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Swedbank Analysis

Income distribution in Estonia- did the crisis change anything?
 By 2010, the largest negative changes in age category had taken place for the young (15-24) and middle-aged (45-54), as the incomes of many in these cohorts had fallen, mostly as a result of job losses and wage cuts. Meanwhile, the situation improved somewhat for the elderly (65+), mainly because of the grown old-age pensions. Notable changes for the worse occurred in the nationality category of non-Estonians, where the share of people earning lower incomes increased. One of the main reasons behind this was that a considerable amount of non-Estonians had insufficient language skills which weakened their position on the labour market even further at the time the situation was already difficult. The other main reason was regional, as many non-Estonians are living in the northeast and north- two regions where unemployment was the highest during the crisis. The lack of major changes in income distribution for people with tertiary education confirms the argument that education may offer some protection against losses in income. This is especially so, considering that the number of people earning higher incomes decreased for those with lower education.

October 29, 2012

There has been much discussion recently about the average wage, and whether it really reflects how most of the people in Estonia are managing financially. The average wage has now exceeded the precrisis level, but the fact is that many people are receiving vastly less than statistics show, and many who lost their jobs during the crisis are still unemployed and, therefore, earning no wages. According to the income inequality measure, the Gini coefficient1, inequality declined slightly from 0.34 in 2005 to 0.31 in 2010, placing Estonia close to the euro area average. However, to get a more detailed overview, it is bet1

The Gini coefficient decreased from 0.34 to 0.31 in five years

The Gini coefficient measures the inequality of income distribution, with a value of 0 expressing perfect equality and a value of 1 absolute inequality.
Economic Research Department. Swedbank AB (publ). 105 34 Stockholm. tfn 08-5859 1028. E-post: ek.sekr@swedbank.com Internet: www.swedbank.com Legally responsible publishers: Cecilia Hermansson. +46- 8-5859 1588. Elina Allikalt +372 888 1989. Teele Reivik +372 888 7925

ter to observe if and by how much the income distribution changed to see whether the crisis was responsible for pushing more people into poverty. Income explains people's financial situation better than wages because, besides wages, income comprises many other cash inflows- e.g., social transfers, regular financial support from family members, etc. However, it does not include assets and accumulated wealth. In this analysis, we compare income distributions from the years 2005 and 20103 by age, labour status, gender, education, region, and nationality. Income distribution is represented by income quintiles, where the lowest quintile (the first quintile) contains people who are receiving the lowest incomes and the highest quintile (the fifth) the top earners. The year 2005 was chosen for this comparison because it represents a more or less normal situation for the Estonian economy, as the data for the following years was strongly influenced by the real estate and loan boom. The year 2010 was the first year of recovery after the crisis, when the situation was on its way to improvement. However, for many people, incomes were negatively influenced, as numerous enterprises went bankrupt and the labour market hit bottom in the first quarter of 2010. This meant job losses and wage cuts- two main reasons for “falling” into lower quintiles.
Upper limits of equalised yearly disposable income quintiles, EUR
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 ,0 1st quintile Source:ES 2nd quintile 3rd quintile 4th quintile 2,260 3,526 3,132 4,824 4,240 6,519 5,918 2005 2010 9,073

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The young and the middle aged take the hardest hits There were some notable changes in income distribution between the years 2005 and 2010 amongst young people (15-24). The amount earning the highest incomes dropped by nearly 4 percentage points (pp) and grew by 5 pp in the lowest quintile, meaning that many lost in their income. The reason for these changes for the young people in the workforce were the soaring unemployment rates and severe difficulties in finding (new) jobs because of the fierce competition in the labour market with already experienced and educated people. Many nonactive ones (e.g., full-time students), who depended financially on their family, suffered decreases in their incomes if their family’s finan2

A sum of income from wage labour, benefits and losses from selfemployment, property income, social transfers, regular inter-household cash transfers received, and receipts for tax adjustment, of which inter-household cash transfers paid, taxes on wealth, and repayments for tax adjustment have been subtracted. 3 The last available data is for 2010, as of September 2012.

