Ministry of Economic Affairs and Communications Ministry of Finance ECONOMIC SURVEY OF ESTONIA 2010

Transcription

1 Ministry of Economic Affairs and Communications Ministry of Finance ECONOMIC SURVEY OF ESTONIA 21 Tallinn 211

2 Contents Macroeconomic situation... 3 Labour market... 7 Foreign trade... 1 Manufacturing Manufacture of food and beverages Tarmo Noop, manager of A. Le Coq: people are again interested in the appearance of products... 2 Textile Manufacture of wearing apparel Wood processing... 2 Martin Arula, manager of Toftan: The economic crisis did not catch us Manufacture of paper pulp, paper and paper products Manufacture of chemicals and chemical products Manufacture of rubber and plastic products Manufacture of metal and metal products... 3 Manufacture of machinery and equipment Manufacture of electronic and electrical equipment Jan Kotka, executive manager of AS Elcoteq Tallinn: A new era has started for us Manufacture of transport equipment Furniture... 4 Construction Domestic trade... Janne Lihavainen, manager of Prisma: decline continued in Transport... 3 Tõnis Rihvk, manager of SLK: super long queues for ferries have become a thing of the past... 7 Tourism... 9 Anu Soosaar, manager of Sokotel: we saw record occupancy rates Information and communication... 6 Annexes Abbreviations in text: y-o-y year over year r.s. right scale l.s. left scale

3 Economic Survey of Estonia 21 3 Economic growth in Estonia turned positive again in Q2 21, after nine successive quarters of decline. In Q4, the growth accelerated to 6.7 and the total annual growth rate was , Eurostat Economic growth in Estonia and Euro zone Estonia Euro zone Contribution to growth net export consumption inventories growth Growth in domestic demand and imports domestic demand Export growth imports Real growth of exports of goods and services Weighted import growth of trading partners, Eurostat Macroeconomic situation The main driver of growth was exports of goods and services spurred by increasing foreign demand and contributing 14 percentage points to GDP growth. Imports increased along with exports, yet the growth was slower due to low domestic demand. Thus, the contribution of net exports to economic growth remained positive despite falling to 1.7 percentage points compared to previous year. The main elements of domestic demand private consumption and investments began to increase in the last quarter; the annual growth of domestic demand was, however, marginal (1), mainly due to the cyclic increase in inventories. The share of domestic demand in GDP dropped by 2.3 percentage points compared to 29, accounting for 9 of GDP at current prices. Before the crisis, the ratio was 11. Private consumption declined by 1.9 in 21 for a third successive year. From peak to bottom, the cumulative decline in consumption was 27. However, in the second half-year, consumption began to show signs of growth. Besides changes in income, people s consumption habits are affected by their saving behaviour that has been extremely volatile during the last decade. In precrisis years (23 27), the household saving rate (the percentage of saved money in disposable income) was negative (-3.8 on average), i.e. consumption was greater than income. In addition, people invested in dwelling. Due to increasing uncertainty caused by the economic downturn the savings ratio became positive in 28 and increased by 29 to 13, i.e. to the average level of EU27. Therefore, private consumption decreased more than people s income because apprehension about the future made people cautious. In 21, the saving frenzy eased somewhat and despite incomes continuing to decrease consumption remained at the level of 29. The decline in real consumption was caused by a 3 increase in consumer prices. While in the first half-year the consumption of all groups of goods and services was in decline, the second half-year saw fast increase in the consumption of durable goods. Powerful recovery can be attributed largely to goods related to transport and dwelling, the consumption of which declined most during the crisis. The consumption of services started to increase also, followed in the last quarter by the increase in the consumption of semi-durable and non-durable goods. The consumption of food, however, continued to decline in the second half-year because the price increase reached 12 by the end of year. Private consumption is expected to increase in 211 at a moderate pace, encouraged by increasing consumer confidence and growing income, although Ministry of Economic Affairs and Communications Ministry of Finance 211

4 4 Economic Survey of Estonia 21 accelerating inflation is impeding the real income growth. The share of private consumption in GDP ( before the crisis) dropped to 48 and is not expected to increase significantly in the immediate future. Investments decreased (-9.) in 21 for a third successive year before eventually starting to grow in Q4. Investments hit the rock bottom around the middle of 21, representing less than half of those at the peak in 27. Investment activity is greatly affected by future prospects of economic operators and is, therefore, more volatile during an economic cycle than consumption and gross production. Until 26, investment growth exceeded GDP growth significantly and the share of investments in GDP reached 36. When economic growth started to slow down in the middle of 27, the first to decline were people s investments in dwelling followed by corporate investments. By Q3 of 21, the share of investments had fallen below one fifth of GDP. Despite steady improvement of economic indicators since the spring of 29, investment activity remained low in 21. The final decision made in early summer of 21 to adopt Euro did not have the expected positive effect on investments because the majority of economic sectors did not make full use of their production capacity and did not need to invest. Due to powerful growth in the export of industrial goods, the need for investments began to grow and thus, investments in machinery and equipment as well as in means of transport increased significantly in the last quarter. However, investments in buildings and facilities continued to decrease. Investments of households in dwelling also began to grow in Q4, remaining, however, at the level more than twice below the peak of 26. The reasons are the persisting risks in the European economic development and the accompanying insecurity of jobs as well as more cautious lending behaviour of banks. Despite active use of resources from the European funds, government investments continued to decline in 21, mainly because the budgetary means of local governments were very limited. In 211, the investments should grow although the sectors oriented to domestic demand still have some unused resources. Investment opportunities are also limited by the desire of the private sector to improve the balance between their assets and liabilities, which is expressed in steady decrease in loan balance despite growing loan turnover. For many exporting companies year 21 turned out to be very successful. Exports of goods accelerated to such extent that the annual export volumes exceeded the pre-crisis level. While exports of machinery and equipment, in particular electric and electronic products, increased most, the growth was comprehensive. The reason for the positive development beyond expectations was mainly strong demand from major trading partners supported by fast growth of developing markets. Moreover, the difficult economic situation forced manufacturers to make important changes in their manufacturing processes which in its turn increased productivity and improved competitiveness of companies. Rapid growth of exports paved way to significant increase in imports in the second and third quarters; for this reason, net exports did not contribute to economic growth in the given period. The real exports of goods and services for the year was 22. GDP Savings Foreign savings Private savings Source: Bank of Estonia, Statistics Estonia Other fields of activity Construction Transport Wholesale and retail trade GDP Public savings Domestic savings Contribution to GDP by fields of activity Financial intermediation Real estate Processing Goods Revenue Current account structure Current account Services Transfers The profitability of foreign investments increased significantly in 21 and as a result, the current account surplus decreased to 3.6 of GDP. The surplus of services and payments decreased slightly compared to year ago and the trade in goods was in balance in the second half of the year. For the total Ministry of Economic Affairs and Communications Ministry of Finance 211

5 Economic Survey of Estonia 21 year, the deficit on trade in goods was only 1. of GDP. As regards incomes, the normal balance deficit was restored after temporary low of 29. Domestic savings remained in 21 at the level of 23 of GDP, i.e. at the level of 29. Private sector savings jumped up in 28 and 29 and decreased slightly in 21, while government savings increased. Of all economic sectors, the business sector had the most significant effect on GDP growth in 21, increasing value added by.1 compared to 29. Besides increased foreign demand, the growth was triggered also by increased economic activity in the domestic market which in its turn increased production in both the industrial and service sectors. Decreasing operating costs, in particular labour costs, which increased productivity and had a positive effect on profitability, had a great impact. Rapidly increasing value added (21) in manufacturing had major impact on GDP growth. Due to this, the share of manufacturing in GDP increased by 2.4 percentage points compared to year ago and represented 16.8 of the total value added. y-oy Consumer price index (Estonia and Euro zone) Consumer price index (Estonia) Base inflation (Estonia) Consumer price index (Euro zone) (MUICP), Eurostat thousand Employment and unemployment Change in employment rate Unemployment rate (r.s.) y-oy Wages and labour productivity Growth in real wages Labour productivity GDP real growth, Eurostat Economic value added increased due to strong exports in most sectors of the manufacturing ; however, the main reason for the growth was increase in value added in the production of electronic devices (1.6 times). The increase in value added in the wood processing and metal industries contributed to the overall increase in value added. These three sectors contributed 7 to the increase in economic value added in the manufacturing. Value added increased rapidly also in the energy and mining sectors, mainly due to increase in the exports of electricity. GDP growth was also strongly affected by fast increase in value added in the sector of financial intermediation, caused mainly by decreased loan losses of banks and increased interest income and income from service fees. The sectors of real property, leasing and business, forest management, transport and warehousing in which economic value added increased due to improved domestic and foreign demand also contributed significantly to GDP growth. At the same time the Ministry of Economic Affairs and Communications Ministry of Finance 211

6 6 Economic Survey of Estonia 21 building sector was still in decline (value added decreased by 1) due to decreased demand in the domestic construction market. Value added continued to decrease also in important government sectors (public administration, national defence, education, healthcare and social welfare). In 21, the prices of raw materials started to increase in international markets; the price increase was quickly reflected in Estonian prices, in particular those of food and fuel. Such price increase, typical at a time of high unemployment, was caused by several factors occurring at the same time: rapid recovery of demand from developing countries, shortage of food due to unfavourable weather conditions and aid programmes designed by Western countries to support their domestic economies. As regards Estonia, increased indirect taxes and trade margins also contributed to the price increase. As a result, consumer prices increased by 3 in 21 while food prices increased by 12 by the end of the year. The number of employed people decreased by 4.2 or by 2, people, being by 86, people smaller than in 28. Fast economic recovery increased demand for labour at the end of the year. Unemployment rate reached its peak in Q1 21 (19.8) and started to decrease quickly in the second half-year. Average unemployment rate in 21 was 16.9 and according to the Statistics Estonia, there were 93, unemployed persons at the end of the year, nearly half of them having been out of job for more than a year. The number of economically inactive people remained at the same level as in previous year. Average monthly gross wages and salaries increased approximately by 1. However, due to accelerated inflation, real wages decreased by 2 in 21. Wages and salaries grew fastest in the mining, manufacturing, and the energy and agricultural sectors. The decrease was biggest in the real estate sector and other service sectors. Because GDP growth accelerated already in the second quarter, while employment started to increase only in the fourth quarter, the productivity of labour and labour costs increased significantly in 21. The average real growth in labour productivity reached 7.6. Public sector s fiscal position was in surplus again in 21, first time in two years, constituting 18.3 million or.1 of GDP. Central government was in deficit (.6) by the end of the year, while social security funds and local authorities were in surplus (.6 and.2 of GDP respectively). Contributors to the achieved surplus were, inter alia, the improved economic environment and revenue from sale of emission credits. State budget tax revenue was EEK 63.4 billion ( 4. billion) in 21 and tax burden accounted for 33. of GDP. The most important contributors were labour taxes (18.1 of GDP) followed by consumption taxes (13.2 of GDP) and capital duties (2.2 of GDP). Government debt reached 6.6 by the end of 21, having decreased over the year by.6 percentage points. Estonian debt is continuing to be the lowest among EU Member States. Of the total debt of EEK 14.9 billion (.9 billion), 6.8 was the debt of local governments which has grown by.8 percentage points compared to 29. Ministry of Economic Affairs and Communications Ministry of Finance 211

