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The Estonian Economy - March 12, 2013

The Estonian Economy - March 12, 2013

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Published by Swedbank AB (publ)
The Estonian Economy - March 12, 2013: Price competitiveness of exported goods is at risk on foreign markets
The Estonian Economy - March 12, 2013: Price competitiveness of exported goods is at risk on foreign markets

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Published by: Swedbank AB (publ) on Mar 14, 2013
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The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department by Tõnu Mertsina, Teele ReivikNo. 112 March2013
Economic Research Department. Swedbank AB. SE-105 34 Stockholm.Phone +46-8-58591000.E-mail: ek.sekr@swedbank.com www.swedbank.comLegally responsible publisher: Magnus Alvesson, +46-8-58593341.Tõnu Mertsina, +372888 7589. Teele Reivik, +372888 7925.
Price competitiveness of exported goods is at risk onforeign markets
Although economic growth in Estonia has depended significantly on foreigntrade, the contribution of exports to GDP growth has fluctuated. However, asexport growth fell already at the end of 2011, the contribution of domesticdemand to GDP growth started to dominate.
Since last September, exports of manufacturing output have risen,contributing to growth mainly through the acceleration of exports of computers and electronic products. Seventy-one percent of manufacturingsales are exported. The share of intermediate goods in exports is decreasing,while that of capital goods is growing. We expect a more broad-basedimprovement in exports in the second half of 2013.
Unit labour costs are, however, picking up, as a result of both growth inlabour costs and a deceleration in labour productivity. According topreliminary estimates, the growth of unit labour costs against our maintrading partners is not expected to slow in 2013, owing to the worsening pricecompetitiveness. Still, a weakening euro exchange rate against SEK, RUBand USD will have a positive influence on our export prices and costcompetitiveness.
Contribution of exports to GDP growth hasfluctuated
Estonian economic growth depends significantly onforeign trade. The share of total exports and importsin GDP has risen already to above 90% in 2012, butthe contribution of exports to GDP growth hasfluctuated in the past years. Exports, especially of goods, were the main driver of economic growthafter the recession in 2010-2011. However, asexport growth diminished at the end of 2011 due tothe fall in foreign demand, the contribution of domestic demand to GDP growth started todominate.Domestic demand was boosted mainly bygovernment investments, while corporateinvestment activity has been moderate. Investmentswere mainly driven by externally financedinfrastructure projects (EU transfers and CO
quotasales revenues). This is expected to moderate over the coming years. In conjunction with the decreasein domestic demand and weak foreign demand - atleast in the first part of 2013 - economic growth willdampen.
Nominal value of export, import and GDP
(EUR million)
-10000100020003000400050002006 2007 2008 2009 2010 2011 2012GDP Trade balanceExp. of goods and services Imp. of goods and servicesSource: SE
The Estonian Economy 
Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 12 March 2013
2 (5)
Contributions to GDP growth, pp
-30-25-20-15-10-5051015202007 2008 2009 2010 2011 2012Net exports GDP Domestic demandSource: SE
Russia is growing increasingly importantas an export partner 
Nominal growth of Estonia’s exports of goodsdecelerated from 37% in 2011 to 4% in 2012.Besides weakened foreign demand, the growth ratealso decelerated due to the high base in 2011 whenthe economy was still recovering from the crisis.Estonia’s largest export partners have been mainlyits neighboring countries. For the first time in years,the share of the euro area in exports of goods fellbelow 30%. The decrease was strongly influencedby Finland (which accounts for over half of Estonia's export to the euro area), whose share fellfrom 26% in 2005 to 15% in 2012. However, thevalue of export to Finland has not fallen.
Shares of main export partners (export of goods)
40,430,531,2 31,534,231,030,028,423,228,925,1 23,925,526,124,624,913,112,313,313,812,615,615,615,96,57,88,810,49,39,710,912,09,19,111,510,09,58,98,08,83,16,6 4,2 4,84,2 3,86,2 4,74,64,95,95,74,85,04,65,40%20%40%60%80%100%2005 2006 2007 2008 2009 2010 2011 2012LithuaniaUSALatviaRussiaSwedenOthersEuro areaSource: SE
Economic conditions in some of Estonia's mainexport partners, Sweden and Finland, worsened inthe second half of 2012; in Finland, somewhatearlier. Fortunately, this was partially compensatedby strong exports to the other Baltic countries andRussia. The largest contributor to overall exportgrowth was Russia, at 2 percentage points (pp),and Latvia, Lithuania, and Sweden, all at 1 pp.Whereas in 2011, the euro area contributed 10 ppand the US 5 pp to overall growth, in 2012 their contributions were negative (-0.4 and -1.4 pp,respectively).Russia has become more important to Estonia for exports, increasing its share from 6% to 12% ineight years and growing by over 400%.Althoughthese numbers are impressive, the estimated re-exports are over 40%
