2011 – a year of economic growth

Leev Kuum
Senior researcher
Estonian Institute of Economic Research

Although a year of great difficulties and uncertainties in the European Union, 2011 turned out to be quite successful for the Estonian economy, exceeding the forecast of the beginning of 2011. The results reveal that the economy has rearranged itself during the downturn, and is now more efficient than ever. This is best evidenced by the huge growth in export capacity. The perfectly timed government austerity programme showed Estonia in a positive light on a global scale – we are a testament to the sustainability of an economic policy of avoiding excessive borrowing and overspending. At the same time, heavy budget restrictions raised the unemployment rate, cut social benefits, reduced state investments, among other effects.

The year 2011 will go into history as the year the euro was adopted – i.e. the recognition of our country as worthy of the common currency. The introduction of the euro lowered the cost of borrowing and increased the country’s attractiveness for investors. Still, the true impact of the accession to the euro zone is yet to be determined. The year 2011 was characterised by quick economic growth, current account surplus, a one-third rise in export, establishment of new companies, improvement in employment, a significant increase in profitability of businesses, etc. There is thus good reason to call the year 2011 the year of economic growth (in the business cycle). Let’s have a closer look.

The gross domestic product (GDP) increased by 7.6% in 2011, amounting to 16.0 billion euros in current prices (14.3 billion euros in 2010; a record-breaking 16.3 billion euros in 2008). The main contributors to the value added included the processing industry, construction industry and IT and communications. Unlike last year, the breakdown by quarters shows a deceleration of the growth in GDP: 9.5% in the first quarter, 8.4% in the second quarter, 8.3% in the third quarter and 4.5% in the fourth quarter.

GDP calculated based on the expenditure method reveals that the economic development was supported, above all, by the high external demand. Fuelled by investments, domestic demand grew as well (by 11%). Despite the low base, private consumption only increased by 4% (a decrease of 16.1% and 1.8% in 2009 and 2010, respectively) and investments by 27% (a decrease of 38.0% and 9.0% in 2009 and 2010, respectively). The share of investments in total GDP increased, to some extent, amounting to 21.5%; the share of private consumption and public sector end-consumption was 49.6% and 19.5%, respectively.

Employment (annual average number of the employed) grew by 38,000 (i.e. 6.7%), amounting to an annual average of 609,000 (a record-breaking 656,000 in 2008). The number of the employed grew with each quarter, peaking at 628,000 in the third quarter. Industry was the biggest contributor to the growth in employment – 13,000 people. The employment rate increased to 61% in the third quarter, falling short of the record-breaking 63.3% in the third quarter of 2008. The unemployment rate retreated from 16.9% in 2010 to 12.5% in 2011, bottoming out at 10.9% in the third quarter. There was an annual average of 87,000 unemployed people – 29,000 less than in 2010. The unemployment rate was higher among men (13.1% for men; 11.8% for women), but the gap narrowed during the year. The average number of people unemployed for a longer period of time (more than 12 months) was 49,000, of whom 28,000 had been searching for a job for over 24 months.

Consumer prices
rose by an annual average of 5% in 2011 (2010 – 3.0%): 5.4% in the first quarter, 5.2% in the second quarter, 5.3% in the third quarter and 4.1% in the fourth quarter (year-on-year). The 9.7% increase in the price of food and non-alcoholic beverages made up two-fifths of the total price increase, with the 6.2% rise in the price of heat energy and 12.2% rise in the price of engine fuel contributing another one-fifth. The price of goods was 3.4% and services 4.4% higher in December 2011 than in 2010. The regulated process of goods and services were 6.5% and non-regulated prices 2.8% higher in December, compared to 2010. The quicker-than-expected increase in inflation (3.5%) was partially conditioned by the commodity price hikes on the global markets.

The export of goods grew by 37% at current prices in 2011, amounting to 12.0 billion euros – the second best results in the post-occupation republic (the previous record of 8.75 billion euros dates back to 2010). The export turnover broken down by quarters: 2.74 billion euros in the first quarter, 3.17 billion euros in the second quarter, 3.06 billion euros in the third quarter, 3.05 billion euros in the fourth quarter. The quick growth in export indicates a rise in the competitiveness of Estonian companies as well as a growth in export demand within the European Union and elsewhere. The main export destinations included Sweden (15.6%), Finland (15.0%), Russia (11.0%) and Lithuania (8.0%). Exports to the European Union contributed 66% of total exports, a small drop from 2010 (69%). The Estonian processing industry exported an estimated 70% of its output. This result is partially due to low domestic demand, which still needs to recover. The biggest exporters were companies completely or partially owned by foreign entities.