7 Economic Survey of Estonia 21 7 Employment decreased in or by 2, people. While in the first half of the year, employment decreased as compared to a year ago, then with the recovery of economy, demand for labour increased. In the last quarter, employment increased by first time since Q2 28. Employment increased most in the fourth quarter in the manufacturing where the number of employed people increased by 14,6 people compared to year ago. thousand thousand Number of employed people Unemployed and discouraged persons Discouraged people Unemployed people Unemployed persons by period of thousand unemployment III 27 III 28 III 29 III 21 III Less than 6 months 6-11 months 12 months or longer 24 months or longer Unemployment rate North Estonia Central Estonia Northeast Estonia West Estonia South Estonia Labour market Rapid economic recovery increased demand for labour significantly. Since economic growth is caused mainly by increased production volumes in the industrial sector, employment also increased mainly in this sector. The number of employed people decreased most in the building sector (by 1,4 people), educational sector (by 6,4 people) and in the sector of transport and warehousing (by 6,1 people). Employment increased most in public administration and national defence (by 3,7 people), administration and support services (by 2,1 people) and healthcare and social welfare sectors (by 1,6 people). Unemployment was highest in Q1 21 reaching The number of unemployed people increased by 2,9 people compared to previous year reaching 116, people. Estonia has not experienced such high unemployment rates in the 2 years after reestablishing independence. Unemployment started to decrease in the second quarter and by the fourth quarter, the number of unemployed people had decreased to 93,3 people or to The unemployment rate increased more among the non-estonians from 19 in 29 to 23.4 in 21. At the same time, the unemployment rate among the Estonians increased from 11 to Unemployment rates continued to be the highest in the Northeast Estonia, increasing in one year from 18.1 to 2. Unemployment rate was lowest in Western Estonia where it reached 14.. Since the beginning of 29, the number of longterm unemployed started to grow. While in 29, the share of those who had been out of job for more than 12 months was 27, in 21 this share increased to 4. While in Q2 and Q3 21, unemployment decreased mainly on account of those who had been out of job for less than a year, in Q4 the number of long-term unemployed decreased significantly (by 1,3 people compared to Q3). The gap between unemployment rates of men and women has also decreased significantly. In Q1 21, at the peak of unemployment, the unemployment rate among men was 2.2 and among women 14.2; in Q4 the unemployment rate was 14.2 and 13 respectively. The number of economically inactive people remained in 21 at the same level as in 29. The number of economically inactive people increased on the account of retirement (by 1,7 people) and need to take care of children or other family members (by 1,9 people). Inactivity decreased on the account of those who returned from maternity leave (by 4,7 people). Because of rapid economic recovery, demand for labour has increased significantly. Economic growth is most likely the reason why many people who Ministry of Economic Affairs and Communications Ministry of Finance 211

8 8 Economic Survey of Estonia 21 worked part time during the crisis are working full time again. With production volumes growing, companies will need more employees. In 211, the number of employed people is expected to grow by approximately 12, people or 2.2 compared to previous year. In 212, the growth is expected to slow down and fall to 1.9. By the end of the forecast period (21) the growth is expected to decrease to.8 (expected number of employed people 611,). Unemployment rate is expected to decrease to 13. in 211. Unemployment will partly decrease due to the long-term unemployed giving up on finding a job and becoming discouraged workers which may increase the number of inactive people in 211. In 212 unemployment rate is expected to decrease to By the end of the forecast period, unemployment rate is expected to fall to 8, which could be a normal rate of unemployment for Estonia. Average gross monthly wages and salaries decreased during the crisis by. Nominal wages and salaries increased in 21 by.9 and real wages 1 decreased by 2. Based on the quarterly data, the average gross wages were EUR 791 in 21. Decrease in wages was caused by low demand and decrease in companies income as well as by rapid increase of unemployment due to poor economic situation. In Q2 21 wages started to grow again and average gross wages increased by 1.2. Improving economic situation supported by increased wages in exporting industries affected wages positively. Average wages continued to grow in Q3 and the growth reached 3.9 in Q4. Growth in wages was also affected by bonuses paid at the end of the year the payment of which was reduced significantly during the crisis. Labour productivity started to increase at the end of 29. Average real growth of labour productivity was 7.6 in 21. Many companies were forced to become more effective during the crisis they have restructured their manufacturing processes and use smaller number of workers. As a temporary measure, some companies reduced working hours and employed workers part time. This has reduced the imbalance created during the boost of domestic demand; the growth of labour productivity exceeds the growth of average wages helping to reduce the imbalance. It should be noted, however, that the growth of labour productivity and the growth of average wages are converging. By sectors, the average wages increased most in mining (11), agriculture (6.9) and manufacturing (.2). Increased mining of oil shale and production of energy products as well as 1 Wages corrected by inflation. export of energy caused rapid growth in wages in the mining. Accommodation & catering Real estate Art, entertainment Agriculture Education Administration & support Processing Construction Health care Water supply Transport & warehousing Public administration Professonal & research Electricity Information & Finance & insurance Wages and salaries by fields of activity Other Trade MEAN Mining Increase of export volumes caused by increased demand in foreign markets resulted in significant increase in wages in the manufacturing. Average gross wages decreased least in the real estate sector (1.7), in other service sectors (1.) and in financial and insurance sectors (9.3). The decline in average wages in these sectors reflected the need to cut costs because the increase in income remained marginal. Despite the increase in wages the share of labour costs in value added decreased in 21, meaning that the major part of economic growth was used to euro y-oy Wages and labour productivity Real growth in wages bour productivity Real growth in GDP, Eurostat Ministry of Economic Affairs and Communications Ministry of Finance 211

9 Economic Survey of Estonia 21 9 restore the profitability of companies. This is justified because companies have to restore profitability first and only then can they increase wages and salaries. In 211, average wages will continue to grow at a moderate pace (reaching 3.) due to increased work load and improved financial situation of companies. Real wages will decrease by 1 due to inflation. Economy has not fully recovered from the crisis and as long as domestic demand remains low, no overall quick increase in wages can be expected. In order to increase wages a company has to be recovered from the crisis and its profitability has to increase. In certain sectors, the main driver behind wages increase is shortage of labour and necessity to keep specialists motivated. Higher than average wage increase can be expected in manufacturing, finance and insurance, energy, transport and warehousing sectors as well as in information and communication sectors. In 212, average wages are expected to increase by 4.2 and real wages by 1.4. By the end of the forecast period, average wages will increase by.2 and real wages by 2.. Labour productivity real growth will decrease to 1.8 in 211 and start increasing again reaching 2.6 by the end of the forecast period. The share of labour costs in GDP which had increased steadily since 26 started to decrease in 21. Companies started to reach the pre-crisis profitability level and tried to keep labour costs low until the end of the year; as a result, the share of labour costs in GDP decreased from 1.6 in 29 to 47.2 in 21. In 211, labour costs are expected to fall to 46.9 of GDP and by the end of the forecast period to 46.3 of GDP which is still higher than in the period before the economic boom. Ministry of Economic Affairs and Communications Ministry of Finance 211

10 1 Economic Survey of Estonia 21 Trade developed fast in 21. Both exports and imports reached a record level growing by a third and a fourth respectively. Due to fast recovery of foreign demand as compared to the domestic market trade deficit continued to decrease. World economy recovered in 21 faster than expected and this gave a boost to Estonian economy. In particular, economy benefitted from rapid growth of exports as the economies of our main trade partners Sweden, Finland, Russia and Germany were also growing fast. Increasing demand for Estonian goods in external markets facilitated also imports. Estonia is a small country and therefore most materials needed to produce export goods have to be imported. Imports was also supported by increased domestic consumption at the end of the year. Total foreign trade turnover increased in 21 by 31 reaching 18 billion Euros. Export volume was 8.8 billion Euros and import volume 9.2 billion Euros. The share of exports in total foreign trade turnover increased to 49, which is by 2 percentage points more than a year ago. In 26 27, the share of exports in total foreign trade turnover was around 4. Increase in raw material prices in global market and growing demand in both external and domestic markets increased significantly export and import prices in 21 (by 6 and 9 respectively). Therefore, real exports grew by 27 and real imports by 17. Export and import growth Nominal export growth Nominal import growth Source. Statistics Estonia. billion Trade dynamics Exports Imports Balance Foreign trade As a result of fast export growth trade deficit continued to decrease constituting in 21 only. billion Euros or less than two thirds of the trade deficit in 29. The deficit decreased mainly due to surplus goods, such as timber and timber products, furniture and log houses with positive balance increasing by a total of.3 billion Euros during the year. On the other hand, deficit in fuel trade decreased (by.1 billion Euros). At the same time, increasing domestic demand has resulted in increased negative balance in the trade in machinery and equipment. According to forecasts trade balance deficit may increase in 211 due to increased consumption in the domestic market and expected increase in investments. Although in Q1 exports continued to grow faster than imports, trade deficit was by a fifth bigger than in Q1 last year. About half of experts of Eesti Konjunktuuriinstituut (EKI) forecasted in March 211 that trade balance would remain the same in the following six months and about 4 believed that the balance would worsen. Exports The crisis forced Estonian companies to turn to foreign markets. The fast recovery of external markets in 21 helped exporters to increase export volume. While in the first half of the year exports increased by a quarter as compared to a year ago then in the second half of the year it grew even faster and total growth in 21 in current prices was 3. As a result of these developments, export volume exceeded that of the pre-crisis period. In 21, export growth was driven by the exports of machinery and equipment the export volume of which exceeded the export volume of the previous year by more than a half and reached a record level of nearly 2 billion Euros. This increased the share of such exports in total exports to 23 (29 2). Mobile communication devices constituted an important part in the exports of machinery and equipment the exports of mobile communication devices increased more than 2. times as compared to a year ago. Other important export goods were insulated wires and cables and power distribution equipment the exports of these goods also grew fast. Exports of other goods also increased in 21. Mineral fuels exports grew by 27, exports of electricity doubled. In addition to Finland and Latvia, electricity was sold also to Lithuania because the Ignalina nuclear power station in Lithuania was decommissioned at the beginning of the year. Of exported oil products, nearly three fourth were processed fuels, exported mainly to USA and Nigeria. Ministry of Economic Affairs and Communications Ministry of Finance 211

11 Economic Survey of Estonia The share of timber and timber products as well as metals and metal products reached nearly one tenth in total exports. Yearly growth in the exports of these commodity groups was similar (42). About one fourth of exported timber products were sawn timber, one fifth construction details and about one tenth round wood and firewood. Most important export items in the metal group were scrap ferrous metal, galvanized steel and metal structures. Exports of furniture grew more than by one fifth. Exports of seats and other furniture increased at the same level. Seats made up about half and wooden furniture a third of the total exports of furniture. Manufacturers of log houses increased exports considerably more (by ). Exports to Norway resumed more than one third of all log houses were exported to Norway (growth doubled). One fifth of log houses were exported to Germany and one tenth to UK although in these countries the growth remained around In 21, 69 of Estonia s total exports went to the EU internal market and export volumes increased by one third. Exports to all larger EU countries increased significantly. Exports to CIS states and EFTA 2 countries grew even faster (by ). The increase in exports to CIS states was driven by exports to Russia (growth 41), at the same time exports to Kazakhstan grew fastest (3.4 times), mainly due to the big number rail tanks sold to that country. It is worth noting that exports to Byelorussia grew by 7 and exports to Ukraine grew by one fifth. Growth of exports to NAFTA 3 countries remained low in 21 due to exports to Canada (mainly processed fuels) decreasing by one third. Exports to USA increased more than one fifth compared to a year ago. Exports to Sweden increased significantly in the second half of 21, representing 1.6 of the total exports ( ). Thus, Sweden as an export partner caught up with and overtook Finland in Q In 21 exports to Sweden exceeded the level of 29 by two thirds, the growth being the fastest. Machinery and equipment, the exports of which more than doubled in a year, accounted for more than half of the goods exported to Sweden. Mobile communication equipment accounted for most of such exports. The exports of timber and wood products as well as metal and metal product grew also at a fast rate. Finland is losing its importance as the main export country. While in 21 one third and in 2 one fourth of all exported goods went to Finland, in 21 2 Europaen Free Trade Area: Norway, Swizerland, Iceland, Liechtenstein 3 North American Free Trade Area: USA, Canada, Mexico. only 17 of all exported goods were exported to Finland. At the same time exports to Finland grew by almost 2; the growth was, however, slower than the growth of total exports. Machinery and equipment represented one fourth of total exports to Finland. The share of other industrial goods (furniture lighting fixtures), metal and metal products and timber and wood products was approximately 1. The exports of metal products and timber increased by one third; the exports of furniture and lighting fixtures increased less than 2. Machinery and equipment Mineral products Timber and wood products Metals and metal products Furniture, log houses Means of transport Finland Sweden Russia Latvia Germany Lithuania Exports by commodity groups Exports target countries Due to the relatively fast recovery of Russian economy Estonian exporters managed to increase exports to Russia. As a result, Russia gained the third place in the ranking of target markets. Last time Russia was ranking so high was more than 1 years ago. About a quarter of the goods exported to Russia were agricultural products, food and beverages the exports of these goods increased by 4. Demand for Estonia dairy products grew fastest. Machinery and equipment are also an important export item these goods represent nearly one fourth of total exports as the exports grew by two thirds. The exports of chemical products (14 of total exports) grew by in a year. Ministry of Economic Affairs and Communications Ministry of Finance 211

