2008 – (the first) year of crisis in Estonian economy
In the middle of the year one could hope as justified that the financial year will be poor, but the economic growth will remain though with the plus-sign. This hope fell apart in September, when the financial crisis having started from USA hit the world. The latter soon became the economic crisis and spread as wildfire over the world.
The world’s financial collapse and abrupt increase in distrust hit Estonia at the bad time. In the first half of 2008 the after-effects of overheating of 2005-2006 still could be clearly felt – the volume of construction works decreased, the increase in loans stopped, the risk of unemployment weakened the future belief of the consumers and thus also decreased the demand. The capital of many companies was stuck under the real estate, the growth in unsold inventories caused difficulties in continuation of production. The way out was seen in the development of export which had to make up the reversion of the domestic market. The global economic crisis though decreased the demand at the Estonian traditional foreign markets. The banking crisis worsened the work of commercial banks. In co-impact of own and global problems the Estonian economy was in the deep crisis in the second half-year.
Now more in detail about everything. In 2008 the gross domestic product (GDP) decreased by 3.6% in fixed prices and made 248.1 billion kroons in current prices (the increase in current prices was 9.2 billion kroons, i.e. 3.7%). The economic situation worsened quarter by quarter: I q – increase 0.2%, II q – decrease 1.1%, III q – decrease 3.5% and IV q – decrease 9.7% (the decrease of 0.5% of I half-year, 6.7% of II half-year). The negative impacts of global financial crisis on GDP (in sum) were the highest in industry, trade and transport-warehousing.
The calculation of GDP based on the consumption method indicates that the domestic demand decreased by 4.6%, the private consumption of which 4.0% and investments 8.6%. 28.4% of the created added value was invested and 54.8% was consumed by the households.
Regardless of the economic recession the number of the employed as the annual average did not decrease, but even increased by one thousand. The average number of the employed was 656.6 thousand people and was quite even all the year round. The number of the employed still in IV quarter was 652.6 thousand people. Probably the companies waited for the more favourable economic development up to the last chance and did not hurry with the redundancy of the people. Even in construction the number of employees was still 77.7 thousand in the second half of 2008, which is just 8.2 thousand less than during the boom. The registered unemployed stayed in I half-year within 16-17 thousand people, but increased in II half-year each month and reached 30.4 thousand in December. The unemployment rate as the annual average made 5.5%, being 0.8% higher than in 2007.
During the whole year the increase in consumer prices was in the centre of attention of the economic analysts which considerably exceeded the expectations. The annual level of inflation was 10.4% which is the highest of the last ten years. The matter is more curious as this is the year of economic recession. High inflation can be partly explained with the rise in world market prices of some raw materials and energy carriers, rise in prices of labour in Estonia and increase of several excises. The essential reason is also the insufficient competition at the domestic market which enabled the companies to increase the prices without worrying about their position at the market. The fast rise in price “ate” the rise in salary and made the real growth of economy negative. In 2008 the food products and residential expenses (14.4% and 15.8% respectively) had the faster rise in prices than average.
The goods export increased in 2008 in the nominal price by 5.5% and reached 132.5 billion kroons. The growth remained smaller than expected and this also partly due to the world’s economic crisis. On the other hand, the rise in price of labour and others caused the rise in price of export (export price index 4.2%) which decreased our competitiveness at the foreign markets. The companies of the processing industry exported 54% of its production which is 3% points less than in 2007. The goods were exported to 160 countries, whereby the main target countries were still Finland, Sweden and Russia. The percentage of the countries of the European Union in export was 70%. The export of goods was greatly based on the imported raw material and half-products which is proven by the fact that the major export group was again the plant and equipment, by making about one fifth of the export sales.
The goods import in 2008 made total of 169.9 billion kroons by decreasing 4.9% compared to the previous year (in nominal prices). Thanks to the decrease of import the balance sheet of the trade in goods considerably improved which has been in big minus through the years. Now the deficit made 37.4 billion kroons which is lower of the record of 2007 by 15.8 billion kroons. The highest negative balance sheet was in the trade of mineral products (about 12 billion kroons). At the same time the highest positive balance was in the trade of wood and wood products (about 7 billion kroons).
The balance sheet of services was traditionally positive in 2008, whereby both export and import increased. The services were exported for 55 billion kroons (in 2007 50 billion kroons) and imported for 38 billion kroons (in 2007 35 billion kroons). The positive balance sheet of services decreased in its turn the chronic deficit of current account which now made 23.4 billion kroons, i.e. 9.4% as to the GDP (in 2007 43.5 billion kroons and 18.2%).
The fast increase in salaries in 2007 (20.5%) expressed the after-effect also on the salary of 2008 (adjustment between the fields of activities). Regardless of the economic recession the average salary increased to 12 818 kroons according to the initial data, i.e. 13.1%. The 10.4% rise in consumer prices also had some impact on the faster rise in price than labour productivity. As a result of the latter the real salary increased by “only“ 2.7% (13% in 2007).
The real estate market had the major fall already in 2007 (the number of transactions fell by 17%) which promised to hope that in 2008 we can already talk about the stabilization of the market. This was not the case and now we can state that the bottom was still far in IV quarter of 2007. The economic crisis also surely added to the continuing fall. In the year ended 34.4 thousand notarised real estate transactions were concluded with the total cost of 33.9 million kroons. It should be noted that in 2006 and 2007 60.2 and 50 thousand transactions were concluded respectively. Thus the shrinking of the real estate market in 2008 was even more intensive than in 2007. The latter is confirmed also by changing of the average cost of real estate transaction – if in 2007 this was 1170 thousand kroons, then in 2008 985 thousand kroons, i.e. 16% less (in 2007 the fall in the cost was 4.5%).
The expansion of the loan market continued in 2008, but considerably slower than in 2007. The total loan portfolio of the commercial banks was 260.1 billion kroons at the year end, by increasing 20.6 billion kroons, i.e. 8.6% with a year. A year earlier the relevant numbers were 62 billion kroons and 35%. The best times of expansion of the loan market had passed this time. The loan balance of the citizens (without leasing) increased 120.7 billion kroons by the year end, being 109 billion kroons a year earlier. The loan growth decreased approximately three times compared to 2007 (28 billion kroons). In the year ended the deposits of the citizens increased 6.1 billion kroons in the banks and made total of 59.8 billion kroons at the year end. The deposits of the citizens make about half of their loan portfolio and 2/3 of their annual salary fund.
The activities of the companies in 2008 are described by the following data: industrial production (volume index) fell by 6.5%, retail of goods (volume index) decreased by 3% and the cost of construction works carried out with own forces in current price decreased by 9.1%. As to the industry and trade the second half-year was considerably worse than the first.
It could be added that the balance of payments of 2008 with 10.3 billion kroons and the state budget with 5.2 billion kroons remained in minus.
Leev Kuum, Estonian Institute of Economic Research