Success of the timber and furniture industry unable to slow down decline in industrial output.

Industrial output contracting; timber and furniture industry doing well

Industrial output indicators published today continue the same trend: September saw the volume index for industrial output contract 4%. Whereas the summer months saw industrial output impacted adversely by significantly reduced energy generation, September saw the contraction in electricity generation continue, but at a slower rate. September was more challenging than in the past, specifically for the processing industry, with output down 4%. Among industries with the highest return on sales, output contracted in the electronics industry (-7%) and food production (-1%). At the same time, September proved one of the best months of the year for the timber industry among the major sectors, with output up by as much as 11%. Furniture industry also did well, with output volume up 8%. The other industry exhibiting good results this year, manufacturing of metal products, did grow but by a mere percentage point. Of the other major fields of activity, the manufacturing of chemicals and chemical products (e.g. fertilisers, several building materials) had the most adverse impact on the industrial production index, with output down by more than one-fifth year on year. The sector has likely been impacted by the closure of a major fertiliser producer in Ida-Viru County. September saw a significant decline also hit the manufacturing of other non-metallic mineral products (-9%), which mainly includes the building materials industry. The month was also poor for many other industries, which translated into such a significant decline for September on balance. All things considered, the third quarter of the year has definitely not been a cause for joy in the processing industry. Problems with growing sales volumes are being experienced by many industries, mostly due to poor external demand. According to preliminary data, sales of output for export declined 10% compared to September 2014. Nonetheless, there are fields of activity which have posted very good results this year; the swift and stable growth in the timber and furniture industry may be considered the most remarkable of those.

Growth in retail trade likely to slow slightly in 2016
Demand shows no signs of letting up in retail trade. September saw the volume index for retail trade grow by 9%. According to Statistics Estonia, sales of goods totalled EUR 422 million, translating into 322 euros per capita. September saw swift growth continue in mail order and online trade (+37%), with mail order trade likelier to be dragging the growth numbers down. The swiftest growth in sales volumes was posted by other specialist shops (e.g. bookshops, sports goods shops etc.): 42%. Retail trade expanded apace, however, also in traditional trade sectors, such as industrial goods (+17%) and food shops (+4%). It is quite likely that retail trade may be expected to simmer down next year – the impact of the decline in fuel prices is wearing off, which will erode growth in real wages. Also, the one-off effect of income tax cuts and child benefit increases by the government will end.

Low interest rates dampening interest in term deposits
As is well known, swift growth in wages has significantly boosted household consumption over the past year. Apart from spending, however, people have also set about saving money – savings by private persons have been growing at a stable average rate of 8% since as far back as early 2014. However, there have been significant changes in the preferences of those saving. During the economic crisis, from late 2008 to late 2011, the volume of term deposits exceeded the value of savings held in current accounts. Currently, the share of term deposits has dropped below one-third of all household deposits. People’s motivation to allocate money to term deposits is no doubt affected by the interest payable, which has hit very low levels currently. Nonetheless, the volume of term deposits is not perfectly correlated to the change in interest rates, which indicates that deposits have been impacted by other factors as well. The risk of losing one’s job forced people to set money aside more diligently than previously, and people who had lost their incomes partly or fully had to start consuming their savings, first by using up the amount accumulated in their current account at the bank. The security of deposits may have played a role as well: in those uncertain times, term deposits provided one of the few options for securing a guaranteed rate of return on one’s savings.

Investments in research and development down
In addition to the usual industry and trade statistics, last Friday also saw the publication of interesting figures about research and development (R&D) in Estonia, which should provide a basis for the manufacturing of products with higher added value in the long term. Internationally, the most monitored indicator is likely R&D expenditure as a share of GDP, which is also one of the indicators under the Europe 2020 Strategy. Estonia has set itself the objective of reaching levels where its R&D expenditure makes up 3% of its GDP by 2020. After the economic crisis, in 2011 and 2012, the achievement of this target appeared within reach just by looking at the numbers. Supported by low GDP levels and the EU Structural Funds, the ratio of R&D expenditure to gross domestic product reached as high as 2.3% in 2011, topping the EU average and securing a respectable sixth place. This ratio has been severely eroded by economic recovery and the beginning of the next structural instruments period. In 2014, Estonia spent just 1.4% of its GDP on R&D. On the one hand, the ratio has decreased due to faster economic growth; however, on the other hand, the absolute amount of R&D expenditure has contracted as well. Whereas the record year of 2011 saw EUR 384 million invested in research and development in Estonia, in 2014 this figure was nearly EUR 100 million less: EUR 286 million. Given the significant dependence on EU funds and the delays due to the beginning of the new structural instruments period, 2015 is unlikely to prove any better. There remains the separate issue of how, and how quickly, investments made will manifest themselves in economic gain.

Mihkel Nestor
Economic Analyst, SEB


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