12 12 Economic Survey of Estonia 21 Exports to Latvia grew also significantly (+28); however, it did not reach the growth of the exports to Russia. The goods exported to Latvia were mainly mineral fuels (one fifth of total exports), agricultural products, food and beverages (18) and machinery and equipment (13). Exports of these goods increased in a year by 2 to 4. The growth of exports to Germany in 21 was the slowest compared to other important export partners (1); such growth was, however, the fastest in the last five years. Fast recovery of German economy increased demand for Estonian goods. While the exports of machinery and equipment (representing the largest part of total exports to Germany) grew insignificantly, the exports of timber and wood products increased by more than. Exports is expected to continue growing fast in 211. This is confirmed by the results of the first quarter exports increased by more than. In the second half of the year, the growth of exports is expected to slow down due to the significantly higher reference base of the previous year. In March 21, the experts of Eesti Konjunktuuriinstituut had positive expectations regarding export growth. 83 of experts forecasted that export volumes would grow and 17 believed that export volumes would remain at the same level. Imports Imports increased in the second half of 21. On the one hand, it was caused by the fast increase in exports demand which resulted in a significant increase in the imports of intermediate goods. On the other hand, positive developments in the domestic market increased the imports of consumer goods and capital goods. In 21, imports in current prices increased by 27. Machinery and equipment became again the largest group of imported goods, representing nearly one fourth of total imports. The yearly growth was similar to that of exports (+). The majority of imported goods were semi-finished goods necessary for manufacturing export goods. The imports of mineral fuels increased slower than total imports and the share of mineral fuels in total imports fell to 18. The imports of fuels grew in monetary terms only due to the increase in oil prices while the volume decreased. The imports of metal and metal products increased in the second half of the year and the total yearly growth was nearly. This significant increase happened partly due to the increase of metal prices in the world market; at the same time, fast recovery of the world economy increase demand for metal and metal products. Therefore, the Estonian metal needed more raw materials to manufacture export products. The growth in the imports of chemical products was modest due to low domestic consumption. Medicines account for one third of imported chemical products; the imports of medicines remained at the same level. The imports of fertilisers, paints and varnishes as well as some other chemicals grew faster. The imports of the means of transport increased similarly to that of metal and metal products by nearly compared to 29. While the import of metal was driven by the increase in raw material prices the import of cars increased significantly due to low reference base. In 21 8 of the total imports originated from the EU internal market which maintained the level of the previous year. Imports from EU increased by 2. The share of CIS countries (11) remained also the same as imports from these countries increased in line with the total imports. Imports from EFTA countries increased fastest reaching 44. The importance of Finland as an import partner is decreasing. While in 2 imports from Finland represented 38 of total imports, in it accounted only for 14 of total imports. In 21 imports from Finland increased by one third and accounted for 1 of total imports. At the same time, Finland has always been one of Estonia s most important import partners. In 21, one fourth of goods imported from Finland were machinery and equipment, mineral products accounted for one-fifth and metal and metal products for more than one tenth of total imports. Imports of oil products tripled in a year, the imports of equipment and metal products increased by nearly one third. In 21, Germany became again the second most important import partner for Estonia (11). Imports from Germany increased by more than one third compared to previous year. Imports of metal and metal products and means of transport increased fastest (more than twice and nearly twice respectively); these goods represented one fourth of total imports. Imports of machinery and equipment increased by 29. In the comparison of main import partners, Sweden was the country that increased most its exports to Estonia (66). Therefore, Sweden ranked third among Estonia s import partners. Fast growth was driven mainly by fast increase in the imports of machinery and equipment which represented more than half of total imports. The imports of metal and metal products increased also significantly. Latvia ranked the fourth among import partners despite the fact that imports from Latvia grew significantly (+31). The imports of mineral fuels grew nearly and the imports of machinery and equipment by nearly one third. The imports of agricultural goods, food and beverages increased by 1. These product groups accounted for more than half of Latvian exports to Estonia. Ministry of Economic Affairs and Communications Ministry of Finance 211

13 Economic Survey of Estonia Imports from Russia increased in line with total imports. Therefore, Russia ranked fifth among Estonia s import partners. Mineral fuels accounted for two-thirds (growth 3), timber and wood products accounted for one-tenth (growth 43) and metal and metal products for 8 (growth two-time) of total imports from Russia. In 211, imports is expected to continue growing fast. On the one hand, import growth is caused by increased exports of input and raw materials necessary for manufacturing export products, on the other hand, investments and domestic consumption are growing and by the end of the year import growth may exceed export growth. In the first quarter imports grew slightly slower than exports. In March, the experts of Eesti Konjunktuuriinstituut expected imports to grow at the same pace as exports. Machinery and equipment Mineral products Metal and metal products Chemical products Means of transport Prepared foodstuffs and beverages Imports by commodity groups Imports by country of consigner Finland Germany Sweden Latvia Russia Lithuania Ministry of Economic Affairs and Communications Ministry of Finance 211

14 14 Economic Survey of Estonia 21 Manufacturing Estonian manufacturing comprises about, companies, most of them being SMEs. There are only 2 companies with at least 1 employees; however, these companies employ more than half of all workers of the industrial sector. The largest companies are for example Ericsson Eesti AS (manufacturer of mobile communication devices), ABB AS (electrical equipment), PKC Eesti AS (wiring harnesses) and BLRT Grupp AS (metalwork), AS Norma (safety belts) and AS Rakvere Lihakombinaat (meat products). Production volumes grew fast during the pre-crisis period (about 1 in a year) while the number of employees in the sector remained the same for nearly ten years. The growth was fastest in the sectors which create more added value or have a potential for achieving high than average productivity e.g. electronics, metal and machinery, chemical. However, the largest industries are food and wood. The economic crisis which began in 28 resulted in a decrease in both production volumes and the number of jobs. The industrial sector reacted quickly to the changes and manufacturing was among the first to recover from the crisis. Export has played an important role in the recovery. More than 6 of production is exported, the largest target markets being Finland and Sweden the countries from which comes more than half of foreign investments in Estonian manufacturing. Investments in machinery and equipment and production process have facilitated the growth of productivity but the gap with more developed countries remains significant. While in 2 added value per employee was in Estonian manufacturing eight times smaller than in Finland, Sweden and Denmark, in 28 the gap had reduced to less than five times. In the future, the manufacturing should focus on increasing productivity and in some branches which create more added value, more jobs can be expected to be created ,8 value added Share of sector in economy 67,1 Share of exports in sales 19, employment 9,3 Ratio to average wage Sales and exports * Sales Change in sales (r.s.) Textile Rubber and plastics 3 Other subsectors 1 Share of sub-sectors in sales of Timber 1 Chemical 8 Exports Change in exports (r.s.) manufacturing Food Building materials 17 4 Metal 1 Furniture Equipment 4 19 Manufacturing recovered from the crisis in 21. The growth was based mainly on export. By the end of the year production volumes reached nearly the pre-crisis level. Positive developments are expected to continue also in 211. Manufacturing was supported by the increase in demand from Estonia s main trade partners. The situation of economy was assessed to be good in Germany and Sweden and satisfactory in Finland. Production volumes grew in almost all EU Member States. According to preliminary data, the production volume in manufacturing grew fastest in Estonia: However, it should be taken into account that the effects of the economic crisis were greatest also in Estonia. Although the recovery was comparable to other Member States, Estonia managed to restore most of its production volumes lost during the crisis. The manufacturing produced in more than in the previous year and the sales increased accordingly. Fast growth was driven by export that increased by more than 4. The crisis forced companies to focus on foreign markets and this was their key to success. The yearly export was bigger than in the pre-crisis period. Sales to the domestic market were similar to the previous year. While in the first half of the year sales decreased, in the second half demand was restored. Of sectors the development was quickest in the sector of electronic and electrical goods production tripled compared to 29. This sector contributed one third of the growth of production volume in manufacturing. Manufacturing of automotive accessories and trailers doubled. In other major sectors, the growth was between 1 and 3. Food, which was less affected by the crisis, Ministry of Economic Affairs and Communications Ministry of Finance 211

15 Economic Survey of Estonia 21 1 enjoyed stable production and increased exports significantly. The production of beverages decreased. The growth of production volumes increased demand for production inputs while labour costs remained at the level of the previous year. The overall number of employees decreased by and grew only in some sectors (oil, automotive parts, furniture). However, the situation improved each quarter and more jobs were created. The costs of manufacturing increased by one fifth; however, the faster growth of revenues doubled the companies gross profit. Thus, the profitability returned to the pre-crisis level. Restored demand and increase in prices of production inputs (metal, fuel, primary agricultural products) increased production prices by 3.7 as an average and by the end of the year, price increase exceeded. Fast increase in production prices was seen primarily in those sectors where prices had previously fallen fast (dairy and production of metal products). Since the growth of production volumes achieved with fewer resources, the indicators of employment and total productivity improved significantly. Sales income and added value per employee and compared to labour costs were in 21 higher than ever. The increase in productivity reflected in salaries and wages. The average wages increased in manufacturing by.2 fastest compared to all industries. Investments remained at the level of 29 and investments in tangible assets represented from 4 to per cent of sales income. At the same time, investments in most important assets machinery and equipment increased by one fifth of the previous year. Investments in machinery and equipment exceeded the pre-crisis level and as much as two thirds of total investments were made in this area. Investments in the means of transport also increased while investments in other types of assets (mainly buildings and facilities) decreased. The situation differs by sectors in some sectors (production of vehicles and automotive parts, production of electronic and electrical products, production of furniture) investments increased significantly while in other sectors (production of machinery and equipment) investments in fixed assets decreased. thousand * Number of employed people No of workers (labour survey data) No of workers (business statistics) Change in No of workers (r.s.) Change of workers in companies (r.s.) Average gross wages Average wages (in Euros) Value added, labour costs and productivity Change (r.s.) * Value added Labour costs Groth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

16 16 Economic Survey of Estonia 21 According to a study conducted by Eesti Konjunktuuriinstituut industrial companies assessed 21 more positively than the previous year. While in the first quarter the confidence indicator was negative, in the following months assessments were mainly positive. Improvement could be seen in all areas: companies received more orders, production volumes increased, utilisation of production capacity improved, and competitiveness of companies in both domestic and foreign markets improved. The main problem was still insufficient demand although it was gradually becoming less relevant. The share of companies who indicated that there is a shortage of labour, equipment, and materials increased although these shortcomings were of secondary importance. Undertakings were more optimistic about the future than a year ago and planned to hire more employees. At the same time prices were expected to increase. Confidence increased practically in all sectors. Based on relatively good growth prospects of the main export markets, the production volumes are expected to grow fast. During the second half of the year, the growth will probably slow down due to the base effect. At the same time it is clear that further growth cannot be achieved with the existing workforce and therefore the number of employed people is expected to increase in the industrial sector. Ministry of Economic Affairs and Communications Ministry of Finance 211