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Swedbank Analysis • October 29, 2012

cial situation worsened. While in 2005 the at-risk-of poverty rate was 18% in this age group, by 2010 it had increased to 22%.
Unemployment rate by age
35% 30% 25% 20% 15-24 15% 10% 5% 0% Source:ES 2005 2010 25-64

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The most uneven income distributions appeared in two age groups: 25-34 and 65+. In 2005, 35% of 25-34-year-olds had incomes at the level of the highest quintile, and every other person earned an aboveaverage income, making this the most successful age group, incomewise. In 2010, the previous claim was still valid, despite a decline in the highest quintile and a growth in the lower quintiles. People in the age group 65+ were in the worst position in 2005, as almost 70% had below-average incomes, and only 6% earned the highest incomes. This is because most people in that age group no longer work (full-time) and have to “survive” on pensions, savings, support from family members, etc. By 2010, the share in the lowest quintile had decreased by over 10 pp and increased in the middle quintiles. This improvement probably occurred because, while a large share of working-age people experienced losses in their income, the average old-age pension actually grew about 85%, moving pensioners into the upper quintiles. This is also one of the main reasons why the at-risk-of-poverty rate for the elderly fell from 25% to 13% in five years. In other age groups, including people aged 35-64, the income distribution has been more even between the quintiles than in the groups discussed above. By 2010, the most notable change was in the 45-54 age group, where the number of people earning the lowest incomes grew by over 5 pp and declined by 6.5 pp in the higher quintiles. There could have been several reasons for this change. For example, some employers may have ageist attitudes (amongst other things, believing that the education and/or skills of those in this group have devalued), making it difficult for them to find new jobs; on the employees’ side, there may be less willingness to retrain and move for career.

Middle aged faced the largest negative changes incomewise

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The at-risk-of-poverty rate indicates the share of persons with equalised disposable income lower than the at-risk-of-poverty threshold.

Swedbank Analysis • October 29, 2012

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Distribution of income by age groups
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0-15 1624 Source:ES 2534 3544 2005 4554 55- 65+ 0-15 1664 24 2534 3544 2010 4554 55- 65+ 64 4th quintile 3rd quintile 2nd quintile 1st quintile 5th quintile

Situation for pensioners improves compared with others For many adults, wages usually form a great part (if not all) of income; therefore, having a job is crucial for most people to maintain a decent living standard. An unemployed person’s income comes from different unemployment benefits, financial support from family, temporary (often unofficial) jobs, family and child benefits, and subsistence benefits. The problem is, these benefits tend to be rather small in Estonia, making the financial situation difficult for most of the unemployed. In 2005, over half of unemployed people had the lowest incomes, and the proportions had not changed much by 2010. Another group of people for which a large part must manage with below-average incomes are pensioners: in 2005, over 70% of pensioners earned lower incomes, while fewer than 5% were amongst the top earners. By 2010, the distribution had changed in the lower quintilesthe share in the first quintile decreased by 10 pp and increased in the second and third quintiles (by 4 pp and 7 pp, respectively). The reasons for these developments were discussed above, as the categories “pensioners” and “age group 65+” mostly overlap. Amongst employed people, there were no major or unexpected changes from 2005 to 2010. The share among top earners fractionally decreased while increasing in the fourth and bottom quintiles. Income distribution amongst nonactive people (excluding pensioners) also mostly remained unchanged. As most of the nonactive people are students, homemakers, or disabled, their incomes usually depend on financial support from their families, as well as child or other benefits, and, for students, student loans. Income dependence might be one of the reasons why the distributions did not change that much in five years.

