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The Estonian Economy - December 13, 2012

The Estonian Economy - December 13, 2012

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Published by Swedbank AB (publ)
The Estonian Economy - December 13, 2012: Fluctuations in manufacturing continues
The Estonian Economy - December 13, 2012: Fluctuations in manufacturing continues

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Published by: Swedbank AB (publ) on Dec 20, 2012
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The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department by Teele ReivikNo. 4 13 December 201
Economic Research Department. Swedbank AB. SE-105 34 Stockholm.Phone +46-8-58591000.E-mail: ek.sekr@swedbank.com www.swedbank.comLegally responsible publisher: Cecilia Hermansson, +46-8-58597720.Kristjan Tamla, +372888 7952. Teele Reivik, +372888 7925.
Fluctuations in manufacturing continues
 After six months of negative growth, manufacturing production surprised withover an 8% increase in September. Unfortunately, this growth could havebeen a onetime event, mainly supported by a low base and large increase inproduction volumes among the sub-sectors holding larger shares; in October,amounts started to decrease and due to global headwinds the trend couldstart becoming negative again.
Despite the overall downward trend for manufacturing and the negativeeconomic sentiments in Estonia and Sweden, Estonia’s main trading partner,output in the electronics sector has recently managed to grow extensively.
Manufacturers have started to borrow and invest again. Their investments inconstruction have grown by over 70% annually – both domestic and foreignlarge manufacturers are building new production plants.
Growth in manufacturing slowed in 2012
The Estonian manufacturing sector has had aturbulent past few years, with growth rates tumblingfrom nearly 40% at the end of 2010 during therecovery phase to -7% in July this year. Strong,double-digit growth, caused by a strong foreigndemand and a low base, remained until August2011. But growth then started a deceleration,lasting through August 2012. After six months of negative growth, themanufacturing sector surprised with over an 8%increase in production volumes in September. Thisgrowth was not broad based, as over half of thesubsectors actually experienced a decrease, but for roughly 40% of them growth was strong enough toturn the overall trend for the manufacturing sector positive. Although the ratio of declining toincreasing subsectors stayed the same in October,this strong growth could have been temporary asproduction volumes started to decrease again.Domestic sales fell during most of the second half of 2012 while export sales growth remainedpositive. The risks are on the downside since globaldevelopments point to a deeper recession in theeuro area, and Estonia’s main export markets areaffected.If in September the growth of production volumeswas fastest in electronics, the manufacture of refined petroleum products and other transportequipment, then by October only one of thesesectors, electronics, had a positive growth.
(Annual growth)
-40%-20%0%20%40%60%80%2006 2007 2008 2009 2010 2011 2012domestic sales export sales productionSource: Statistics Estonia
The manufacture of other transport equipment (e.g.trains and boats) which had multiplied its productionvolumes (over 700%) in September contractedsharply in October. Its fluctuating nature isexplained by being a very volatile subsector, whichis influenced by onetime large orders, mainly fromabroad: export sales in September grew sixfold.
The Estonian Economy 
Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 4 13 December 2012 
2 (4)
One of the contributors to this growth was likely anEstonian boat manufacturer that sold a secondcoast guard vessel of a five-unit order inSeptember.Other important export-oriented sectors, likemanufacture of food and wood products, had astrong growth in production volumes for most of thefirst half of 2012. The performance in the secondhalf has been rather volatile and although theeconomic conditions of our main export partners infood products (Latvia, Russia) are good comparedto many other euro area or our neighboringcountries, the modest growth of privateconsumption in Estonia and cooling economicconditions in the Nordics have had its negativeinfluences.
Growth in electronics- for how long?
In the first half of 2011, the manufacture of computers, electronics, and optical products wasthe fastest growing subsector, but this growthstarted to decelerate and eventually turned negativeat the end of the year, remaining so for 10 months.Somewhat surprisingly, despite pessimisticsentiments in Sweden, Estonia’s main exportpartner, production volumes in electronics grewthroughout the September (nearly 70% annually,reaching the highest level since August 2011) andOctober (30%). Although negative sentimentsindicate to continuing contraction, new exportorders in September and October managed togrow.
Production volumes
(Annual growth)
-10%0%10%20%30%40%50%2010 2011 2012-50%0%50%100%150%200%250%300%Manufacturing Electronics (rs)Source: Statistics Estonia
