The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 4 • 13 December 2012
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.
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