2010 – a year of economic resurgence

Leev Kuum
Senior researcher
Estonian Institute of Economic Research

As we recall, 2009 proved more difficult for Estonia than forecasted. The opposite can be said of 2010 – it was better than feared at the beginning of the year. Instead of the expected minimal improvement, the economy grew by 3 percent, export turnover set records, the current account ran a surplus, industrial output grew substantially, bank loan balance fell, and the country enjoyed record numbers of foreign tourists. All this gives us reason to call 2010 a year of economic resurgence.

Alongside the positive developments, 2010 was also still characterized by austerity in budget expenditures, high unemployment rate, and increase in consumer prices, among other things. Now let’s take a closer look at all of these.

Gross domestic product
GDP grew 3.1% in constant prices in 2010 and amounted to 14.5 billion euros in current prices – growth of 0.6 billion euros. In terms of economic sector, the primary engines driving EVA were the processing industry, the energy sector and financial services. Year-on-year GDP growth accelerated from one quarter to the next:
Q1 – decrease of 2.6%,
Q2 – increase of 3.1%,
Q3 – increase of 5.0%,
Q4 – increase of 6.7%.

Calculation of GDP using the expenditure approach shows that external demand grew in 2010, but internal demand remained on par with the previous year, and even this was only due to an increase in inventory. Private consumer spending dropped 1.9% (the decrease was 18.8 percent in 2009) and investments fell 9.1% (33.0% in 2009). The share of investments in GDP fell for the second straight year and made up 18.6% in 2010 (2009: 21.8%, 2008: 28.4%). The share of private consumer spending made up 48.2%, which is 2.3 percentage points less than 2009. Public sector end consumer spending was 20.6% of GDP.

The drop in total employment, which spanned two years, ended in the second quarter of 2010, when employment increased 0.9% compared to the first quarter. The recovery of employment continued in the third and fourth quarters as well, when employment was already 2.1% greater than the year before. The average size of the workforce was nevertheless only 571,000, or 25,000 less than in 2009. There were 348,000 inactive people aged 15-74 (students, pensioners, home-makers, chronically unemployed), as many as in 2009. The greatest increase in the number of the employed (14,600) took place in industry, reaching nearly boom-era (2007) levels by the end of the year. The level of unemployment fell throughout 2010, attaining the lowest level (13.6%) in the fourth quarter. The average number of the unemployed was 116,000 people, which is 21,000 people more than in 2009 and made up 16.9% of the workforce (2009: 13.8%). Among males, unemployment continued to be higher than among females, but the gap closed over the course of the year. The share of long-term (over 1 year) unemployed fell in the last quarter to 49 percent (Q3: 53%).

Consumer prices
Consumer prices fell in 2010 by 3.0% as an average of the quarterly figures for the year (2009: deflation of 0.1%), with the respective figures for Q1 through Q4 being 0.3%, 3.2%, 3.3% and 5.2%. The greatest impact on the consumer price index was exerted by motor fuels, which became 20.1% more expensive, electricity and thermal energy and heat, which rose 6.9%, and food and non-alcoholic beverages, up 3%. In December 2010, goods were 7.2% more costly compared to the same month in 2009, and services cost 3.2% more. The administratively regulated prices of goods and services rose 8.6% during the year; non-regulated prices increased 4.8%. The higher than expected growth of inflation was caused by rising commodities prices on international markets.

Export of goods
Export of goods grew 35% in 2010 and amounted to 8.75 billion euros in nominal prices – besting the old record of 8.47 billion euros set in 2008. The rise of export (compared to 2009) started already in the first quarter but the real momentum was gained in the second half-year. Export turnover was as follows by quarter:
Q1 –1.78 billion euros;
Q2 –2.07 billion euros;
Q3 –2.26 billion euros;
Q4 –2.65 billion euros.

In December, export grew 67% year-on-year. Machinery and equipment were largely responsible for the rapid growth, as 60% more products from this category were sold to foreign markets compared to the same period a year ago. Of goods in this group, mobile communications equipment and insulated electrical cables had the greatest role. The export of wood and timber products and metal and metal products grew by nearly half during the year. The primary export destinations continued to be Finland (17% of all export), Sweden (15.7%), Latvia (9.7%) and Russia (9.0%). The share of the EL27 in Estonian export was 69%. The greatest share of export was to Sweden (68%) and Finland (24%). These were also the countries to which Estonian export decreased the most during the downturn. The reason is the fact that a major part of our trade with Finland and Sweden is within the industrial sector and depends on how much Finland and Sweden export to third countries. Estonian processing industry companies exported over 70% of their output, according to initial estimates, which is an all-time high. This was partly due to low internal demand.

Import of goods
Import of goods amounted to 9.24 billion euros in 2010, outstripping the 2009 level by 27%. Compared to the record year 2007, import of goods was 19% lower, above all due to weak internal demand (lower for both consumer goods and capital goods). Like export, import also grew from quarter to quarter:
Q1 –1.95 billion euros;
Q2 –2.25 billion euros,
Q3 –2.35 billion euros;
Q4 –2.69 billion euros.

