Nr. 12-2011 Published monthly by:
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Estonia: Good figures, but unemployment and inflation cause concerns The international financial community got positively surprised as Estonia reported its second quarter 2010 GDP up 3,5% year on year, compared with a contraction of 2% in the first three months this year. The GDP report followed an earlier upgrading of Estonia's credit rating from BBB+ to A by Fitch, an international credit rating institution.

- The robust pace of rebound is impressive, commented Violeta Klyviene, chief Baltic analyst at Danske Bank. The Estonian economy expanded at the second fastest pace in the second quarter among the EU27 countries, trailing only Sweden.

Estonia's second quarter 3,5% GDP growth was to a large extent influenced by growth of value added industrial production, supported by strong exports of manufactured products and electricity. The GDP growth put Estonia on fourth place within EU27 with Slovakia (4,9%), Germany (3,7%) and Sweden (3,6%) being ahead.

A Eurostat report said that in June, Estonia was second in the EU measured by annual growth of industrial production year on year. Slovakia scored highest with a 23,9% increase, Estonia's increase was 20,7%, followed by Finland 14,1% and Latvia 13,3%. The same Eurostat report said that the industrial output in the eurozone increased 8,2% and 7,7% in the EU27.

However, Estonia's second quarter 18,6% unemployment rate causes concern as does the impact of announced price increases on the rate of inflation.

Estonia had about 128.000 unemployed persons in the second quarter this year equaling an unemployment level of 18,6%. Though the figure is down from the 19,8% level reported for the first quarter 2010, the slight increase in employment is explained by seasonal and other temporary jobs typical of the 2nd quarter – e.g. the accommodation and food service industry and the arts, entertainment and recreation sector.

- For the man on the street, Estonia's GDP growth means little, commented SEB's analyst Hardo Pajula. Until we see a real fall in unemployment and wages start increasing from current levels, GDP growth will be felt only by a limited number of exporters. The economic growth is likely to remain subdued for several years since consumers remain heavily indebted and domestic demand is low.

According to Eurostat, Estonia's unemployment rate puts the country on third place in the EU27 unemployment list, with only Latvia (20%) and Spain (19,9%) having higher unemployment levels. At the other end of the listing, the lowest unemployment rates were recorded in Austria (4.0%) and the Netherlands (4.3%) while Sweden was noted for an 8,8% unemployment level putting the country in the middle of the list.

- Since Estonia's economic growth so far has been the result of an increase in the workload of existing employees, there is currently no pressing need to hire new people, said Natalja Viilmann, an economist at Eesti Pank, the Estonian central bank. According to preliminary estimates, Estonia's productivity growth accelerated to 9,8% year on year in the second quarter, and the employment level is not expected to pick up as long as companies have underutilized production capacity.

- Research show that Estonia's labor market recovery may turn out to be not only slower than the economic recovery, but also less extensive. This means that the Estonian unemployment level will be higher than it was before the crisis, and for several more years to come, concluded Natalja Viilmann.

Estonia's rate of inflation has indeed come down since the years of overheated and booming economy. A 2,9% inflation was reported for July this year, which can be compared to 10,6% in 2008. However, concerns have been raised over Estonia's capability to keep the inflation down.

- July is the month of seasonal discounts, and durable goods and clothing are available at summer sales campaign prices, said Martin Lindpere, an economist at Eesti Pank. However, food prices went up in July as a result of poor global climate conditions in the beginning of this year.

Several Estonian food producers have now revealed plans for raising their prices this autumn due to increased costs of raw materials, energy and fuel.

- Look at the price of bread in Finland and Sweden, said Rein Kilk, chairman of Pere, an Estonian bakery. How can we continue to keep prices down, when raw materials, fuel and electricity have become much more expensive and taxes make up a third of the price?

Following the bakeries' announcements on increased bread prices, the Estonian brewery Saku said it plans to increase the price of beer with 0:50 up to 1 kroon per liter this autumn.

- Saku has seen its electricity bill going up with 20%, fuel is about 10% more expensive, and the price of grain and malt is also increasing, said Saku's sales manager Margus Kastein. Additionally we have seen the alcohol excise tax raised four times, by about 50%, and we have had one VAT increase. All influencing the retail sell out price to the consumers.

Estonia got the final and formal go ahead for joining the eurozone as ECOFIN – EU's Economic and Financial Affairs Council met July 13th, and the euro will become legal tender in Estonia as per January 1st, 2011. The decision was backed up by ECB – the European Central Bank – but, in a May 12th non-binding opinion, ECB also said:

- Estonia's conquest of price pressures reflects temporary factors and it may be difficult to prevent macroeconomic imbalances, including high rates of inflation, from building up again.

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