17 Economic Survey of Estonia Manufacture of food and beverages Food (with annual turnover of EUR 1.3 billion) is one of the largest industries in Estonia. Manufacture of food is the main activity of nearly 4 companies. High competitiveness in foreign markets has increased the share of export to nearly one third of production volumes. More than 13,7 people are employed in food. The companies are distributed throughout Estonia quite evenly. Food producers are among the largest companies in each region. The largest of them is AS Rakvere Lihakombinaat, a meat producer in the Lääne-Viru County, followed by Atria group in South Estonia and poultry producer AS Tallegg. The largest bakeries are Fazer Eesti AS, AS Eesti Pagar and AS Leibur. The largest beverage producers are AS Saku Õlletehas in Harju County and AS A. Le Coq in Tartu; the largest dairies are Valio Eesti AS and TERE Aktsiaselts. The largest fishery is AS Paljassaare Kalatööstusin Harju County and the largest confectioner is AS Kalev Chocolate Factory. Competition is tough in the food and beverages sector. However, farthest markets are unattainable because of the short shelf life of many product groups and different taste preferences of consumers. Nonetheless, many companies have successfully entered foreign markets and the trend is expected to continue. The number of employees is not expected to change much companies are focusing on increasing efficiency in order to catch up with their European competitors. Share of sector in economy The food and beverages started to 1 recover from the crisis in 21 similarly to other 8 industries. Sales volumes increased by more than 6. The main engine of growth was export and 4 32, 88,8 the domestic market remained weak throughout the year. 2 2,1 8,2 11,4 value added man. exports Share of exports in sales employment of man. Ratio to average wage Sales and exports * Sales Change in sales (r.s.) Production of beverages 1 Production of bakery and pasta products 9 Share of sub-sectors in sales Processing and preserving of fruit and Other vegetables 14 4 Exports Change in exports (r.s.) Production of prepared animal fodder 2 Meat processing 19 Fish processing 9 Dairy 28 Production volumes were relatively stable in the food even during the crisis. Therefore, the recovery has been slower than in other sectors. Moreover, the growth was hindered by the large share of domestic market since in other sectors growth was driven mainly by export. Compared to other sectors, it is much more difficult for the food and beverages to enter foreign markets and therefore, the growth has been slower. Throughout 21, the sector was affected by fast increase in production input prices. The purchase price of milk increased 32 and the purchase price of grain 48. The increase in the purchase price of meat and fish was considerably smaller. The prices of raw materials increased mainly in the second half of the year when the markets started to feel the effects of the previous year s unfavourable weather and overall tension. As a result, production prices increased above the level of 28. Nearly one third of the production of the food is exported. The largest product group in food exports is dairy products which represented 3 of the total export. In 21, exports to nearly all major target countries increased. Exports to the Nordic Countries grew fastest exports to Finland by 6 and exports to Sweden by more than 7. Russia is still the largest export market although export volumes to Russia decreased in 21 by one tenth. The main reason is that exports in the beverages segment decreased by 79. Dairy production, which is the most important sector in food, was characterised by sharp increase in prices. Production prices increased by nearly 12. Nonetheless, total costs increased more than sales income and despite smaller labour costs profit decreased by 2. Despite decreasing labour costs Ministry of Economic Affairs and Communications Ministry of Finance 211

18 18 Economic Survey of Estonia 21 working hours and the number of employed people remained the same. However, cutting costs was not sufficient to improve productivity and productivity per employee decreased in a year by more than 1. The largest export market for dairy products in 21 was Russia almost 4 of products were exported to that country and sales increased more than 2. times. Total exports of dairy product increased by. The most important export items were cheese and cottage cheese (4). The share of milk in exports has also grown, reaching nearly 3 of total exports, mainly due to increase demand. For the meat, 21 was a relatively stable year. Production volumes remained almost the same while sales income decreased by a couple of per cent. At the same time the sector managed to cut costs and earn profit. Productivity per employee increased more than 8 indicating that investments in technology have started to pay back. The development of the sector was also supported by the 7 fall in the purchase price of one of the main inputs - pork. The largest export markets for the meat were Latvia, Lithuania and Finland. About 2 of meat is exported to Latvia. The beverages sector was affected on the one hand by decrease in alcohol consumption and on the other hand by increase in excise duty on alcohol. Sales dropped both in the domestic market and in foreign markets. Production volume in constant prices decreased by 9 - the most significant fall in the manufacturing. Productivity indicators improved, however. Beverage decreased labour costs by more than 1 and as a result, increased productivity by more than one fifth. Taking into account that people in Estonia consume relatively large quantities of alcohol and that grape wines have become more popular, the producers of alcoholic beverages should focus in the future more on foreign markets. In 21, the largest export market for the beverages was Finland. Exports to Russia which had been the largest export market in previous years decreased by 8. Exports to Finland, on the other hand, increased by 88. Due to the decreased exports to Russia the total export volume of the beverages decreased by more than 4. The producers of bakery and pasta products had a difficult year due to the increased purchase prices of grain. Sales volumes decreased by more than one tenth. Although the sector decreased the number of jobs it was not sufficient to save costs and the total profit of the sector decreased by one third. Exports represented less than one tenth of total sales and export volumes did not increase in 21. In fish processing, sales increased in 21 by nearly. The growth was driven mainly by export since sales to the domestic market decreased by more than 2 compared to the previous year. Total costs increased faster than sales income and the profitability of the sector decreased. Added value per employee increased by mainly due to decreased number of jobs. Exports increased in a year by 4. The main export markets were Russia and Ukraine nearly 2 of products were exported to these countries. Ukraine Sweden Lithuania Latvia Finland Russia Other products 24 Fish products 24 Exports by main target countries Main export commodity groups Goods of Estonian origin Dairy products 3 Meat products 12 Beverages 1 Number of workers and wages * Number of employed people Average wages (in Euros) Change in the number of employed people (r.s.) Change in wages (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

19 Economic Survey of Estonia Beverages 11 Share of sub-sectors in employment Production of bakery and pasta products 22 Production of other foodstuffs Value added, labour costs and productivity Meat processing 21 Fish processing 12 Dairy 16 Production of prepared animal fodder * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * The number of jobs in the food and beverages continued to decrease in 21. In a year, nearly 7 of jobs were cut. In the meat and fish processing sectors, the number of jobs decreased 3 and 6 respectively, in the dairy sector the number of jobs remained stable. Average wages did not change in 21. The producers of food and beverages continue to be the biggest investors in the manufacturing in 21, they made nearly one fifth of all investments. Investments in fixed assets increased by more than one tenth. One fourth of investments were made in dairy and one fifth in meat. The producers of beverages invested 16 although the investment volume decreased by more than 1. Nearly 6 of investments were related to machinery and equipment and nearly one fifth to building and renovating buildings and facilities. The companies participating in the survey conducted by Eesti Konjunktuuriinstituut were relatively positive about their future prospects. Utilisation of capacity in the food was more than 7 and outstanding orders ensured work for more than six months. In the beverages sector the situation is somewhat different. Only 8 of production capacity is utilised and orders covered five months of production. Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

20 2 Economic Survey of Estonia 21 Tarmo Noop, manager of A. Le Coq: people are again interested in the appearance of products The economic depression is over, exports are growing and Estonian people are willing to spend money on beverages again, says Tarmo Noop, manager of A. Le Coq. How was 21 for A. Le Coq? It was a good year, sales increased by 8 and export by 32. While in 28 and 29 consumption decreased then last year, things changed to better. The growth in export is driven by the fact that we had unused production capacity and we started to pay more attention to export markets. Our export turnover was last year 1 million Estonian kroons. The largest export market is Denmark and we intend to increase export to that country also this year. We also exported the Viru Premium brand to Finland, Lithuania and numerous other EU countries. Did you create any new jobs last year? The number of jobs remained the same. We did not cut any jobs during the crisis but we did decrease the number of employees before the crisis when we invested in new production lines which are much more efficient and require less manpower. We had invested in production for five years and therefore did not have to cut jobs during the economic downturn. We have no intention to cut jobs on the contrary, we are planning to start hiring again. What kind of investments did you make last year? We bought a line for 2 litre juice cartons. The decision was made during the crisis in order to produce cheaper products. This investment has paid back since people were very price sensitive. We invested nearly 3 million Estonian kroons in that line. Expors increased on account of earlier investments, We utilised the existing capacities. The main change was focussing on export. We started to think differently. How did the adoption of Euro affect the production and sale at A. Le Coq? Positively. The year started very well domestic sales increased in the first three months by 12 and export by 62. Total sales increased by 18 compared to the same period last year. Export growth is not related to the adoption of Euro but the 12 increase in the domestic market exceeded expectations. We were hoping to achieve zero growth at the best. We assumed that people would be more careful with spending but it did not happen. Which external factors affected the food most in 21? The most important factor was sharp increase in raw material prices in all markets. Crop prices increased by 4-, sugar prices doubled, the prices of raw material for juices also increased. Last year s harvest was poor but the main reason for price increase was that at the beginning of the economic downturn in 28 warehouses were full and in 29 they tried to sell everything to decrease stock in warehouse to minimum. The hope for good harvest did not realise. This created shortage of raw material. We had to increase our prices to keep pace with increasing prices of raw material. What are the plans of A. Le Coq for 211? We are very optimistic. We are going to invest nearly three million Euros in product development. We are going to modernise packages because consumption is growing and people are again interested in the appearance of products. Ministry of Economic Affairs and Communications Ministry of Finance 211

21 Economic Survey of Estonia Textile Estonian textile is mainly exporting that includes nearly 2 companies. The number of workers has decreased, efficiency ha increased and the product portfolio has changed. Large textile companies are located throughout Estonia. The largest of them is AS Wendre, a beddings manufacturer located in Pärnu County, followed by AS Toom Tekstiil, a household textile products producer in Viljandi County and Hilding Anders Baltic AS in Harju County; AS Mistra-Autex is a producer of carpets and carpeting material. The largest finished fabrics producer is Qualitex AS in Pärnu County. The textile adapted to changes. Kreenholm, a textile factory with a long history, was closed down and replaced by new companies such as Wendre and Toom Tekstiil. The production of several products, such as linen textiles and cotton yarn was stopped in Estonia since it was not profitable. At the same time, producers have shifted their production from intermediary products to consumer goods which in the long term create higher margins and more added value Share of sector in economy 86,3 73, Production volumes in the textile started to grow in 21 increasing by 11. The growth was supported by exports; in the domestic market, sales were almost at the same level as in the previous year. 4 2, 4, value added man. exports Share of exports in sales 4,6 employment of processing Relation to average wages * Sales Change in sales (r.s.) Norway UK France Germany Finland Sweden Sales and exports Exports Change in exports (r.s.) Exports by main target countries Similarly to other sectors, 21 was a year of recovery for the textile. Production volumes in at constant prices grew first time after 26 despite the dissolution of the Kreenholm factory which had previously contributed to the production volumes. Estonia textile depends on competition in foreign markets. The share of export is significant reaching 86 in 21. The developments so far indicate that the products of the Estonian textile have become more competitive in foreign markets. The main reason for this is the fact that companies have learned to use their competitive advantages. The proximity to the vast and wealthy European market enables companies to save on both transport costs and delivery time. Moreover, labour costs are growing in Asian countries faster than in Estonia and moving production to those countries has lost its appeal. More than one third of textile products are exported to Finland and Sweden although export to those countries started to decrease in 21. Exports to Finland decreased in a year by nearly one fifth mainly due to a decrease in the export of beddings. Blankets and pillows represent more than two thirds of total export and the importance of those export items is growing. One reason is definitely Wendre s success in foreign markets. About one fifth of blankets and pillows are sold to Sweden and more than one tenth to Finland. The number of workers continued to decrease in 21 (decreasing by nearly one tenth). At the same time wages remained at the same level even during the crisis and even increased by the end of 21 by 6.. Continuous wage increase has reduced the gap with the national average and wages have reached the level of two thirds of the national average. Since the jobs which were cut were mainly those with little added value the productivity indicators have improved. The productivity of labour costs increased Ministry of Economic Affairs and Communications Ministry of Finance 211

22 22 Economic Survey of Estonia 21 by nearly 1 and productivity per working hour increased even faster. Investments continued to decrease in 21 (nearly 4 compared to the previous year). More than two fifths of all investments were made to acquire buildings and facilities and about one third to buy machinery and equipment. Investments in machinery and equipment decreased by. Textile producers were rather optimistic in March 211. None of the companies were planning to cut jobs. One third claimed that there were no obstacles to increasing production. The same number of producers mentioned insufficient demand as an obstacle to growth. The existing orders ensured production for 6 to 7 months which is the highest level of recent years Number of workers and wages * No of employed people Average wages (in Euros) Change in the No of employed people (r.s.) Change in wages (r.s.) Main export commodity groups Cotton Other fabric readymade 2 textile products 1 Carpets and other textile floor covering 7 Other textile products 9 Goods of Estonian origin Value added, labour costs and productivity Blankets and pillows * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Invetsments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

