terms. The average salary in Q3 was 1,119 euros, which is by about 45 euros less than in Q2, considering seasonal factors. When considering seasonal factors, the average salary increased in Q3 from Q2, but in a slowing rhythm. The median wage payment in Q3 was 785 euros, which increased quicker compared to the average both in governmental institutions and business registers – in an annual comparison by 6.7%. Thus, the average salary is moving closer to median salary. According to government estimates, a wage growth by 5.5% to 1,200 euros a month is expected in 2017.

 

The average salary level that has increased by time is not an objective indicator in evening of the income level, since it has partially deduced from the re-division of company and salary income. A faster increase in salary at the time of slow economic growth is explained by better developments in areas of activity that require more labour force. The majority of areas that have inhibited economic growth require much capital, which shapes the situation on the labour market less. Thereby, the development of areas that require more labour force has been faster and the demand for additional workforce has entailed a shift in salary growth from the economic growth. The growth in average gross wages started to slow down in 2016 and adjustment will continue on the labour market in the following years. In the condition of faster inflation, the growth in real wages in 2017 will be below the growth in the last years, which could decrease the confidence of consumers.

 

Quarterly macro environment indicators

Indicator of 2015/2016	Value	Change compared to previous quarter (%)	Change compared to previous year (%)
Retail trade capacity index (III Q, 2010=100, %)		-0,3	4,3
Consumer price index (IV Q, %)		0,0	1,3
Construction price index (III Q, %)		0,7	-0,7
Average price of apartment square metre (III Q, €)	1 086,3	2,3	8,2
Registered unemployed (III Q)	27 720,3	4,4	-2,0
Average gross wages (III Q, €)	1 119,0	-3,8	7,1
Export (III Q, mln €)	3 022,0	-0,3	6,8
Import (III Q, mln €)	3 330,6	-4,5	1,9

Source: Bank of Estonia

 

Bank of Estonia established since March 2015 three requirements on issuing residential loans to commercial banks, which reduce the risk of the loan boom; in April, the bank announced readiness to strengthen the requirements. Of the currently valid requirements the first is that the loan amount can be up to 85% of the loan guarantee value, i.e. the value of the purchased dwelling. If surety is provided to the loan by KredEx, loans can be granted up to 90% of the guarantee value. As the other requirement, all monthly loan and leasing payments of the loan applier have to form a total of up to 50% of their net income. Net income denotes regular income that comes to the loan applier’s bank account. The third requirement limits the maximum length of residential loan to 30 years.

 

In March 2016, changes in Creditors and Credit Intermediaries Act and Law of Obligations Act started to apply, concerning appraisal of property given as a loan security. Thus banks that issue residential loans can require from the purchasers of new apartments an expert appraisal of the purchased property instead of a price offer. This change makes bureaucracy related to a new apartment purchase more expensive and it can thus increase the required own financing. Partial price increase can be regionally expected also due to the regulation that will start to apply as an addition to the Creditors and Credit Intermediaries Act as of March 2017, which encompasses the requirements on the specific knowledge, skills and experiences of the credit provider or the managers and employees of the credit provider. The regulation entails above all the requirements set for real estate appraisers, which adds some additional criteria for compilation of the current expert assessment.

 

Based on the major economic events in 2016, it is forecasted that both Brexit and possible difficulties in European banking will entail in the near future increased conservativeness in managing bank risks and in policy as a whole. According to the forecast of the Ministry of Finance, Estonian economy will grow in 2016 by 1.3% and in 2017 by 2.5%. In 2019–2020 Estonian economy should grow by the average of 2.7% a year, supported on the one side by increased export growth and a rather strong increase in domestic demand. According to the forecast of the Bank of Estonia, Estonian economy is expected to grow by 2.6% in 2017. Estonian Institute of Economic Research forecasts a growth by 2.3% in 2017.

 

The loan portfolio of Estonian companies has grown stable in the near past, but main part of the loans goes for financing of business premises – direct capital investments have not been made; thus major gain from investments has not been added. The growth potential of economy would need a boost, i.e. companies’ competitive power and production capacity. GDP growth in the coming years deduces from the recovery of investments and export growth. Recovery of growth could take place if the sales prices of companies increase and the decrease of production would not deepen.

 

Estonian residents’ incomes and purchasing power has increased very fast in the last years; increase in household consumption has preceded economic growth in many years. The fast growing purchasing power will however start to slow down due to faster inflation. This is due to end of cheaper energy and tax increases. In terms of household investments, slowing down of growth is expected; thus, in the near future, the number of real estate transactions should not grow.

 

Increase in loans can increase bank risks that are above all related to the real estate market. Due to income increase and low interest rates there is a danger that real estate prices, residential loans and real estate companies’ loans start to increase faster. This increases the vulnerability of risks related to real estate. The Bank of Estonia is ready to make the requirements of residential loans stricter in order to prevent the risk of too fast growth in residential loans, should the risk on loan or real estate market increase.