SEB: Tax receipts, energy behind Estonia's economic downturn in Q1 ({{contentCtrl.commentsTotal}})

SEB economist Mihkel Nestor.
SEB economist Mihkel Nestor. Source: ERR

SEB economic analyst Mihkel Nestor said low tax receipts and reduced electricity and heat production led the Estonian economy to a 0.7 percent decline in the first quarter of 2020.

In the first quarter of 2020, Estonia's gross domestic product (GDP) fell by 0.7 percent compared to the first quarter of 2019. Compared to the fourth quarter of 2019, the seasonally adjusted GDP fell by 3.7 percent, Statistics Estonia said on Friday.

In April 2020, the production of industrial enterprises in Estonia decreased by 17 percent compared to April 2019, while the turnover of retail trade enterprises was €517 million, down by 15 percent at constant prices compared to April 2019.

"Although the Estonian economy fell slightly in the first quarter of this year, it was a technical peculiarity rather than broad-based recession. Significantly gloomier figures can be expected in the coming quarters," Nestor said in a press release.

The analyst highlighted that, according to Statistics Estonia, tax receipts were the main negative factor - fuel excise duty, as well as VAT receipts, declined significantly.

"The reason for this is not to be found in the coronavirus crisis, but in significantly earlier events. Namely, the requirement for a bio-component in motor fuel came into force this year, which forced companies to acquire large stocks in December, before the law came into force," Nestor said.

He added that the shadow of the coronavirus can be seen more behind the low VAT receipts, which were affected by the decline in turnover in car sales and wholesale trade in March.

"In addition to tax revenues, GDP was also driven down by electricity and heat production, which has been affected by the loss of competitiveness due to carbon dioxide (CO2) quotas, but also by a  warm winter, which reduced the need for heat," Nestor said.

Information and communications and construction, on the other hand, made a strong positive contribution to the economy. "The value added of the information and communications sector increased by more than 25 percent during the year. The main reason behind the rapid growth was once again the IT sector, which has been able to show very fast growth for several years in a row," Nestor said, adding that, despite modest employment in the sector, they accounted for almost 30 percent of last year's economic growth.

"The construction sector has been a bit more erratic in recent quarters, because despite record construction volumes, input prices have also grown rapidly. In the first quarter of this year, the sector was able to show very fast value added growth - 16 percent," the SEB analyst said.

According to Nestor, normal economic activity has been significantly disrupted in the second quarter due to various restrictions, but on the other hand, the Estonian economy has reached a phase where three months is not too long a period for most companies and people to withstand.

"A separate sign, too, is that although, adding together recipients of the Unemployment Insurance Fund's wage compensation and registered unemployment, 25 percent of the Estonian workforce should seemingly be out of employment, it is not yet that noticeable on the streets that terrible times have arrived in Estonia. However, one can fear that the situation will change in the fall," Nestor said.

He noted that if Estonia could count on a fairly rapid recovery in terms of consumer confidence and a relatively healthy domestic economy, then the question of how foreign trade, which accounts for almost three quarters of the country's GDP, is doing is becoming the real question.

"The beginning is not promising. Signs of a slowdown in the exporting industry could already be found last year, but the sector finally fell in the first quarter of this year. The value added of the sector decreased by 2.4 percent compared to the same period last year, that is by a similar amount to exports. At the same time, the fall in the second quarter will probably be significantly deeper," the analyst said.

He pointed out that while Estonian industrial production fell by 9 percent in March, it fell by altogether 17 percent in April.

"Although the problems have been exacerbated by the problems in the energy industry, the situation is not much better in the manufacturing industry, either - production decreased by 7 percent in March and by 15 percent in April," Nestor added.

He said, of the largest sectors, production has fallen sharply in the electronics industry, but also in the metal and machinery industry, the furniture industry and several other fields. The only activities that were not affected by the decline in production volumes in March and April were the chemical and pharmaceutical industries.

Nestor said that an even gloomier picture opens up when you look at business surveys. "While industrial confidence was already low before the crisis, it has now fallen almost as deep as it was in the worst months of 2009. By comparison, many other euro area countries have withstood the crisis much better," he said.

According to Nestor, the long-term and structural problems of the Estonian industry have now coincided with those arising from the coronavirus crisis. He added that the peculiarity of Estonian industry has also been low productivity -- the goods produced here are simple and local companies are focused on low-paid production, while there is a shortage of jobs at the higher end of the value chain, such as product development or sales.

"It is very difficult to predict what kind of a symbiosis this will form with the loss of demand currently caused by the coronavirus crisis and the reorganization of supply chains, but the very negative outlook of companies does not predict anything good," SEB's economic analyst said.

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Editor: Helen Wright

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