23 Economic Survey of Estonia Manufacture of wearing apparel The development of clothing has been rather modest. Production volumes are twice below the level of ten years ago and employment in the has decreased accordingly. More than two thirds of products are exported which makes the less dependent on the domestic market. The largest clothing manufacturers are AS Baltika, AS Silvano Fashion Group and Osaühing Lenne (manufactures of children s clothing) in Tallinn and AS Sangar and AS Ilves-Extra in Tartu. The clothing continues to be the sector with the biggest share of subcontracting in Estonian manufacturing. There are some Estonian brands that have reached foreign markets but more than half of the sector s sales income comes from subcontracting. Taking into account the instability and smaller profit margins of subcontracting the producers should consider moving from subcontracting to producing their own trademarks. This takes time and requires considerable investments in marketing but is inevitable for the sector. The number of workers in the sector may continue decreasing since the average wages are low and the sector is not able to keep pace with the overall wage increase. Share of sector in economy 21 was a year of stabilisation for the clothing 1 1. Sales stopped to decrease and exports started to increase ,4 1,6 value added man. exports Source Statistics Estonia ,1 Share of exports in sales 8,2 employment of man.,7 Ratio to average wage Sales and exports * Sales Change in sales (r.s.) Exports Change in exports (r.s) After three years of downturn production volumes at constant prices started to grow and increased in 21 by 4. The increase was driven by the s success in export markets since sales in the domestic market decreased by nearly one fifth. The second half-year was significantly better than the first production volumes increased by more than 2. The clothing continued to suffer from the same problems as in previous years. On the one hand, growth was hindered by modest demand, on the other hand, profitability decreased due to competition from countries with cheaper labour. However, the competitiveness of Estonian clothing has improved as the wage pressure eased during the crises while in Asia wages continued to grow. Also, transport costs increased due to high oil prices and our clothing could breathe more easily. The production is targeted mainly to foreign markets - more than two thirds of the production is exported. Exports grew mainly on account of growing exports to Finland (growth more than 27). At the same time exports to Latvia and Lithuania decreased. The largest product group exported are men s clothing export grew in a year by nearly one fifth. Exports of women s clothing increased only by. The growth of export to Finland was driven mainly by growth in the segment of working clothing. The average number of people employed in the clothing decreased - mainly due to the cuts of jobs in the second half of 29. In 21, employment was stable throughout the year and started to grow in the last quarter. The average gross wages increased more than 6 - by one percentage point faster than in the manufacturing on the average. Productivity started to improve also. Added value per employed person increased by 1 and total profit by more than. Investments increased in the clothing in 21 significantly. According to preliminary data more resources were invested than a year ago. Ministry of Economic Affairs and Communications Ministry of Finance 211

24 24 Economic Survey of Estonia 21 Nonetheless, the ratio of investments to sales income is half of that of the average of the manufacturing. A little more than half of investments were made in machinery and equipment. The growth in investments was biggest in the segment of acquiring buildings and facilities. The clothing manufacturers participating in the survey conducted by Eesti Konjunktuuriinstituut were more optimistic about their future in March 211 than a year ago. More than a third expected their production volumes to grow and none were planning to cut further jobs. At the same time utilisation of capacity was more than 9 which means that further development requires more investments. Lithuania Germany Latvia Norway Sweden Finland Spordi- ja töörõivad 14 Exports by main target countries Women's clothing Main export commodity groups T-shirts and vests 4 Other products 1 Men's clothing Number of workers and wages * Number of employed people Average wages (in Euros) Change in the number of employed people (r.s.) Change in wages (r.s.) * Investments in fixed assets Change in investments (r.s.) Investments of companies Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Goods of Estonian origin Ministry of Economic Affairs and Communications Ministry of Finance 211

25 Economic Survey of Estonia 21 2 Wood processing Beside oil shale, timber is one of the most important natural resources in Estonia and an important contributor to the trade balance. Timber is one of the largest industries in Estonia. Nearly a thousand companies with more than 12, employees are engaged in wood processing and manufacturing of wood products. Production volumes which declined significantly during the crisis have started to increase again and the number of jobs has stabilised. The offers a wide range of products from sawn timber to log houses, wooden windows and doors. Stora Enso AS, a sawn timber producers, JELD-WEN Eesti AS, a window and door manufacturer and AS Technomar&Adrem, a particle board and door-facing manufacturer, are the largest employers in the sector. Other largest companies are AS Viljandi Aken ja Uks, a manufacturer of wooden doors, windows and frames, and UPM- Kymmene Otepää AS and Balti Spoon AS, manufacturers of veneer and plywood. Timber is becoming more and more versatile and increasing amounts of raw timber are processed in Estonia. Beside wooden construction components and sawn timber, the share of log houses has grown significantly Estonia has become the fourth largest log house exporters in the world. Further development depends increasingly on our ability to offer new solutions and high quality products since relying on cheap prices and large volumes is not sufficient for competing with Poland and Lithuania. 1 Share of sector in economy 1 In 21, timber started to recover from the crisis. Production volumes at constant prices 8 96,7 8 increased by more than 2 and sales volumes 67,3 by a third. The growth was driven mainly by 6 6 export although sales volumes increased also in 4 4 the domestic market. 2 2,3 value added 14, man. exports Share of exports in sales 13, employment of man. Ratio to average wage 1 4 Sales and exports * Sales Exports Change in sales (r.s.) 2 Change in exports (r.s.) Throughout 21, Estonian timber was characterised by fast growth. Sales to the domestic market increased by one fifth significantly more than the manufacturing as a whole. However, the developments in the domestic market depend on the developments in the construction sector which started to recover in the second half of the year. While in 29 the prices of the main production input continued to fall, in 21 they started to increase. Prices of raw material, as well as energy and labour costs increased. According to the data of the State Forest Management Centre, the prices of different types of timber went up by 2 on average. The prices of pine increased in line with the average price increase, the prices of birch and aspen increased by 1. As a result, producer prices increased by which is more than the average of the manufacturing. Rather modest research and development activities remain a concern in the. While timber accounts for almost 12 of the total turnover of the manufacturing, less than 4 of research and development specialists work in that segment. At the same time, Estonian timber is characterised by a relatively large number of small companies that do not have necessary resources for research and development activities. Since it is very likely that the will lose its advantage of having cheap labour research and development capacity will become a key of success. 21 was a year of relatively fast price increase in timber. Average wages increased nearly twice as fast as in the manufacturing on average - nearly 1. The average wages in timber are Ministry of Economic Affairs and Communications Ministry of Finance 211

26 26 Economic Survey of Estonia 21 again nearing the national average. The number of people employed in the continued to decrease. The decline has stopped, however, and the number of jobs in timber is expected to increase. Fast increase of sales income together with declining number of jobs resulted in improved productivity in the sector. Productivity per employee increased by nearly 3. However, growing total costs meant that total productivity did not increase and remained slightly below the level of the previous year. Exports has always been important for Estonian timber, accounting for nearly two thirds of the total sales. The main export partners were in 21 Finland and Norway accounting for more than 2 of export. Exports to Norway increased 6 spurred by the export of log houses which more than doubled during the year. Exports to Finland increased by 2 and export to Sweden by. Sawn timber and construction components account for more than half of exported products. Exports of these product groups increased in 21 by and 23 respectively. Exports of log houses increased even faster (64) and the value of such exports reached 13 million Euros. More than half of log housed manufactured for foreign markets went to Norway and Germany followed by UK and France. Exports of plywood increased also significantly more than two and half times in a year. Investments which had declined during the crisis started to grow in 21. According to preliminary data, more money was invested in fixed assets than a year ago. More than half of these investments were made in machinery and equipment (growth 8). Significantly more resources were invested in means of transport and IT systems. According to the survey conducted by Eesti Konjunktuuriinstituut the utilisation of capacity reached 8 in 21 almost exceeding the long-term average. Thus, more investments are needed to increase production volumes further. The companies participating in the survey were rather optimistic about their future prospects. Nearly two thirds of them expected their production volumes to grow. One fifth of respondents mentioned that shortage of raw material or lack of equipment may inhibit further growth. Optimistic opinions were supported by the fact that more than half of companies had more orders for export than usually. Japan UK Sweden Germany Norway Finland Building components (including windows, doors, laminated timber) 2 Sawn timber 26 Exports by main target countries Main export commodity groups Goods of Estonian origin Plywood Log houses 21 Profiled timber 6 Other products 17 Number of employed people and wages * No of employed people Average wages (in Euros) Change in the number of employed people (r.s.) Change in wages (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

27 Economic Survey of Estonia Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s) Investments of companies * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

28 28 Economic Survey of Estonia 21 Martin Arula, manager of Toftan: The economic crisis did not catch us According to Martin Arula, manager of one of the largest sawmills, 21 was one of the most profitable years for his company and a year of largest investments the company took a huge step towards greater efficiency. How was 21 for Toftan? Last year was a good year. Production volumes and turnover increased and the year was one of the most profitable years for us. The crisis never caught us and only 28 was slightly less profitable than other years. Despite that, we managed to increase our production volumes during the economic downturn. We created the preconditions for coping with the crisis earlier, in 26 and 27. Did the number of jobs at your company change and how? The number of jobs did not change, we employed and continue to employ 18 people. We are going to create more jobs this year; with a new maintenance system, we will need 4 or more people. What kind of investments did you make in 21? We invested in technology improved sawing preciseness and introduced scanning technologies. The solution is unique, a prototype which we created in our company. By now the equipment is being finetuned and we can start production with practically no lost material and guaranteed higher quality and high productivity. It is very difficult to achieve this trinity in wood processing and we are very proud of our achievement. Our new maintenance system can also be regarded as an investment. The system will be implemented in 211. This is an investment in people and processes this type of investment becomes important when investments in technology are no longer necessary. Which external factors affected the timber most in 21? Consumption was restored everywhere in the world. This was a slow process but it gave and opportunity for those companies in the wood processing who had been forced to make cuts in 28 and 29. There were no extraordinary developments in the sector. Fast price increases of 26, 27 and 28 and the subsequent downturn overshadow all other events. What are the plans at Toftan for the future? I think we will continue what we have done so far focus on clients and the market, identify bottlenecks in processes and the organisation and search for solutions take a small step forward every day. We are not planning to make large investments. We are, however, ready to face challenges, both organisationally and financially. What are the prospects of the timber in Estonia? Taking into account the rapid and contradictory developments of the last couple of years, foretelling future events seems very difficult because economy can change within days both in Estonia and elsewhere in the world. In order to increase production volumes private forest owners need more encouragement. Today, special taxation of private forest owners is an obstacle. I don t believe, however, that abolishing the special tax will increase yields sharply. Unfortunately, there is no political interest in amending the tax law. Increasing wood processing volumes is also limited by prescribed yields. Volumes are probably going to increase in the middle of 212 when in theory it is again possible to import timber from Russia. However, the import volumes will not reach even half the level of The emergence of new sawmills is very unlikely; old ones will be modernised and maybe some sawmills that were closed down will start operating again. All companies that survived the crisis will continue operating. Ministry of Economic Affairs and Communications Ministry of Finance 211

29 Economic Survey of Estonia Manufacture of paper pulp, paper and paper products Paper has long history and traditions in Estonia and is relatively consolidated. There are more than 6 companies producing paper, chemical pulp or paper products that employ about 1 people. Although production volumes have not reached the level of 27, trends are clearly positive. The backbone of the sector are two companies: AS Estonian Cell, mechanical pulp producer with turnover of nearly 6 million Euros, and "HORIZON" Tselluloosi ja Paberi Aktsiaselts, paper and cardboard manufacturer with turnover of 49 million Euros. These companies contribute more than half to the total sales income of the sector. Both companies have improved their competitiveness in foreign markets and are expected to maintain their current production volumes next year, provided the macroeconomic environment does not change. Share of sector in economy In 21, the volume of production increased in 1 1 the paper. Sales increased by almost a 84, fifth during the year, exports growth was even 8 16,9 12 faster. domestic sales increased also by a few per 6 9 cent. 4 2,3 3,1 value added man. exports Share of exports in sales 1,6 employment of man. Raio to average wage (r.s.) Sales and exports * Sales Exports Change in sales (r-s.) UK India Egypt Italy Germany France Change in exports (r.s.) Exports by main target countries was significantly better for the paper than 29. The recovery of global economy increased demand for paper and pulp and the world prices moved to a higher level compared to the previous year. Although the recovery was noticeable, the production levels in the sector remained about 2 below the peak of 27. Thanks to an improved market situation the largest company of the AS Estonian Cell was able to increase the sales by more than a third. The second largest manufacturer Horizon increased its turnover by 44. However, with the recovery of the economy the prices of raw material also started to increase and because the is energy consuming, it is affected significantly by changes in energy prices. 84 of the production is exported. The largest export countries depend heavily on the activity of Estonian Cell as the company s exports account for almost half of the s exports. This is the main reason why the largest target country for exports is France pulp exports to France increased by 2. times. In the external trade sector, the importance of Europe increased and the importance of Asia decreased in 21. The total pulp exports increased in a year by 41. One third of the paper s exports consisted mainly of uncoated kraft paper and paperboard manufactured by Tselluloosi ja Paberi AS HORIZON, the exports of which grew by almost 6. Employment in the paper remained virtually unchanged in 21 compared to the previous year. However, average wages increased by almost one per cent, remaining higher than the national average. Rapid growth in revenues led to an increase in the productivity figure. Value added per employee rose by a third and the total productivity of the increased by more than twofold. Efficiency improved in 21 noticeably while sales income increased by more than a third, the total costs increased by only 1. Good results can be attributed to Estonian Cell s increased profitability. Ministry of Economic Affairs and Communications Ministry of Finance 211

