Transcript Estonian Economy – on the course for soft landing?

Eesti Pank
Bank of Estonia
Andres Sutt
Estonian Economy - on the
course for soft landing?
October 25, 2007
Eesti Pank
Bank of Estonia
Outline
• Has the soft landing started?
• Economic policy outlook
Andres Sutt
Estonian Economy – on the course for soft landing?
2
Eesti Pank
Bank of Estonia
Estonian economy stands on a strong footing
Estonian economy
has expanded on
average about 8
percent a year in the
last decade
GDP per capita (PPP, EU25=100)
140
1996
2006
120
100
80
Average growth in the
EU has been around
2 percent
60
40
Andres Sutt
Latvia
Poland
Lithuania
Slovakia
Hungary
Estonia
Malta
Portugal
Czech Rep.
EU-25
EU-15
Germany
Finland
0
Slovenia
20
The structure of
economy is becoming
increasingly similar to
the OECD countries
Estonian Economy – on the course for soft landing?
3
Eesti Pank
Bank of Estonia
Economy has slowed as anticipated
Real GDP growth
14%
•
12%
10%
8%
•
6%
4%
2%
0%
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2001
2002
2003
2004
2005
2006
Real GDP growth
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2007
2008
2009
•
Especially taking into
account additional
pressures caused by the
external environment
Investment in real estate
sector will slow, but
overall level of
investment will stay
relatively high
GDP growth will pick up
again in the second half
of 2008.
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Domestic demand is driving the slowdown
Retail sales volume index
3-month average
monthly (y-o-y)
25%
20%
15%
10%
5%
0%
2001
2002
2003
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2004
2005
2006
2007
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
The real estate market is adjusting to “normal life”
Number of transactions with apartments in Tallinn
and annual growth of median price
1 400
70%
1 200
60%
1 000
50%
800
40%
600
30%
400
20%
200
10%
number of transactions (lhs)
Data: Land Board
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09.07
07.07
05.07
03.07
01.07
11.06
09.06
07.06
05.06
03.06
01.06
11.05
09.05
07.05
05.05
03.05
01.05
11.04
0%
09.04
0
annual growth of median price (rhs)
• The number of
real estate
transactions has
declined to the
same level as
early 2004
• Annual growth of
real estate prices
has slowed
• Demand has
dropped
considerably
Estonian Economy – on the course for soft landing?
6
Eesti Pank
Bank of Estonia
Credit cycle has turned
Credit growth in the non-financial sector
60%
• Banking sector
remains strong
50%
40%
• Monthly credit
growth has declined
from its peak
30%
20%
10%
0%
• More attention is
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paid to the risk2009
2008
2007
2006
2005
2004
2003
2002
2001
based assessment
of clients
Growth rate of credit stock
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Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Exports growth is broadly in line with expectations
Total exports
Exports excl fuel
Exports excl fuel and electronics
35%
Core export is
strong,
enterprises are
expected to
maintain their
competitiveness
30%
25%
20%
15%
10%
5%
0%
2004
2005
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2006
2007
july
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
The external balance is improving
Current account (% of GDP)
0%
-5%
-10%
-15%
-20%
-25%
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2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Current account balance
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Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Key risks to outlook:
• First of all - the continuous strong wage growth
– wage moderation is necessary to contain inflation
expectations and safeguard the competitiveness of
the economy
• Second of all - the full impact of recent
international financial markets turbulence and
decline in Eastern trade on Estonia’s real
economy is yet to be seen
Andres Sutt
Estonian Economy – on the course for soft landing?
10
Eesti Pank
Bank of Estonia
Wage growth has been faster than expected
Average gross wages
25%
• It is important to
maintain realistic
expectations in
terms of wage
formation, wage
growth should be in
line with productivity
growth
20%
15%
10%
5%
0%
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2001
2002
2003
2004
2005
2006
2007
2008
2009
Growth rate of average gross wages
Andres Sutt
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Extended gap between wage growth and productivity
improvements would eventually erode competitiveness
Labour productivity (Y/L)
real growth of wages
16%
14%
12%
10%
8%
6%
4%
2%
0%
1999
2000
2001
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2002
2003
2004
2005
2006
2007
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
A period of strong growth in domestic demand and
wages had an impact on inflation rate
Inflation
9%
•
We expect that impact of
rapid demand growth on
inflation will gradually
weaken, but inflation will
nevertheless remain
above average in 2008
because of administrative
prices and tax changes.
•
Inflation will return to a
more moderate level by
2009
8%
7%
6%
5%
4%
3%
2%
1%
0%
I II III IV I II IIIIV I II IIIIV I II III IV I II II IV I II IIIIV I II IIIIV I II III IV I II III IV
2001
2002
2003
2004
2005
2006
2007
2008
2009
Harmonized index of consumer prices, growth
Andres Sutt
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Apart from conjunctural price increases current
inflation rate also reflects price convergence
CPI
Services
Manufactured goods excl fuel
0,12
0,10
0,08
0,06
0,04
0,02
0,00
-0,02
2000
2001
2002
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2003
2004
2005
2006
2007
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
In general, price growth in Estonia has been in
line with the growth of our wealth
(Comparison: 1997 - - - 2006)
Relative price level (EU25=100)
90%
80%
Slovenia
70%
Estonia
Poland
60%
50%
40%
30%
Hungary
Romania
Lithuania
Latvia
Czech
Slovakia
Bulgaria
20%
20%
30%
40%
50%
60%
Relative income level (EU25=100)
Andres Sutt
70%
80%
90%
Estonian Economy – on the course for soft landing?
15
Eesti Pank
Bank of Estonia
External environment – reassessment of risks
• The turmoil of the global financial markets has not
influenced Estonian economy and financial system thus
far
– Its further impact will depend to which extent it will
influence global economic growth and funding terms
of parent banks
• Investors should factor in all risks while doing business
in non-EU markets
Andres Sutt
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Economic policy
outlook
Eesti Pank
Bank of Estonia
Economic outlook
• The economy is expected to stay on course for a “soft
landing”
• Economic adjustment will take place through market
channels and requires a consistent implementation of
macroeconomic policies
• Banks remain sound and credit quality is good
• The pace of credit growth should remain consistent
with expected income growth of households and firms
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Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Public finances should stay on track
• The fiscal policy should remain conservative to mitigate risks
and maintain sufficient flexibility. Also longer term costs of
pensions and health insurance should be considered.
• The planned budget surplus for 2008 is welcome, but may
not be sufficient givent the projected domestic demand
– Additional revenues should not be used to increase
expenditure in the budget for 2008-2009 but targeted for
a surplus in the order of 2% of GDP
• Public sector wage growth must not undermine the
competitiveness of the private sector
Andres Sutt
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
Income growth will slow
Revenue and income growth is going to be more
subdued
– Enterprises, especially real estate developers,
should take this into account in their business
plans
– Households should bear in mind that interest rates
have risen and their income growth will slow
– Banks should exercise extra prudence in lending
decisions
Andres Sutt
Estonian Economy – on the course for soft landing?
20
Eesti Pank
Bank of Estonia
Euro adoption is in Estonia’s interest
• Adopting the euro remains the top priority for
Estonia’s economic policy
• Estonia must be ready to adopt euro at the first
opportunity. However, it is unlikely to happen before
2011
Andres Sutt
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
To conclude:
Staying on the course for a soft landing
means Estonia has a good opportunity to
grow significantly faster than the euro area
over the medium term.
Andres Sutt
Estonian Economy – on the course for soft landing?
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Eesti Pank
Bank of Estonia
THANK YOU!