Economist: Slowdown attributable to decline in shale oil product exports

Swedbank Estonia chief economist Tõnu Mertsina.
Swedbank Estonia chief economist Tõnu Mertsina. Source: Siim Lõvi/ERR

The deceleration of export growth to 4 percent in the first half of 2019 is largely attributable to a low result in June, where the outcome was affected first and foremost by a strong decline in the export of shale oil products, Swedbank chief economist Tõnu Mertsina said on Friday.

"While the export growth of goods produced in Estonia weathered the weakened external demand rather well during the first few months of the year, in June it decelerated sharply by one tenth," Mertsina said in a press release. "The impact was largest in relation to a strong decline in the export of specific shale oil products. The export of wood products and prefabricated wooden buildings likewise decreased."

In the first half of 2019, however, exports increased by over €200 million on year, which is largely attributable to the segments of mechanical appliances, mobile communications equipment, prefabricated wooden buildings, wood products, and measuring and precision instruments.

First half-year exports increased the most to the U.S., which ranked third among Estonia's trade partners, following Finland and Sweden.

"A third of the growth, however, came from mobile communications equipment, indicating that this growth was not broad-based," Mertsina continued. "The U.S. was followed by Denmark and Spain in terms of export increases, which, however, were three times smaller than growth in exports to the U.S."

Slower import growth in production inputs also affects export growth, as Estonia purchases the lion's share of its production inputs from abroad. The import of goods declined altogether 8 percent in June; growth over the first six months of 2019 decelerated as well.

The decline in the import of goods in June is attributable primarily to a sharp drop in the import of production inputs. The latter decelerated significantly at the beginning of the year and has been in decline for the past three months which, according to Mertsina, forecasts a possible slowdown in export growth in the coming months.

"GDP growth is not just dependent on our exports but also on the differential between export and import growth, as imports constitute expenses," Mertsina said. "When it comes to goods, it is always negative in Estonia — the higher the negative number, the more it reduces GDP growth. The foreign trade balance was less negative in the first half of 2019 than during the same period last year; thus its hampering effect on economic growth was reduced."

External demand weakened

External demand, meanwhile, has weakened, and entrepreneurs' export expectations have deteriorated. World trade has been growing at a reduced speed in recent months, and the import growth of Estonia's largest trade partners has decelerated. The export expectations of Estonia's industrial enterprises, too, have deteriorated sharply.

"Even though the economic growth of our primary trade partners is slowing down this year and external demand is weakening, the trend is largely attributable to the industrial sector in many states," Mertsina explained. "Preliminary statistics for dry bulk goods transported by ships and those of container transport are showing signs of rapid improvement this year. On the other hand, it's too early to tell when there will be any improvement to speak of in global demand."

He also noted that the short-term external demand situation depends largely on the trade conflict between the U.S. and China, and the extent to which protectionism will spread in other states, including the EU.

"A no-deal Brexit continues to jeopardize EU member states," the economist explained. "Even though it does not impose a strong direct effect on Estonia, its negative impact via trade partners may prove to be considerable. In Europe, the economic situation in Germany also worsened due to stricter environmental regulations imposed on the automotive industry last September, which have notably decreased the production of cars."

He added that central banks' measures aimed at relaxing the monetary policy or preliminary notices thereof may mitigate the situation of the real sector, should the economic situation deteriorate; however they have little effect on the negative impacts of decreased demand and increased uncertainty.

According to information released by Statistics Estonia, the exports and imports of goods in June decreased by 8 percent on year. In the first half of 2019, exports increased by 5 and imports by 2 percent on year.


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Editor: Aili Vahtla

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