In 2005, over 70% of pensioners earned lower incomes; by 2010 situation had improved somewhat

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Swedbank Analysis • October 29, 2012

Distribution of income by labour status
non-activ e pensioner 1st quintile unemploy ed employ ed non-activ e pensioner unemploy ed employ ed Source:ES 0% 20% 40% 60% 80% 100% 2nd quintile 3rd quintile 4th quintile 5th quintile

Fractional changes in income distribution in favour of women In Estonia, as on average across developed economies, men’s incomes tend to be higher than women’s. These inequalities arise from several factors:  Horizontal segregation- women work more in sectors with lower average wages-e.g., health and social services, and education.    Women do more part-time work than men, often for personal reasons, such as taking care of family members. Most women experience nonactive periods in their lives, e.g., maternity leave. Differences in personalities- men are often more ambitious and demanding when it comes to their career and wages than women. Recent studies also confirmed that women’s wage expectancies are 30% lower on average5 than men’s. The “glass-ceiling” phenomenon- the barrier that keeps women from being promoted despite their achievements or qualifications.

2005

2010

Women’s wage expectancies are 30% lower on average than men’s

In 2005, nearly 43% of women and 37% of men had below-average (first and second quintiles) income, while, amongst top earners, the shares were the opposite: 43% of men and 38% of women were earning above-average incomes. By 2010, there had been some fractional changes: according to the data, the number of men earning the lowest incomes had increased, and the highest-income earners had decreased very slightly. For women, the movements were the opposite: more women were now earning the highest incomes, and the number of women who earned the lowest incomes had decreased, also very slightly. Although these changes are very small they might be explained by developments in the job market during the crisis. The number of people employed in the construction and manufacturing sector (where most of the workers are men) dropped over the five years, leaving many people unemployed or- in case of a “better” scenariowith decreased wages. In fact, the enterprise death rate6 grew the most in the construction sector over the five years. On the contrary, in
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J.Meriküll, P. Mõtsmees „Palgalõhe meeste ja naiste palgaootuses” University of Tartu. 6 The share of dead enterprises in the number of active enterprises.

Swedbank Analysis • October 29, 2012

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education and wholesale and retail trade (where many of the employees are women), the number of employed persons grew notably. Also, many women who had previously preferred to be homemakers had to start working to support their families. This explains the growth in the labour participation rate and unemployment rate amongst women (many previously inactive women registered themselves as unemployed to receive unemployment benefits and find jobs).
Labour force participation rate
73% 72% 71% 62% 70% 61% 69% 68% 67% 2005 Source:ES 2006 2007 2008 2009 2010 60% men women (rs) 64%

63%

59%

Distribution of income by gender

2010

men 1st quintile

2005

men

2nd quintile 3rd quintile

2010

women

4th quintile 5th quintile

2005

women

Source:ES

0%

20%

40%

60%

80%

100%

Educational “protection” against losses in income Differences in people's education levels are one of the main reasons why income distribution is far from equal. Better education usually gives a greater opportunity of earning higher income: on average across OECD countries, a person with a tertiary education can expect to earn over 50% more than a person with an upper-secondary education. Although this premium is much lower in Estonia (37%),7 it is still a considerable difference. Sometimes, it is a matter of choice whether people use the advantage of higher education- some prefer to work part-time or at lower positions than their education would allow; sometimes there is an education-job mismatch. Some jobs do not pay very well despite requiring a good education, e.g., teachers and nurses. Of

On average, a person with tertiary education can expect to earn over 37% more than a person with lower education

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As of year 2009. “Education at a Glance 2011: Country note- Estonia”, OECD 2011.

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Swedbank Analysis • October 29, 2012