The import of goods amounted to 12.6 billion euros in 2011, exceeding the level for 2010 (9.25 billion euros) by 36%, and breaking the previous record (2007 – 11.44 billion euros) by 12%. The import indicators were quite balanced by quarters, significantly influenced by the export of goods: 2.96 billion euros in the first quarter, 3.30 billion euros in the second quarter, 3.20 billion euros in the third quarter and 3.17 billion euros in the fourth quarter. A majority of the goods – a total of 9.9 billion euros worth (i.e. 78.4% of the total import) – was imported from EU member states. The balance of trade showed a significant improvement during the crisis but still ended up with a deficit of 0.6 billion euros in 2011 (0.5 billion euros in 2010 and a record-breaking 3.4 billion euros in 2007). Timber and wood products showed the greatest positive balance.

As has become tradition, the balance of services was positive in 2011, with export amounting to 3.9 billion euros and import to 2.7 billion euros at current prices. Both of these indicators – export as well as import – are record-breaking. Export grew by 15% and import by 27%, compared to 2010. The positive balance of services covered the balance of trade deficit. For the third year in a row, the current account thus remains positive – 0.5 billion euros or 3.2% of the GDP in 2011.

Average gross wages increased by 5.9% in 2011, amounting to 839 euros and exceeding the 2008 record by 14 euros. With consumer prices (CPI) rising by 5.0%, real wages showed modest growth (0.9%) for the first time after the crisis (a drop of 4.9% in 2009 and 1.9% in 2010). The highest salaries (according to fourth-quarter data) were in financial intermediation (1,369 euros) and the IT sector (1,359 euros).

The loan market shrank for the third year in a row, with the loan balance amounting to 14.1 billion euros at the end of 2011 – 2.6 billion euros or 15% less than the record level of 2008. The loan market showed signs of recovery in the second half of the year. Despite the repayment of loans, the private and corporate savings grew, amounting to 11.6 billion euros at the end of the year (an increase of 10.1%). The share of termless deposits is unusually big, as the bank interest rates remain low.

The real estate market showed signs of recovery for the second year in a row. Both the number and total value of transactions still fell short of the record level of 2006. A total of 32,486 notarised real estate transactions were concluded – a 3% increase from last year. The total value of the transactions amounted to 1.5 billion euros, exceeding last year’s level by one-fourth. The average transaction value was 47,528 euros. Forty-eight per cent of all real estate transactions involved apartments. In comparison, a total of 62,800 transactions were concluded during the boom (in 2006), with the total value amounting to 4.8 billion euros (average value: 76,700 euros).

Commercial enterprises generated 42.1 billion euros in turnover (i.e. an 18% increase from last year), with the total profit growing by 40% and amounting to 2.8 billion euros. Corporate investments amounted to 2.3 billion euros, growing by one-half from 2010. Expenses increased by 17%, including personnel expenses by 11%. The hour productivity of the business sector (based on net value added) increased by 15%.

Industrial output (volume index) increased by 17.9%, retail sale of goods (volume index) by 5.6% and own construction in fixed prices amounted to 1.7 billion euros (a volume increase of 27%). The general government consolidated budget showed a surplus of 163.9 million euros (1% of the GDP), with central government spending exceeding revenue by 0.7 million euros.

The ratings of international rating agencies for Estonia is given below (as at 21 August 2012).

International competitiveness rating
(Institute for Management Development, Lausanne): Estonia ranks 31st among 59 countries. The rating is an indication of the country’s general economic situation, business efficiency and infrastructure development. We have risen one notch from last year.

Global competitiveness rating (World Economic Forum, Geneva)
Estonia ranks 33rd among 142 countries. The rating is an indication of the country’s ability to ensure sustainable economic growth in the medium to long-range perspective. The rating is based on the information characterising the country’s level of development, depending on whether the development relies on resources, technology or innovation. We have maintained last year’s position.

International human development index (United Nations)
Estonia ranks 34th among 187 countries. The index takes into account the level of education, life expectancy, economic development, etc. We have maintained last year’s position.

International economic freedom index (The Heritage Foundation)
Estonia ranks 14th among 179 countries. The ranking is based on trade policy, state intervention, monetary policy, black market, etc. We have maintained last year’s position.

International long-term credit rating (Standard & Poor’s)
The rating agency Standard & Poor’s (S&P) raised the Estonian rating by a notch, from A to AA– outlook negative. The rating is based on the structural reforms, volume of direct investments and fiscal and monetary policy.

International corruption index (Transparency International)
Estonia ranks 29th among 183 countries, ranked by the lowest level of corruption. We have lost three places from last year.

International IT index (World Economic Forum)
Estonia ranks 24th among 142 countries. The index is based on the use of IT for the purpose of economic development. We have gained two places from last year.

Tourism competitiveness index (World Economic Forum)
Estonia ranks 25th among 139 countries. The index takes into account the general safety level within the country, transportation and IT infrastructure, natural and cultural resources, health care and hygiene conditions, etc. We have maintained last year’s position.