30 3 Economic Survey of Estonia 21 Investment in fixed assets in the paper remained almost at the same level as in the previous year. Three quarters of all funds invested in fixed assets were spent on machinery and equipment. However, several largest companies of the reported increasing levels of investment in capacity expansion as well as in saving energy and the environment. The future of the paper is largely dependent on the developments in the world market. Due to the high share of export, the rapid economic growth does not provide significant support to the domestic paper. A stable production environment, however, gives Estonia an advantage in world markets. An earthquake in Chile reduced the pulp production capacity and prices started to increase rapidly. This effect might not persist for a long time, nevertheless Estonian companies have demonstrated that they are reliable supply partners.. Copybooks 7 Main export commodity groups Other products 7 Goods of Estonian origin Pulp 47 Uncoated kraft paper and cardboard 33 Boxes, crates, bags and other packaging 6 Number of employees and wages No of employed people Average wages (in Euros) Change in number of employed people (r.s.) Change in wages (r.s.) Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

31 Economic Survey of Estonia Manufacture of chemicals and chemical products Estonian chemical has always been closely related to the oil shale although other sub-industries, such as production of construction and consumer product chemicals, are also strongly represented. While production increased until 29, the number of jobs remained stable. Thus, sales and production volumes increased mainly due to improved productivity. While productivity has improved rapidly it is still significantly below the productivity in developed countries. While in Estonia the value added per employee was about 4, Euros in 28, in Finland, for example, it was 12, Euros. There are about a hundred chemical companies operating in Estonia. More than half of them can be found in the northeast of Estonia, about one third of all jobs are located in Tallinn and Harju County. The largest chemical companies are VKG Oil AS, Kiviõli Keemiatööstuse OÜ and Eesti Energia Õlitööstus AS (production of shale oil), Akzo Nobel Baltics AS (ES Sadolin AS), AS Tikkurila and AS Eskaro (paints and varnishes), Molycorp Silmet AS (rare earth metals), OÜ Krimelte and Henkel Makroflex AS (assembly foams), Eastman Specialties AS (benzoic acid, sodium benzoate), AS Nitrofert (mineral fertilizers, ammonia and carbamide), Orica Eesti OÜ (explosives) and AS Nycomed Sefa (medical products). Increasing labour productivity may reduce demand for labour. The need to improve efficiency results from the rising input prices. The increase in costs related to the environmental protection is also an important factor in the chemical. Fluctuation in oil prices has increased interest in alternative fuels, including oil shale and therefore, the number of jobs is expected to grow in that segment. Share of sector in economy In 21, the situation improved in all sub-sectors 1 1 of the chemical 4, sales increased in both the domestic and foreign markets. Rising oil 8 69,8 19,7 12 prices raised prices also in the chemical. 6 9 Expectations of businesses for 211 were positive , value added 8, man. exports Share of exports in sales 3,4 employment of man. Ratio to average wage (r.s.) Sales and exports * * Sales Change in sales (r.s.) Exports by main target countries Russia Latvia The Sweden Finland Ukraine Lithuania USA Germany 6 3 Exports Change in exports (r.s.) The chemical increased production by 14 in 21; production volumes grew in all sub-sectors. The growth was fastest in the smallest sub-sector, production of pharmaceutical products, where production grew by more than a fifth. The economic crisis affected the production of pharmaceutical products relatively little and therefore, production volumes reached a new record highs. The companies of major sub-sectors were also producing more than the previous year (increase of 11 in the oil, and of 1 in the production of chemical products), but the pre-crisis levels has not been reached yet. Fertilizer manufacturer Nitrofert has not started production yet. Developments varied in various fields that depend on the construction sector the production of varnish and paint products decreased, while mastics were produced more than in the previous year. Due to rising prices sales volumes increased more quickly than production. In the chemical as a whole the average annual price increase remained within a few per cent, but at the end of the year, rising oil prices started to push up producer prices Delayed spill over to the prices of chemical products means that prices are expected to continue growing. Import prices of chemical products increased by more than 1; increase in export prices reached the same level by the middle of the year. However, oil 4 Besides the production of chemicals and chemical products (NACE 2), this sector includes also the production of fuel oils (NACE 19) and the production of main pharmaceutical products and proprietary medicinal products (NACE 21). Ministry of Economic Affairs and Communications Ministry of Finance 211

32 32 Economic Survey of Estonia 21 responded quickly to world prices and sales revenue in the sector increased by more than a third. Sales of chemical products increased in line with production volumes; sales of pharmaceutical products grew slightly faster than production. Sales increased in both domestic and foreign markets by approximately one quarter. Half of fuel oil is sold in the domestic market (the majority of products may reach foreign markets through intermediaries), other sub-sectors are focused mainly on exports. Growth in the export of oil shale was based mainly on price increases, the sales to foreign markets increased by. Compared to last year, less paints and varnishes were exported. Exports to different countries were affected mainly by changes in sales channels. Exports of chemical products to Lithuania decreased. In 21, chemical companies invested in the fixed assets by one-tenth more than a year earlier. Investments decreased only in the pharmaceutical that invested in fixed assets in 29 more than usually. Most investments were related to the development of oil ; the sector is expected to invest actively also in coming years. Both VKG and Eesti Energia Õlitööstus are planning to build or building new oil plants. Three fourth of investments were related to machinery and equipment; investments in this field grew by 4 as compared to 29. Oil created over a hundred jobs in a year, but little more jobs were cut in the production of chemical products. Thus, the number of people employed in the chemical remained at almost the same level as the previous year, increasing, however, with each subsequent quarter. Workload (number of hours worked per employee) increased a little, which in turn led to a slight rise in wages (an average of 4 in the sector). Sales income increased faster than costs in all subsectors, resulting in increased profit. The share of total profit in sales income reached the pre-crisis level (1). Productivity indicators also improved significantly, reaching almost the record level of 28. The confidence of companies strengthened at the beginning of 211. The majority of companies participating in the survey conducted by Eesti Konjunktuuriinstituut expected their production volumes to increase; 1-2 were planning to hire more employees. However, prices were also expected to rise significantly. Production volumes were expected to increase partly due to low reference base. Mineral fuels and oils 4 Main export commodity groups Fertilizers 1 Paints, varnishes, mastics 24 Goods of Estonian origin Other 2 Inorganic chemicals 4 Organic chemicals 6 Number of employees and wages * No of employed people Average wages: production of chemical product (in Euros) Change in number of employed people (r.s.) Change in wages (r.s) * Value added, labour costs and productivity Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) * Invetsments of companies Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

33 Economic Survey of Estonia Manufacture of rubber and plastic products Rubber and plastic products are used in various fields from food (packaging) to automotive and production of building materials. While the sector has been developing fast, production volumes and the number of jobs decreased due to the economic crisis. Estonian rubber and plastics comprises nearly 2 SMEs. The largest of them are Pipelife Eesti AS (plastic pipes), AS Estiko-Plastar (plastic film and plastic bags), AS Plasto (plastic windows), Promens AS, Talent Plastics Tallinn AS (plastic products for the automotive ), Greiner Packaging AS (plastic containers), OÜ Merinvest (rubber o-rings, membranes) and AS Balteco (bathtubs). The largest companies are located in Tallinn and Harju County (about half of all jobs), Tartu County and Ida-Viru County (about one-tenth of all jobs); however, there are quite many jobs also in the islands of Hiiumaa and Saaremaa. With the recovery of economy production volumes are expected to increase in the rubber and plastics. However, the number of jobs is not expected to reach the pre-crisis level. Production is becoming increasingly more complicated and labour intensive activities are replaced by new machinery. Mass production is moving out of Estonia and companies that are flexible and focused on smaller lots have better prospects. Share of sector in economy Production volumes in rubber and plastics 1 1 grew due to increased exports in ,2 64, 8 Domestic market became more active in the 6 6 second half of the year and the number of 4 4 employees increased. Production volumes and the number of jobs are expected to continue 2, 3,2 4, 2 growing also in 211. value added man. exports Share of exports in sales employment of man. Ratio to average wage Sales and exports * Sales Exports Change in sales (r.s.) Change in exports (r.s.) Number of employees and wages * No of employed people Averagw eages (in Euros) Change in number of employed people (r.s.) Change in wages (r.s.) Production of rubber and plastic products increased in 21 by nearly 2. Despite the relatively fast growth the sector has recovered from the crisis only partly. Production prices increased less than 3, however, the price increase continued. Similarly to the chemicals, the rubber and plastics depends heavily on oil based raw material and the prices reflect increases in oil prices. Sales to foreign markets increased by, sales to domestic market decreased slightly. Domestic market started to recover in the second half of the year when sales to Estonia exceeded the sales volumes of 29. While before the crisis, about the same amounts were sold to the domestic and foreign markets, then after the crisis export is clearly exceeding domestic sales (due to weak domestic demand). In 21, exports accounted for nearly two thirds of total sales. Exports of rubber and plastic products increased in all main target markets. Exports to Germany and Norway grew faster than export to other markets. The main export items were membranes, furniture and automotive accessories, boxes, bags and packaging. Production volume growth was achieved with the existing number of jobs; the number of people employed in the sector decreased by nearly 3 in a year. In the second half of the year, workload increased and the number of jobs started to increase slightly. Wages increased also (in companies with more than employees by 8), increasing labour costs. The main reason for the increase in costs was increased production volumes. Total profit tripled due to increased sales revenues; return on sales reached the pre-crisis level. Profitability indicators showed also signs of improvement. Ministry of Economic Affairs and Communications Ministry of Finance 211

34 34 Economic Survey of Estonia 21 Despite restored demand, investments decreased in the rubber and plastics for a third consecutive year. Investments of companies in fixed assets decreased by one third compared to 29. Investments decreased in all categories of assets except for investments in the means of transport. More than half of investments were made in machinery and equipment. The companies of the rubber and plastics were somewhat less optimistic about their future prospects than the manufacturing as a whole. While the companies participating in the survey had managed to increase their production volumes, they had less order than usually and the capacity utilization rate remained below the average of previous years. The situation improved at the end of the year and at the beginning of 211, companies expected to increase the number of jobs. Sweden Finland Germany Norway Latvia Lithuania Russia Denmark Poland Exports by main target countries Boxes, bottles, etc. 26 Main export commodity groups Plastic sheets and films 13 Vulcanized rubber products (seals, etc.) 6 Office and school supplies 34 Other products 12 Plastic pipes and hoses 1 Goods of Estonian origin * Investments of companies Investments in fixed assets Change in investments (r.s.) Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