A predominant share of the goods was imported from the European Union – a total of 7.39 billion euros worth, or 80% of all import. In 2010, import grew slower than export, as a result of which the trade deficit again shrank (as it did in 2008 and 2009). The foreign trade deficit was 0.52 billion euros (but in the banner year 2007, it was 3.41 billion). Estonia’s highest negative balance was with regard to chemicals (341 billion euros) and the largest positive balance with regard to timber and timber products (538 billion euros).

The balance of services in 2010 was traditionally positive, and export made up 3.40 billion euros; import, 2.09 billion euros. The positive balance of services compensated for the trade deficit and for a second year running the current account balance was positive (0.52 billion euros or 3.6% of GDP).

A drop in wages in 2009 (-5.2%) was followed by a minor increase in 2010, but the pre-crisis record levels were not regained (2008: 825 euros). Leaving aside the social aspect of declining wages, the moderate decline in wages can be viewed as an indicator of flexibility on the labour market and as a factor that helped ease financial difficulties for companies. The average gross wages in 2010 were 789 euros, which means that wages increased by 0.6%. Real wages (i.e. adjusted for inflation) decreased 2.3%. With regard to areas of activity, the higher wages in the fourth quarter were in financial services (1338 euros) and the IT sector (1305 euros). The lowest wages were in food services and accommodation – 506 euros.

The loan market, which saw major growth during the boom years, contracted for the second year in a row. By the end of 2010, the loan balance had decreased from 15.6 billion euros (2009) to 14.9 billion euros – 4.5%. In the second half of the year, the loan market started picking up. In addition to repayment of loans, deposits held by individuals and companies in banks grew, attaining 10.5 billion euros by year’s end, while individuals’ savings made up 4.2 billion euros of this (growth of 7.8% in the year). The share of term deposits was unusually high, as the interest rates remain low.

Real estate market
After three years of downturn, the real estate market showed slightly more life in 2010: the number of notarized real estate transactions rose 18.4% and the total value of the transactions rose 6.6%. A total of 31,400 sale contracts were signed in 2010, worth a total of 1.23 billion euros. The average value of a real estate transaction was 39,200 euros. For purposes of comparison, it should be noted that during the boom (2006), a total of 62,800 transactions were concluded and the total value was 4.8 billion euros (average value – 76,700 euros).

Companies and their activities were characterized in 2010 by the following data: industrial output (volume index) grew 20.8%, retail of goods (volume index) fell 3.0%, and the cost of construction work performed by a company’s own workforce decreased 15%. It should be added that the payment balance was negative (-831.3 million euros) and the state budget ran a small surplus (8 million euros).

How Estonia placed in international rankings and in the view of ratings agencies (as of 30 March 2011)

International competitiveness ranking (Institute for Management Development, Lausanne)
34th of 58 countries.
The ranking is a description of the Estonian business environment, export capacity, openness and infrastructure development. Compared to the year before, Estonia rose one place in the rankings.

Global competitive ranking (World Economic Forum, Geneva)
33rd of 139 countries.
The ranking describes the country’s capacity to ensure sustainable economic growth in the medium to long term. It is based on information that characterizes the country’s development phase depending on whether the development is based on resources, technology or innovation. Compared to the year before, Estonia has risen two places in the rankings.

International human development index (UN)
34th of 169 countries.
The index takes into account the educational level, life expectancy, level of economic development etc. Compared to 2009, Estonia has risen six places.

International economic freedom index  (The Heritage Foundation)
14th of 183 countries.
The rankings are based on trade policy, government intervention, finance policy, share of the black market in the economy and other criteria. Compared to last year, Estonia has risen two spots in the rankings.

International long-term credit rating (Standard & Poor’s)
The Standard & Poor’s (S&P) rating agency increased Estonia’s country rating by one level from A- to A, the outlook remained stable. This was due to the structural reforms carried out, the volume of direct investment, and fiscal and monetary policy. An A rating means that the country is completely trustworthy. (In August 2011, Estonia’s country rating rose to AA-.)

International corruption index (Transparency International)
26th of 178 countries.
The country that leads these rankings has the lowest corruption. Estonia’s position has risen two spots in the last year.

International information technology index (World Economic Forum)
25th of 134 countries.
The basis is use of IT to promote the country’s economy. Compared to the year before, Estonia has fallen seven places back.

Bertelsmann transformation index (Bertelsmann Media Worldwide)
4th of 128 countries.
Characterizes the development of market economy and democracy in the country through the speed and effectiveness of the reforms. In a year, Estonia has fallen one place back, but is still among the vanguard of fastest developing countries.

Tourism competitiveness index (World Economic Forum)
25th of 139 countries.
The index takes into account the level of safety and security in the country, transport and IT infrastructure, natural and cultural resources, health care and hygienic conditions etc. Estonia has risen by two spots in the last year.