course, education alone does not automatically guarantee a high income, but it does give a better starting point. In 2005, nearly 60% of people with less than upper-secondary education earned lower incomes, and only 8% were amongst the top earners; the corresponding numbers were 12% and 35% for people with tertiary education. The income distribution amongst people with uppersecondary education is more even across the quintiles, but there is also a slight trend to be noticed- most people are earning incomes that place them in the middle quintiles, while fewer people are amongst the top or low earners. By 2010, the number of people with less than upper-secondary education amongst the top earners had decreased by 2 pp, while the share of people with tertiary education in that quintile stayed the same. The largest changes took place in the upper-secondary group, where the number of people earning higher incomes fell by over 5 pp. The lack of major changes in the tertiary group underscores the above-mentioned fact that education tends to play an important part in determining income, especially in (after) crisis period. When unemployment is high and employers have a wide range of applicants to choose from, they usually prefer individuals with relevant and better education; this is why the incomes of people with higher education are more “protected” during the hard times. This argument is also supported by a recent study,8 which found that the unemployed with tertiary education had in the pre-crisis period a 50% higher chance of exiting unemployment than those with only primary education. During the crisis, the importance of higher education in exiting unemployment increased, such that those with tertiary education had a 67% higher chance.
Distribution of income by education
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% below upper upper secondary secondary lev el lev el Source:ES 2005 tertiary below upper upper secondary secondary lev el lev el 2010 tertiary 5th quintile 4th quintile 3rd quintile 2nd quintile 1st quintile

In 2005, only 8% of people with less than uppersecondary education were amongst top earners; by 2010 it had declined to 6%

During the crises, a person with tertiary education had a 67% higher chance of exiting unemployment

Large differences remain between the north and the rest of Estonia Throughout the years, income distribution by region has been rather unequal in favour of northern Estonia and Tallinn. The main reason is that a great share of large and medium-sized enterprises are gathered in and around the capital,9 owing to the wider selection of employees, and better infrastructure and cooperation possibilities.
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J. Meriküll „Labour market mobility during a recession: the case of Estonia” Working Papers of Bank of Estonia No1/2011. 9 In 2005 nearly 60% of Estonia’s GDP was generated in the north. There are no data available for 2010 yet.

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In 2005, every third person in northern Estonia earned the highest income; in the northeast, meanwhile, the indicator was every sixteenth person, and every other had to manage with below-average income. The large differences arise from the fact that roughly 80% of people living in the northeast are non-Estonians, whose incomes are largely and mainly negatively affected by their situation in the labour market, which will be discussed later. No major or unexpected changes had occurred in the north between 2005 and 2010: the share in the upper quintiles decreased by a few percentage points but grew in the middle quintiles. In the northeast, the share in the lowest quintile grew by 2 pp, but, surprisingly, so did the share in the upper quintiles (the fourth quintile grew by 5 pp). This increase might be explained by wage developments in the energy sector. Much of the Estonian energy sector operates in the northeast, and the wages in this sector rose decently during the five years, growing by over 70%.10 So, despite the highest unemployment rate (which reflects the increase in the bottom quintile), the wage improvements in the energy sector increased the number of people with higher incomes. In central and southern Estonia, where most people earn average or below-average incomes, the changes in income distributions were small, but negative- a decrease in the highest quintile, an increase in the lowest. Although western Estonia, like all the regions except the north, follows the above-mentioned trend- most people earn average or belowaverage incomes- there were actually some improvements compared with the other regions. The number of people in western Estonia earning the lowest incomes decreased by almost 7 pp, while more people were now earning average and higher incomes. One of the reasons for this improvement might be western Estonia's unemployment rate; it was the lowest in Estonia in 2010, which might have helped the overall income level in that region not to decrease too much. Comparing the urban and rural areas, it appears that between 2005 and 2010 the differences in income distribution started to decrease. In 2005, 43% of people living in urban areas and 33% living in rural areas were earning above-average incomes; by 2010, this had changed to 42% in urban and 36% in rural areas. One of the main reasons for this change is the growing trend of people moving out of urban areas while still working in the city and, therefore, retaining their higher incomes; there is also the growing popularity of and opportunity for working from home.

In 2005, every other person living in the northeast had to manage with belowaverage income

Differences in income distribution between rural and urban areas have decreased

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Average gross wages grew over 70%, according to the data of Statistics Estonia.