35 Economic Survey of Estonia 21 3 Manufacture of metal and metal products The metal has been characterised by a very fast growth in past 2 years. In 2 28, the production volume of the sector almost tripled. Although the production volumes grew mainly due to export, increasing demand in the domestic market (in the production of machinery and equipment and in construction) also contributed to the growth. Increased sales and production increased need for workforce. Global economic crisis, however, caused serious setback. After the crisis, the number of people employed in the metal fell to 1, people. However, the remained one of the largest in Estonia. There are more than 8 companies operating in the field. Metal companies are concentrated in Tallinn and Harju County (more than half of jobs) and in Ida-Viru County (almost a fifth of jobs). The largest companies are AS Kohimo, Cargotec Estonia AS, OÜ BLRT Marketex, AS Remeksi Keskus, AS E-Profiil (metal structures), ArcelorMittal Tallinn OÜ (galvanized steel), Ruukki Products AS, AS Saku Metall (construction details), Eesti Energia Tehnoloogiatööstus AS (production and maintenance of products used in power stations), AS Hanza Tarkon, AS Favor, Metalliset Eesti AS (metal processing) and Metaprint AS (production of metal containers). Demand (in particular in export) is expected to increase in the metal. The number of jobs will not reach the pre-crisis level and the development of the sector is based mainly on increased productivity. Share of sector in economy Unlike other sectors, the developments in the 1 1 metal were rather modest in 21; 8 116, ,8 however, the situation started to improve at the end of the year. In 211, production volumes are expected to increase. 2 1,8 9,4 12, 3 Recovery from the crisis has been slower than in the Share of Ratio to manufacturing as a whole. A slump in the construction sector affected the production of metal value man. exports in employment average of wage (r.s.) added sales exports man. construction details Sales and exports * Finland Sweden Poland Germany Norway Denmark Russia Czech Republic Latvia Sales Change in sales (r.s.) Exports Change in exports (r.s.) Exports of goods of Estonian origin by main target countries In 21, the production volumes increased, exceeding the volumes of 29 slightly. Metal production increased significantly but as the majority of the companies in the sector produce metal products, the overall growth remained modest. The situation improved in the last quarter when the production volumes of metal products started to increase. Increased metal prices increased companies spending on raw material and consequently, final prices grew also. Production prices increased 12 as an average, i.e. returned to the pre-crisis level. Although production volumes did not increase, the sales increased due to increased prices by more than a third. Sales volumes grew also fast in the metal the sales of metal products increased by 16. Sales increased mainly due to increase in exports although sales to the domestic market improved also. In 21, exports to the Czech Republic and Poland increased due to increased exports of sheet steel. Sheet steel contributed most to the growth of exports, mainly because ArcelorMittal s steel zincing plant started to operate again. Sales of the main product group, metal structures (scaffolding, supporting structures, landing stages), to foreign markets decreased in 21. As a result, exports to Germany and Denmark decreased. The number of people employed in the metal decreased in a year by more than a tenth. The developments were different in metal production, although this sector forms only a small part of the. The number of working hours Ministry of Economic Affairs and Communications Ministry of Finance 211

36 36 Economic Survey of Estonia 21 decreased somewhat more slowly and in the second half of the year, the number of jobs started to grow. Wages increased in a year by few per cent. Labour costs decreased in a year by a tenth in total. Increased raw material prices and production volumes increased, however, total costs, although the increase was slower than the increase in sales revenue. The total profit of companies increased and profitability in 21 was comparable to that of the pre-crisis years. Increased production volumes and decreased number of employees resulted in improved productivity. Productivity of total costs was more modest and added value increased in line with costs. Investments decreased in a year by 4. Companies cut investments in buildings and facilities; two thirds of investments were made in machinery and equipment although companies were forced to cut spending in this area also (by about 2). The findings of the survey conducted by Eesti Konjunktuuriinstituut reflected the developments in the sector. Although production volumes increased and companies received more orders, demand was assessed to be lower than the average, mainly due to the poor situation in the domestic market. The situation started to improve at the end of the year and in early 211, companies expected to increase the number of employees. Some companies mentioned that shortage of labour and materials and equipment was one of the factors inhibiting growth. Metal processing companies referred to financial problems more often than companies of other sectors. However, the main problem was low demand, although the situation is changing also in this regard. The companies expected their production volumes to increase in 211. Iron and steel products 4 Iron and steel 29 Main export commodity groups Goods of Estonian origin Other products 16 Aluminium and aluminium products 11 Copper and copper products 4 Number of employees and wages * No of employed people Average wages (in Euros) Change in No of employed people (r.s.) Change in wages (r.s.) Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

37 Economic Survey of Estonia Manufacture of machinery and equipment Before the global economic crisis, production volumes in the engineering grew fast. However, the crisis affected strongly the manufacturers of investment products, including the engineering. Since a large part of products goes for export, the engineering depends heavily on the developments in the foreign markets. There are about 1 SMEs in Estonia engaged in the production of machinery and equipment. The largest companies in the engineering are AS Hekotek (wood processing equipment), AS Fors MW, OÜ Palmse Mehaanikakoda (log trailers and log loaders), AS Finmec (machinery parts) and Metos AS (catering kitchen equipment). The majority of the companies in the sector are, however, small enterprises. While larger companies are located in Tallinn and Harju County, the engineering is represented in almost every region of Estonia. According to forecasts, both export and sales to the domestic market are expected to grow in long term. Growth in production volumes is mainly based on increased productivity and therefore, the number of jobs is not expected to grow in the sector considerably. Productivity needs to improve because it is below the level of developed countries and also because production costs have increased. Share of sector in economy In 21, the engineering recovered partly 1 1 from the crisis although the number of jobs 8 8,7 119,3 12 continued to decrease significantly during 21. The situation started to improve by the end of the year and expectations for 211 are rather optimistic. 2,8 3,4 value added man. exports Share of exports in sales 2,8 employment of man. Ratio to average wage (r.s.) Sales and exports * Finland Sweden Germany Italy Norway South Korea Russia Sales Change in sales (r.s.) Exports Exports by main target countries 3 Change in exports (r.s.) While in the first quarter of 21 the production volumes in the engineering had not reached the level of the previous year, in the second half of the year, demand and production volumes started to increase. Production grew in 21 a total of 3. Despite the fast growth, the sector has not fully recovered from the crisis. Sales increased in line with production. Production prices virtually did not change, being by one per cent lower than in 29. Engineering was supported mainly by export growth; in the second half of the year, sales to the domestic market started to improve. Exports to Sweden and South Korea increased, sales to Russia, Italy and Norway decreased. The exports of the main product groups spare parts of loading and handling equipment and sales of cranes increased. The number of employees decreased in a year by a tenth. The number of working hours decreased less and in the second half of the year, companies started to hire again. Increased workload and wages pushed up labour costs by few per cent. Average wages increased in the sector by more than a tenth, catching up after the crisis. Total costs increased by a fifth, i.e. less than revenues. The engineering restored its profitability, although it remained below the precrisis level. Labour and cost productivity indicators improved significantly and nearly reached to pre-crisis level. Companies invested three times less than in 29; however, it should be taken into account that the final estimates of investments may change significantly. Unlike other sectors, the engineering sector kept the level of investment rather high during the crisis. Investments in fixed assets decreased in 21 regarding all categories of assets. Half of investments were made in machinery and equipment. Ministry of Economic Affairs and Communications Ministry of Finance 211

38 38 Economic Survey of Estonia 21 Companies were rather optimistic about their future prospects and at the end of the year, the situation could be regarded satisfactory. According to the survey of Eesti Konjunktuuriinstituut, the number of orders exceeded the average; however, there are still unused capacities. The share of companies willing to hire more people increased. The number of orders increased at the beginning of 211 and companies expected to increase their production volumes further. However, producers felt stronger price pressure. In 211, production volumes are expected to grow fast, yet in the second half of the year, the growth is likely to slow down * Number of employees and wages No of employed people Average wages (in Euros) Change in No of employed people (r.s.) Change in wages (r.s.) * Value added Value added, labour costs and productivity Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Investments in fixed assets Change in investments (r.s.) Source: statistics Estonia Ministry of Economic Affairs and Communications Ministry of Finance 211

39 Economic Survey of Estonia Manufacture of electronic and electrical equipment Manufacture of electronic and electrical equipment has been one of the fastest growing industries in Estonia. Sales revenues of the have more than doubled in the past five years. Employment has increased by more than a fifth during the same period. The sector is oriented to foreign markets; the majority of the largest companies in the sector are based on foreign capital. The number of companies operating in the field is approximately 17. Manufacture of electronic and electrical equipment is concentrated in Tallinn and its surroundings; however, the has a great impact on regional development as well. The electronics is one of the largest employers in the island of Saaremaa, and towns of Pärnu, Sindi, Elva and Koeru. Manufacture of electronic and electrical equipment is divided into two sub-sectors. The largest manufacturers of computers, electronic and optical equipment are Ericsson Eesti AS (mobile communication devices), Enics Eesti AS (electronic parts for industrial and medical devices), Elcoteq Tallinn AS (communication devices), Scanfil OÜ (telecommunication devices) and the largest computer manufacturer is AS Ordi. Unlike other products manufactured by the, computers are sold mainly in the domestic market. In the field of electrical equipment the biggest sales revenue was earned by ABB AS whose main line of activity is the manufacturing of electricity distribution devices and power generators. Other companies in this sector are AS Konesko (electrical motors and equipment), Entso Ensek AS (electricity distribution and safety control devices) and AS Draka Keila Cables (cables). Growing foreign demand in 21 helped the manufacturers of electronic and electrical equipment to return to growth. Increased number of orders encouraged companies to expand and hire new workforce. Introduction of new products with more added value helps to increase productivity in the sector ,1 value added 2, man. exports Share of sector in economy 88,4 Share of exports in sales 1,3 employment of man * Sales Change in sales (r.s.) 98,7 Ratio to average wages 12 Increase in sales by sub-sectors * Manufacturing of computers, electronic and optical devices Manufacturing of electric equipment Sales and exports Exports Change in exports (r.s.) -3 The sector of electronic and electrical equipment was in 21 the second fastest growing sector of the manufacturing (manufacture of means of transport being the first). The development of the sector was supported mainly by fast recovery of foreign demand. Production volumes grew due to improved labour productivity, the number of jobs did not increase in 21. Fast recovery of demand in the world market had a positive effect on the electronic and electrical equipment manufacturing as the majority of the production of the sector goes for exports. Production and export volumes reached a record high in 21, mainly because Estonian companies started to manufacture products with higher added value. Sales in 21 exceeded the sales in 29 nearly twice whereas exports grew 2.1 times. Fast growth was based mainly on sales of computers, electronic and optical devices (which account for 97 of the sector) produced for export markets. Exports increased by 2.7 times. The largest contributor to the growth was Ericsson Eesti who started to manufacture mobile devices with higher added value (base stations, broadband devices). The share of electronic equipment in the total sales increased to 69. The manufacturing of electric equipment grew somewhat slower. However, in the second half-year, sales and exports started to grow fast also in this sub-sector, reaching 16 and 17 respectively. Sales in the second half-year were also spurred by the recovery of domestic demand and sales to the domestic market increased in a year by 12. Because of this, the share of exports decreased to 61, which is 12 percentage points less than a year ago. In 21, the share of Sweden as the main export market for electronic and electrical equipment increased further and nearly half of exports went to Ministry of Economic Affairs and Communications Ministry of Finance 211

40 4 Economic Survey of Estonia 21 that country. Exports to Sweden grew 2.3 times. Fast growth was supported by sales of mobile communication devices (base stations, broadband equipment) which tripled in the year. Other most important products exported to Sweden were wiring sets for cars and insulated electrical wires and distribution devices used in telecommunications. Exports of electronic and electrical equipment to Finland increased by a third, accounting for a fifth of the total exports of the sector. The main products exported to Finland were static transformers, electricity distribution equipment, insulated wiring, parts of electrical motors and generators. The third most important export market for the sector was Germany; however, sales to Germany remained to the level of 29. Exports to USA doubled, making the country the fourth largest export market for the. Exports to USA was spurred mainly by sales of mobile communication devices. Exports to Norway and UK also increased (by 1.6 times), taking these countries to the first six in the ranking of target countries. Despite the fast growth of production volumes, the number of people employed in the manufacturing of electronic and electrical equipment did not increase in 21 and even decreased slightly. According to the enterprise statistics, the sector employed 4 less people than a year ago; according to the data of the labour survey, the number of people employed by the sector decreased by a fifth. By sub-sectors, employment decreased most in the production of electrical equipment where the growth of production volumes was somewhat slower. In the sub-sector of electronic equipment which recovered fast, the number of employees decreased little. Added value increased in the sector by more than half, while labour costs increased little. Therefore, the productivity of labour costs increased significantly (48). Improved labour productivity enabled companies to raise wages so that average wages exceeded the average wages of 29 by one tenth. This brought average wages in the sector close to the national average. Wage increase reflects structural changes in workforce as most jobs cut during the crisis were in the group of unskilled workers. The sector of electronic and electrical equipment manufacturing increased investments in fixed assets by nearly in 21. Fast growth was supported by manufacturing of electronic equipment (growth 1.8 times in a year). Several companies restructured their production and introduced to the market new products with higher added value. This meant that production technology needed to be updated as well. 8 of the sector s total investments were made in the production of electronic equipment; most of the funds were used to acquire machinery and equipment. In the sector of electrical equipment investments continued to decrease (-2). In that sub-sector investments increased in 28 when the production volumes grew fast. Investments of companies * Investments in fixed assets Change in investments (r.s.) Number of employees and wages * 21* No of employed people Average wages (in Euros) Change in number of employed people (r.s.) Change in wages (r.s.) Sweden Exports by main target countries Finland 22 Germany 4 USA 2 Norway 2 UK Value added, labour costs and productivity Muud * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) According to forecasts, the electronic and electrical equipment sector will continue to grow fast in 211. This was confirmed by the results of the first quarter, production in constant prices nearly tripled compared to a year ago. However, the reference base of 21 was low and therefore, the growth is expected to slow down in the second half of 211. According to the survey conducted in March 211 by Eesti Konjunktuuriinstituut, about one fifth of the manufacturers of electronic and optical equipment expected their production volumes to grow and the rest expected the production volumes to remain at the same level. The growth is based mainly on increased exports. Ministry of Economic Affairs and Communications Ministry of Finance 211

