The near-term growth prospects of Estonia's industrial sector have deteriorated, Swedbank chief economist Tõnu Mertsina said on Wednesday.
The total production of Estonia's industrial enterprises decreased by 4 percent on year in June, with production increasing in manufacturing and decreasing in energy as well as mining, it appears from figures available from Statistics Estonia. Compared to June 2018, the production of electricity decreased by 58 percent and the production of heat by 10 percent.
"In the first half of this year, growth in the Estonian industrial sector's production volumes decelerated rapidly," Mertsina said in a press release. "This occurred as a result of a strong decline in the energy sector's production volumes, whereas growth in the production volumes of manufacturing expedited."
A strong decline in energy production resulted from the increased price of the CO2 quota and growth in the import of Russian electricity due to its lower price. The volume of energy production has declined by one fifth in the first half of 2019 and by 58 percent on year in June.
"The decreased production of electricity, in turn, has a negative effect on oil shale mining," Mertsina said, adding that a possible long-term solution would be to combine the production of energy from shale oil and the production of electricity, increasing the share of renewable energy and gradually decreasing the production of electricity directly from oil shale.
The economist said that even though the total production of manufacturing increased just 2 percent in June and growth has decelerated over the past two months, the six-month average total production of manufacturing has increased by nearly 5 percent, the highest half-year result recorded in the past two years.
He noted that a significant share of the growth in the total production of manufacturing is attributable to the production of electronic products, the share of value-added of which is very low and the impact thereof on GDP thus quite modest. Strong growth in production figures were reported in ship repair and shipbuilding as well as in the production of oil products and foodstuffs.
"The growth in Estonia's total production of manufacturing was not very broad-based in the first half of the year, but considering the sharp deceleration of growth in the sector and even decline in many European states as well as the world in general, increased growth in manufacturing in Estonia is particularly positive," Mertsina said, adding that without the electronics industry, total production in Estonia, too, would be much lower.
Trade partners' expectations have worsened
In a situation where the export prices of manufacturing have remained unchanged compared to a year ago, the growth in export turnover has sped up.
"While for the past several years, the sales growth of manufacturing companies in the domestic market has been increasing more rapidly than their exports, in the first half of this year, this trend passed," the economist said, noting that sales in the domestic marked slowed down to just one percent, and a decline was reported in several areas.
"Our biggest European trade partners' expectations for production growth in manufacturing have deteriorated as well," Mertsina said, adding that Estonian companies' estimations of their export orders as well as prospects for export growth have likewise taken a downward turn.
He pointed out that world trade has also been notably affected by a deceleration in China's industrial production and decline in its imports.
An escalation in the trade dispute and tightening of trade restrictions as well as a no-deal Brexit in Europe would pose significant problems as well, he added.
Estonia's industrial sector accounts for 17 percent of the country's GDP and 20 percent of its employment. The drop in energy production is bad news for those working in the field, however its impact on employment in Estonia as a whole is relatively modest, Mertsina said.
The main issue, however, is the concentration of energy production in Ida-Viru County and its impact on the local labor market, he continued. The effect of decreased energy production is more keenly felt when it comes to GDP and may significantly hinder its growth.
Editor: Aili Vahtla