Despite these strong numbers, the sustainability of this recent success is becoming more and moreuncertain. The Swedish economy is performingworse than expected in the second half of 2012,struggling with contracting external demand and astill relatively strong krona. Confidence indicatorsreflect rather negative expectations for itsmanufacturing sector, and it is likely that theEstonian electronics sector, heavily dependent onsubcontracting to Swedish manufacturers, will benegatively affected by this in the near future.
Manufacturers are building
Investment activity in the manufacturing sector grewrapidly between 2010 and 2011 (nearly 280%), andthe large upturn could mainly be explained by theneed to catch up during the recovery phase after the deep recession in 2008-2009. A large part of this growth was generated through companies’ ownfunds (loan turnovers were declining whileinvestments were growing).The present year started with a sudden decrease ininvestments, but the trend turned positive again inthe second quarter. At that time, the manufacturingsector’s loan turnovers also started to grow,reaching a three-year high in the third quarter.Many enterprises that have postponed makinginvestments are likely to face the need to makethem in the near future in order to increaseproductivity and move up the value-added chain.Hence, while business cycle developments couldpostpone some of the investments due to increaseduncertainties, there are also structural reasons toinvest (i.e. catching up after the recovery and createconditions for higher productivity) which wouldcontinue to create positive investment growth.
Investments and loan turnovers in manufacturing sector 
(EUR millions)
0204060801001201401601802010 2011 2012investments new loans issuedSource: Statistics Estonia
Roughly 70% of the investments in themanufacturing sector this year have been made inmachinery and equipment; 20% in construction,
The Estonian Economy 
Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 4 13 December 2012 
3 (4)
whose share in overall investments has more thandoubled in a year.Driving these increases is the construction of newproduction plants begun by many manufacturers in2012: including one of the largest engineeringcompanies, ABB (EUR15million), a bakerycompany, the VAASAN group (EUR10million), apoultry processor, TallEgg (EUR15.6million), andan oil shale processor, VGK AS (EUR60million).Besides raising investment amounts, these newproduction plants are also improving productivityand are likely to raise employment in themanufacturing sector.
Employment at the level of year 2010
The manufacturing sector has been the largestemployer for years with ten year average of one infive people working there. After peaking at 25% in2004, this share began to fall, reaching its lowest(17%) in the first quarter of 2010 the time whenoverall unemployment was the highest in Estonia.Employment in manufacturing fell by 35% between2008 and 2010.While in many other countries it is difficult to raisethe share of employment in manufacturing after ithas started to decrease, it has not been the case inEstonia. In other countries the main reasons aremostly long-term structural changes-theimportance of manufacturing has decreased- as inEstonia it has remained relatively high.
5505705906106306506702005 2006 2007 2008 2009 2010 2011 201290100110120130140150160Total Manufacturing (rs)Source: Statistics Estonia
Together with the fast recovery of foreign demandand exports, employment in the manufacturingsector grew as well for a short period of time, but inthe third quarter of 2012 it had fallen to the samelevel as two years before. Fortunately, this declinehas not caused the overall unemployment rate toincrease again. It is likely that manufacturers prefer to hold their staff numbers as low as possible for now, until the economic climate becomes moresecure. Also, because labour productivity hasincreased and production has become moreautomated, not as many employees are needed asseven-eight years ago. Nevertheless as mentionedabove, among other factors, the building of newconstruction plants by many enterprises is likely toincrease the number of staff employed inmanufacturing in the near future.
Uncertainties remain
The movement of the confidence indicators andproduction volumes has been rather contradictory inthe past few months. In a yearly comparison, thesentiments are lower, but production volumes inmany sectors have been growing. It is likely thatprevious (large) orders were increasing theproduction volumes in September-October andnegative sentiments had not caught up with them just yet.
Manufacturing confidence indicator and productionvolumes
-30-20-1001020302006 2007 2008 2009 2010 2011 2012-40%-30%-20%-10%0%10%20%30%40%confidence, points production, annual growth (rs)Source: Statistics Estonia, ECFIN
It seems that many manufacturers are holding their breath, hoping for the best and expecting the worst:keeping employment levels lower while still makinginvestments to improve productivity. BecauseEstonia’s manufacturing sector is largely exportdependent, there is a question of how long it canward off the external threats. Even if domesticdemand grows stronger, this would not be enoughto maintain current production levels in mostsubsectors.Estonia's manufacturers’ best chance is to hopethat, if the economic situation in the Nordics keepscooling and exports start to contract, other trading

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