Overview of the Estonian economy

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The Estonian economy grew by 3.5 per cent in the third quarter of 2012, which was impressive in the European context. The economy of the European Union, on average, contracted in the second as well as the third quarters of last year. This decline was led by euro zone countries - including large nations such as Italy and Spain as well as smaller ones, namely Greece, Portugal and Cyprus.

In 2012, only the other Baltic States were able to keep pace with Estonia or grow even faster. Of our main trading partners, Finland’s economy was also in a decline in the second and third quarters. Sweden’s economy was barely in the black having lost the momentum of 2010 and early of 2011. It was trade with Sweden that was behind the growth of Estonia’s exports in 2010. More recently, Finland and in particular Russia, have restored their places alongside Sweden as our main trading partners.

Estonia’s economic drivers in 2012 included domestic demand and particularly investment in fixed assets. During the years of crisis – from 2008 to 2010 – investment dropped dramatically and its share of domestic gross product (GDP) was only 19 per cent in 2010 compared to 35 per cent in 2007. In 2011-2012, investment in fixed assets increased on average by 25-30 per cent in each quarter and in the third quarter of 2012, investments amounted to approximately 28 per cent of GDP. This increased investment was triggered by short term factors in the economic structure – for example, fast industrial growth supported by exports mainly in 2010 and 2011. Last year, investment increased mainly due to the government’s renovation and reconstruction projects and infrastructure investments, which in turn helped the construction sector recover.

According to statistics, exports of services dropped in line with lower transit volumes. It was also one of the reasons why the Estonian current account was in the red at the beginning of last year. Since Russia has already been developing its Baltic Sea ports for years, the shrinking bulk cargo transit  business (fuel, coal, etc.) through Estonia is probably an irreversible process and companies in this supply chain will have to adjust to the situation. Russia’s accession to the WTO, which should remove discriminatory railway tariffs, has had little impact on improving the situation for Estonia. There are quite a few other informal obstacles. A real alternative for oil terminals, that were and still are the main cargo flow sources for the Port of Tallinn, is to switch to the provision of storage services. Other companies (e.g. railway transit, coal terminal) need to be resourceful.

Whilst the last quarter of 2012 did not bring about any changes in cargo flows through the Port of Tallinn, at least the decline in volumes did not worsen. Over the year, cargo flows through the port dropped by 19 per cent and the total volume fell below 30 million tonnes. In comparison, the peak was in 2006 when cargo volumes reached 41 million tonnes. However, the decline of last year was solely connected to the transit of liquid fuels and these have a smaller potential from the viewpoint of value creation. Volumes of cargo groups with a larger potential for value creation, such as containers and Ro-Ro goods, increased. In addition, the decline in cargo volumes was offset by an increase in passenger numbers to a record level of nearly 9 million people. The financial results of the port also showed that the decrease in volumes of liquid fuels did not significantly affect the profitability of the company.

In addition to the Port of Tallinn, the Port of Sillamäe is slowly becoming another significant player. Volumes are expected to achieve forecasted growth of 6 million tonnes in 2012, which is one-fifth more than in 2011. In 2013, the construction of a container terminal should be completed which will hopefully also attract new cargo business.

The year-end data were not yet available at the time of writing. However, key monthly indicators – retail trade and industrial production growth – did not show any trend changes in October and November. Thus, 3-4 per cent growth can also be expected to have continued into the last quarter of the year.

Most analysts expect growth to continue at the same pace in 2013. The critical driving force of the growth rate is the global and especially the European economic situation. If the uncertainty related to the debt crisis increases, it will probably also be reflected in the Estonian people’s sense of confidence and will curb the domestic demand that drove economy last year. PwC does not forecast any growth for the euro zone economy this year, neither does it forecast any decline although the latter is certainly possible.