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Swedbank Analysis • October 29, 2012

Labour market indicators
Region North Central Northeast West South Source: ES
Distribution of income by region
100% 80% 60% 40% 20% 0% V quintile IV quintile III quintile II quintile I quintile

Unemployment % 2005 7.50% 5.10% 16.20% 5.70% 6.30% 2010 16.20% 15.70% 25.80% 14.50% 15.10%

Employment% 2005 64.28% 57.53% 50.88% 54.48% 53.50% 2010 60.78% 53.78% 46.18% 53.13% 52.50%

Monthly wage(EUR) 2005 594.8 422.6 387.1 431.8 418.8 2010 886.2 623.2 660.2 656.3 645.7

%change 48.99% 47.47% 70.55% 51.99% 54.18%

North

South

Central

Central

North-East

Source:ES

2005

2010

Non-Estonians suffered more financially In 2005, the income of Estonians was distributed more evenly amongst the quintiles than the income of non-Estonians. For Estonians, each quintile contained around 20% of the people and the largest share was the highest quintile (22%); meanwhile, for non-Estonians, only 15% were earning the highest incomes, and the largest share was in the third quintile (24%). Most of the non-Estonians earned average or below-average incomes, and most Estonians average or above-average incomes. By 2010, matters had gotten worse for non-Estonians: every other person earned a lower income, and only 11.5% were in the highest quintile. There were two main reasons for this deterioration. First, a large number of non-Estonians live in the north or northeast: the two regions with the highest unemployment rates in Estonia during the recession. The second reason is the language barrier. There are a significant number of non-Estonians whose language skills are insufficient for higher-paying jobs. Therefore, they are unemployed or must accept jobs that do not involve communicating in Estonian. These kinds of positions are not easy to find, and most of the time they do not pay very well as employers prefer workers who are able to communicate in the official language. Even before the crisis, many nonEstonians were in a difficult position, with twice as high an unemployment rate (13%), and the recession worsened the situation even further (23%). Recent studies showed that, during the crisis, Estonians had a 78% higher chance of exiting unemployment than non-

North-East

North

South

West

West

In 2010, only 11.5% of non-Estonians were earning the highest income

For many nonEstonians, difficult situation in the labour market is caused by insufficient language skills

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Estonians. Even when the recovery started and companies began to hire again, there was a labour supply surplus, which made the situation worse for unemployed non-Estonians with insufficient language skills.
Unemployment rates
25%

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20%

15% Estonians 10% Non-Estonians

5%

0% 2005 Source:ES 2006 2007 2008 2009 2010

Distribution of income by nationality

NonEstonians

2010

1st quintile Estonians 2nd quintile 3rd quintile NonEstonians 4th quintile 5th quintile

2005
Estonians

Source:ES

0%

20%

40%

60%

80%

100%

Concluding remarks Shifts into the lower, especially bottom quintiles, are a cause for concern. Even though these shifts are, after the crisis, somewhat understandable, they should not become a trend, as this would mean that more people had suffered losses in their incomes and might be in danger of falling, or had already fallen, into poverty. This can be a foundation to several serious problems, which would likely cause even a further decrease in earnings. For example, access to good education could be reduced, which, in turn, would mean a smaller probability of higher income and a breakout from poverty in the future. Also, access to health care (especially for pharmaceuticals and dental care) could be reduced. This might cause different health problems, weakening the ability to work (or even causing disability) and thereby lowering incomes even further. Although there are many different problems

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J. Meriküll „Labour market mobility during a recession: the case of Estonia” Working Papers of Bank of Estonia No1/2011.

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Swedbank Analysis • October 29, 2012

