Retail sales were down 0.8 percent in September compared to August, while car sales rose by 10.7 percent. Overall, retail sales rose by 3 percent.

Luminor's Chief Economist Lenno Uusküla said, on a year-over-year basis, retail sales excluding cars fell by 4.4 percent. When included, the decrease was only 1.5 percent.

He said the increase in car purchases is significantly impacting other areas of consumption. Car sales have grown so much compared to last year that, when added to overall retail sales, the total spending amount remains relatively stable.

"Just as at the end of last year, when cars were bought in a rush ahead of a VAT hike, car sales in September saw a significant increase due to the upcoming vehicle tax that takes effect next year. To facilitate these car purchases, however, consumers are spending less in other stores. This led to reduced consumption at the end of last year and into early this year, and consumption is again declining during these months as car sales surge," he explained.

Uusküla highlighted that prices rose in October, which reduces purchasing power. This has reduced spending in other areas.

Looking to 2005, the economist believes that car sales will fall, but purchases of other goods will not increase either. This is because a large item like a car will leave a hole in families' budgets.

"We will likely see a new, slight decline in consumer spending," he predicted, adding there is little good news to be expected in the near future.

"This is primarily due to the fact that income tax will rise by 2 percentage points at the beginning of the year. With the same salary, people will take home less. Wage increases come gradually, often during the spring in Estonia, but much of this additional income will go toward offsetting the income tax hike and gradually covering the new vehicle tax," Uusküla outlined.

The analyst added that since VAT also rises in the summer, all this adds up to the effect that the purchasing power of the average salary will probably be slightly lower next year than it was this year. Falling interest rates will at least reduce loan payments.

Warm autumn postponed purchase of winter goods

Department store Kaubamaja AS board member Erkki Laugus said the decline in retail sales is the result of a combination of several unfavorable circumstances.

The consumer confidence index is the lowest it has been in decades and should be closely monitored as it reflects customers' consumers and future trends, he said. Tax rises will not improve the situation.

"In difficult times, purchases of durable goods are also postponed. Given the slump in real estate purchases, it is natural that domestic appliances and electronics sales are following a similar trend. Clothing and footwear have, in recent years, shifted toward more needs-based purchasing. With an exceptionally good summer and a record-warm September, sales of fall and winter items have been significantly impacted by the weather," Laugus said.

At the same time, he said, campaigns have worked very well and this shows that consumers make important decisions in more favorable periods.

"Overall, consumer behavior is currently shifting from emotional to more rational decision-making," he added.

Another contributing factor to the negative trend is increased travel, Laugus said. The decrease in the share of tourism should also not be underestimated.

"Finnish tourists have historically played a significant role in Tallinn, especially for shopping locations in the city center. Today, however, we see a low level of travel activity from our northern neighbors, along with very restrained spending behavior. The economic downturn in Finland has markedly altered Finnish consumer behavior as well," the board member pointed out.

Laugus does not think car sales will have a big impact as, given the financial situation, many people cannot afford to change their vehicles.

"Unfortunately, government actions are leaving citizens with limited opportunities to make well-informed decisions. The fact that the official vehicle tax rates and calculations are being released only two months before the tax period begins clearly indicates that this tax is not aimed at encouraging environmentally sustainable behavior, as claimed, but is simply a means of collecting money from citizens' pockets," he said.

Laugus said the full impact of VAT changes on retail trade will only be known next year – but will certainly not be positive.

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