of the total exports toRussia. Last year, exports showed strong growth inthe first three quarters, growing annually by around20% in each, but in the last quarter growthdecelerated to nearly 0%. This fall could partially beexplained by the high base in 2011, but also by theslowdown in growth seen in Russia.The main export articles to Russia in 2012 weremachinery and mechanical equipment, with nearly a40% share of total exports. This sector has shownmassive growth during the past five years (over 350%) and continued its upward trend in mostmonths of 2012.Other large export articles -chemical products and food products andbeverages (both alcoholic and nonalcoholic) - alsogrew in volume. In 2012, Russia joined the WTO,which means lower customs tariffs and adopting thesame regulations as other members. This shouldboost exports to Russia even more.Exports to Sweden, despite the slowdown andnegative sentiments in the second half of the year,grew by nearly 7% in 2012. Over half of the exportswere electrical equipment, followed by wood andwood products and mineral products (mostly fuel).In January, the Swedish purchasing managers’index (PMI) rose notably (by 4.6 points to 49.2),indicating that the Swedish manufacturing sector isshowing the first signs of stabilisation. This shouldbe positive news for all Estonian subcontractorswho depend directly on how the Swedishmanufacturing sector is doing.Exports to Latvia grew by nearly 15% in nominalterms in 2012 and crossed the EUR 1 billion line.Growth was rather strong in the first quarter (30%year on year (yoy)), but decelerated at the end of the year (10% yoy). The largest export articles lastyear were vehicles and vehicle parts/accessories,and machinery and mechanical equipment (both14% of total exports), followed by metals and metalproducts (10%) and food products (8%). 
Estimationby Statistics Estonia
The Estonian Economy 
Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 12 March 2013
3 (5)
More than 70% of the manufacturing outputis exported
Manufacturing is the dominant industry contributingto the growth in exports of goods in Estonia. Lastyear, the share of exports in manufacturing saleswas 71%, with several activities' shares evensurpassing 90%. The largest contribution camefrom exports of computer and electronicsproduction, of which almost all (99%) was exportedin 2012. The large share of motor vehicles is madeup of the production and export of accessories for motor vehicles. The activity of other manufacturingcontains different categories, above all musical andsport equipment. The production of pharmaceuticalproducts for export in Estonia is centred mainly inproduct packaging. Since September 2012, exportsof manufacturing output have started to grow, withthe strongest contribution by far from theacceleration of exports of computers and electronicproducts. These were followed by exports of refinedpetroleum products (the growth of which has beenvolatile) and other transport equipment (mainly shipbuilding).
Share of export in manufacturing sales, %
New orders in manufacturing have been relativelysluggish, with growth averaging 9% in the lastquarter of 2012 but decelerating towards the end of the year. Most orders have been for computer,electronic, and optical products. Although its growthhas been relatively uneven, manufacturing of other transport equipment (mainly ship building) hasrecorded a strong growth of new orders for export.In the last quarter of 2012, the majority of exports,around 55%, were intermediate goods, confirmingthat many export-oriented manufacturers are highlydependent on subcontracting from larger foreignproducers. The importance of capital goods inoverall exports continued to grow throughout 2012,crossing the 20% threshold in the second quarter.Over the last five years, it is apparent that the shareof intermediate goods in exports is decreasing whilethat of capital goods is increasing. The latter couldbe seen as a positive sign, as producing andexporting capital goods usually create more valueadded and, therefore, are more profitable for manufacturers.
Share of capital and intermediate goods in export, %
05101520252004 2005 2006 2007 2008 2009 2010 2011 20125052545658606264Capital goods Intermediate goods (rs)Source: SE
Increasing unit labour costs threaten costcompetitiveness
Growing labour costs, beginning in 2011, and aslowdown in labour productivity growth, led toincreasing manufacturing unit labour costs (ULCs)in 2012.Despite the pick up in productivity in thethird quarter of last year, the average growth of ULC remains relatively high. The ULC of the totaleconomy has been rising since the beginning of 2010, and the growth rate has even graduallyaccelerated since the end of 2011. The increase inULC reduces the profit margin of corporations andputs upward pressure on prices to compensate for the shrinking of margins. Theseput pressure on thecompetitiveness of Estonian products in foreignmarkets, especially when ULC grow faster than inthe main trading partners.In comparison with Estonia's main trading partners -Finland, Sweden, Latvia and Lithuania, whichconstituted approximately 45% of Estonia's exports
201020112012Manufacturing, average677171
Computer, electronic and optical products979999Motor vehicles and trailers 939494Other manufacturing869191Textiles879089Pharmaceutical products 808689Other transport equipment898889Chemicals and chemical products848888Basic metals858887Paper and paper products848685Machineryand equipment 817979Furniture787776Leather and related products808076Electrical equipment706971Wearing apparel707170Coke and refined petroleum products476770Wood and of products of wood 676868Rubber and plastic products646464Fabricated metal products636161Printing and reproduction 485051Other non-metallic mineral products514542Repair & installation of machinery/equipment483942Food products353434Beverages202225
Source: SE

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