arising from the lack of financial means, education and health care are the most crucial ones. During the five years which contained a massive real estate and loan boom followed by a severe recession, income distributions changed in all categories; in some, the changes were fractional, while in others they were quite substantial. Mainly, job losses and wage cuts, as a direct result of the crisis, were responsible for the negative changes. The largest shifts took place in age category where it appeared that situation for young (16-24) and middle aged (44-54) people had worsened income-wise, while improved somewhat for elderly (65+) compared to others. Negative changes also took place in the nationality category, where the financial situation for many non-Estonians had taken a turn for the worse by 2010. There were no large shifts in the education category, although it was noticeable that people with lower education were influenced more (negatively) than people with higher education. This indicates that, crisis or no crisis, higher education can work as a protection against losses in income during difficult times. When wondering why the negative events between 2005 and 2010 did not have more severe influences on income distributions, one must remember that 2010 (especially the second half) was already a year of rather strong recovery, with growing employment and wages; this means that, although many people still struggled, the situation for others had already improved. Considering that in 2011 the economy continued its strong growth, the income distributions might have also gotten slightly better, but to expect a massive improvement in the near future is, unfortunately, not very likely. Although wages have been growing somewhat and there are promises to increase some social benefits, the economy is showing strong signs of slowing, and together with increasing prices, insecurities and threats regarding the euro area, it might not be enough to “pull” more people out of the lower quintiles. Teele Reivik

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Economic Research Department
Sweden
Cecilia Hermansson Group Chief Economist Chief Economist, Sweden Magnus Alvesson Senior Economist Jörgen Kennemar Senior Economist Anna Ibegbulem Assistant +46 8 5859 7720 cecilia.hermansson@swedbank.se

+46 8 5859 3341 +46 8 5859 7730 +46 8 5859 7740

magnus.alvesson@swedbank.se jorgen.kennemar@swedbank.se anna.ibegbulem@swedbank.se

Estonia
Kristjan Tamla Acting Chief Economist Elina Allikalt Senior Economist Teele Reivik Economist +372 888 7952 +372 888 1989 +372 888 7925 kristjan.tamla@swedbank.ee elina.allikalt@swedbank.ee teele.reivik@swedbank.ee

Latvia
Mārtiņš Kazāks Deputy Group Chief Economist Chief Economist, Latvia Lija Straš una Senior Economist Kristilla Skrūzkalne Economist +371 67 445 859 martins.kazaks@swedbank.lv

+371 67 445 875

lija.strasuna@swedbank.lv

+371 67 445 844 kristilla.skruzkalne@swedbank.ee

Lithuania
Nerijus Mačiulis Chief Economist, Lithuania Lina Vrubliauskienė Senior Economist Vaiva Šečkutė Senior Economist +370 5 258 2237 +370 5 258 2275 +370 5 258 2156 nerijus.maciulis@swedbank.lt lina.vrubliauskiene@swedbank.lt vaiva.seckute@swedbank.lt

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Swedbank Analysis • October 29, 2012

Disclaimer
This research report has been prepared by economists of Swedbank’s Economic Research Department. The Economic Research Department consists of research units in Estonia, Latvia, Lithuania and Sweden, is independent of Swedbank and responsible for preparing reports on global and home market economic developments. The activities of this research department differ from the activities of other departments of Swedbank and therefore the opinions expressed in the reports might differ from opinions expressed by other employees of Swedbank. This report is based on information available to the public, which is deemed to be reliable, and reflects the economists’ personal and professional opinions of such information. It reflects the economists’ best understanding of the information at the moment the research was prepared and due to change of circumstances such understanding might change accordingly. This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge this report is correct and accurate, however neither Swedbank or any enterprise belonging to Swedbank or Swedbanks directors, officers or other employees or affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faults within this report. Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report and provide financial services (issue loans, among others) to them. Aforementioned circumstances might influence the economic activities of such companies and the prices of securities issued by them. The research presented to you is of informative nature. This report should in no way be interpreted as a promise or confirmation of Swedbank or any of its directors, officers or employees that the events described in the report shall take place or that the forecasts turn out to be accurate. This report is not a recommendation to invest into securities or in any other way enter into any financial transactions based on the report. Swedbank and its directors, officers or employees shall not be liable for any loss that you may suffer as a result of relying on this report. We stress that forecasting the developments of the economic environment is somewhat speculative of nature and the real situation might turn out different from what this report presumes. IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT THEN YOU ACT SOLELY ON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTION INDEPENDENTLY.

Abbreviations: ES – Statistics Estonia

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