41 Economic Survey of Estonia Jan Kotka, executive manager of AS Elcoteq Tallinn: A new era has started for us Jan Kotka, executive manager of AS Elcoteq Tallinn, is delighted because a new era has started for the Elcoteq s Tallinn plant under new owners the company is much smaller, yet more flexible and can manufacture more complex products. How was 21 for Elcoteq Tallinn? For both Elcoteq Tallinn and the Elcoteq Group as a whole 21 was a year of many challenges. The groups has reduced its total workforce from 18, to 7, people and the number of Elcoteq plants has decreased from twelve to eight. Viability and profitability of a plant was the main criterion on which it was decided whether it should continue or be closed down. In August 29, when a major part of Elcoteq Tallinn was sold to Ericsson Eesti the plant which had employed 1,9 people became a small company of 113 employees and it is clear that both our clients and the managers of the group as well as our employees were wondering and asking from themselves will it stay this way?, will we cope? and for how long?. After reducing the plants cost base to the minimum, the sales continued according to plans and the last quarter of 29 showed good results. By January 21, when we moved to new production facilities, it was clear that we could be successful in Estonia also as a medium size enterprise and both the management and the clients were assured that we would continue. Our client portfolio was rather thin at the beginning of 21 and so was our organisation. New expanded roles and responsibilities of the majority of employees, red tape and processes which had been developed for a large company created tensions both among the staff and the clients. We manufacture professional telecommunication products (TETRA phones and systems, satellite phones GPS systems). Demand for these products is more stable and less affected by fluctuations in and seasonality of the market. We have tried to maintain this policy also when choosing new clients and this has ensured sufficient production volumes and decent growth and profitability throughout 21 when the effects of the global economic depression were still strongly felt throughout the world. Although Elcoteq as a group does not publish the results for single production units, I can say that in the fourth quarter of 21 our sales exceeded the sales of the first quarter about three times and the Tallinn plant has earned good profit throughout the new era. Strategic changes in the organisation, made in the second half of 21, helped to shift our activity from everyday reactive fire fighting to a more proactive level. The workers and in particular the management s motivation improved greatly after we won the Estonian management quality award for a third consecutive year. This confirmed that we are moving in the right direction as an organisation. Although we have more plans for 211 than we can accomplish, it is good to know that most of the objectives set in 29 for 21 were achieved and even exceeded. How did the number of employees change? Did you create any new jobs in 21? At the beginning of 21 Elcoteq Tallinn employed 13 people (+ the global team); by now we have more than 3 employees, so the growth is more than 1. We got several new clients during the year and increased our production volumes. We are focussing on smaller lots, a more versatile product range and more complex products. This sets completely new requirements for the team and finding and training competent employees was one of our priorities in 21. It has been very difficult to find engineers who are competent in the fields of electronics, quality and production processes. A small and efficient unit cannot afford a numerous support team to manage with fluctuating demand and outbreaks of flue. It is very important to have a team that is multifunctional and competent in all levels. So far there hasn t been a month when we did not hire some new people and we will continue supplementing our team according to necessity. Did you make any investments and in which assets did you invest? The biggest investments were made in surface mount equipment in the sector of electronic products. The prices of such equipment fluctuate between 1. and 2. million Euros depending on the configuration. We started in 29 with one machine and by now we have four. We also invested in an automated manufacturing execution system and various equipment necessary to complete the orders of new clients and to produce new products. We are also investing in training new employees. In 21 we had an average of 13 training hours per person in a month. Which external factors affected the electronics most in 21? The electronics is vast and difficult to characterise as a whole. In general, the sector followed the slow overall economic growth. If we look at the sector of telecommunication, which is historically more familiar for Elcoteq, then we can see Ministry of Economic Affairs and Communications Ministry of Finance 211

42 42 Economic Survey of Estonia 21 fast growth and wide spread of smartphones (i-phone and other similar Apple products) that has increased demand for faster data communication and hence for base stations offering such data communication. Industrial electronics is developing hand in hand with active development and expansion of infrastructures throughout the world. The old Europe is searching for a place of small-scale production of complex products, the end users of which are also in Europe. Estonia is seen as an appropriate place, especially by Scandinavian companies. I believe that we have an opportunity to expand production and export of electronic products. I think that we should not be afraid of the scenario of South Finland. To have a will and a development plan is not sufficient to start manufacturing i-phones we must have a critical mass of experts and knowledge to introduce our own product to the market. Which are Elcoteq s plans for 211 and beyond? The focus is on stabilising our activity. Since last year was a year of great changes and growth, in 211 we will try to organise and fine tune our processes and start cooperating with new clients, ensure stable and high quality in all fields of services to all clients. In the second half of 211 we will introduce a new ERP system. This is a very important project. We will also continue the development of the product monitoring system and training staff, especially in the field of SixSigma and Lean. Since Elcoteq as a group has a strategic objective of offering more secondary market services, we have actively offering such services in Tallinn and in the second half of 211 and first half of 212 we will expand our activity in this field. We have not planned growth similar to 21 and continue stabilising our client portfolio and moving towards offering more complicated products and services to create more added value. Ministry of Economic Affairs and Communications Ministry of Finance 211

43 Economic Survey of Estonia Manufacture of transport equipment Manufacture of transport equipment depends mainly on foreign demand; exports accounts for the greater part of the sales in the sector. Increasing exports and domestic demand helped to increase production volumes and create new jobs until 29. The economic crisis affected both the domestic market and exports. By now, sales volumes are on the way of being restored. While productivity is higher than in the manufacturing as a whole it still remains more than three times below the level of Finland. There are more than a hundred companies manufacturing transport equipment in Estonia. The largest of them are AS Norma (safety belts), PKC Eesti AS (wiring harnesses for automotive ), Stoneridge Electronics AS (electronics for automotive ), AS Respo Haagised and AS Bestnet (trailers), OÜ Tarmetec (accessories for vehicles), Universal Industries OÜ (exhaust systems), Baltic Workboats AS (aluminium boats), AS Luksusjaht (plastic yachts and speedboats). Many shipbuilding and repair companies, such as BLRT Grupp AS and its affiliate companies operate in the field of repairing machinery and equipment. The largest companies are concentrated mainly in Tallinn and Harju County (three fourth of all jobs), more companies are located also in Tartu County, Ida-Viru County and the island of Saaremaa. According to long-term forecasts the growth of sales volumes depends on exports, domestic market has a more modest part in the future growth. Production volumes grow due to improved productivity as shortage of labour and increasing labour costs force companies to focus on more expensive products. The number of people employed in the sector may, however, grow slightly in the future ,6,9 value added man. exports Share of sector in economy 92,6 Share of exports in sales 3, employment of man. 14,9 Ratio to average wage (r.s.) Sales and exports * Sales Kazakhstan Change in sales (r.s.) Exports Exports by main target countries Sweden Finland Russia Norway Belgium Change in exports (r.s.) Year 21 was a good year for manufacturers of transport equipment, in particular for manufacturers of motor vehicles, spare parts for motor vehicles and trailers. The sector was one of the few to increase the number of jobs. Prospects for 211 are fairly good, although the growth is expected to slow down. Production volumes nearly doubled in 21 in the sector. One reason for such rapid growth is that the sector suffered seriously from the crisis. However, production volumes exceeded in 21 even the precrisis level. It was a good year mainly for the manufacturers of motor vehicles, spare parts and trailers. In other sub-sectors, the growth did not exceed 1. For automotive year 21 was a record year and Estonian subcontractors benefitted from the growth. The production of the sector goes mainly for export. Manufacturers of motor vehicles and trailers exported twice as much as a year ago and sales to the domestic market increased by 2. The sales of other means of transport in Estonia continued to decline while export increased by 16. Export growth was spurred mainly by export of accessories (safety belts) and trailers. A large number of rail tank-wagons were sold to Kazakhstan but this was a one-off transaction of one rail company and does not reflect the developments in Estonian industrial sector. As regards other countries, exports Manufacturing of transport equipment means manufacturing of motor vehicles, trailers and semitrailers (NACE 29) as well as other means of transport, such as ships and boats and rail rolling stock (NACE 3). After the classification of economic activities was amended, the largest shipbuilding and repair companies are listed in the category Repair and installation of machinery and equipment (NACE 33). Ministry of Economic Affairs and Communications Ministry of Finance 211

44 44 Economic Survey of Estonia 21 increased to Russia and Sweden (safety belts, parts of motor vehicles). Sharp increase in production resulted in an increase in the number of employees although only by a couple of per cents (the number of working hours increased, however, by 14). Considerably more new workers were hired in the second half of the year. In the sector of other means of transport, developments in employment were less favourable. The number of workers declined by 12 compared to 29. Revenues increased faster than costs and in both subsectors productivity rose to the highest level of the past few years. Productivity improved considerably and added value per employee reached a record high. Wages increased about 1 and the average wage was comparable to the peak few years ago. Manufacturers of motor vehicles invested slightly more than in 29 while manufacturers of other means of transport invested nearly four times more than a year ago (the reference base is very low). Investments increased mainly on account of investments in machinery and equipment; in the subsector of other means of transport more was invested in buildings and facilities. According to forecasts, year 211 is expected to be another successful year for the automotive. The effect is expected to overspill to Estonia although the growth will probably not reach the level of 21. Main export commodity groups Trailers and semi-trailers 14,9 Parts and accessories of motor vehicles 33,4 Goods of Estonian origin Boats,4 Yahts and other boats,3 other 41, Number of employees and wages * No of employed people Average wages (in Euros) Change in number of employed people (r.s.) Change in wages (r.s.) Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

45 Economic Survey of Estonia 21 4 Furniture More than Estonian companies are manufacturing furniture. The crisis-torn sector is now on the way to recovery. Production volumes are still by 2 below those of the peak years but recovery is clearly noticeable. At the same time, the sector has become more efficient and able to manufacture the same amounts as ten years ago with workforce that is reduced by a third. In the future it will become more important to start manufacturing our own trademarks and reduce the share of subcontracting.. The largest furniture manufacturers are located in Harju County and South-East Estonia. In 21, the largest manufacturers were AS Standard (office furniture), AS Bellus Furnitur (upholstered furniture), Flexa Eesti AS (furniture components) and Valga GOMAB Mööbel AS (wooden furniture). Share of sector in economy For the furniture, year 21 was a year of 1 1 growth. Exports increased by more than 2. 76,2 76,1 8 8 Domestic market, however, remained weak and 6 6 sales declined by ,6,4 value added man. exports Share of exports in sales 6,7 employment of man. Ratio to average wage * Sales Exports Change in sales (r.s.) Change in exports (r.s.) UK Germany Norway Denmark Sweden Finland Sales and exports Exports by main target countries Furniture is closely related to the developments in the real estate market. Fast development of the real estate markets of Finland and Sweden have boosted the sales of Estonian furniture companies. In Estonia, the building market has not fully recovered yet and therefore, sales volumes of new furniture continue declining. As compared to 29, sales to the domestic market increased only in the last quarter of 21. Estonian furniture companies are relatively small, employing a little more than ten people as an average; three quarters of all furniture companies have between one and nine workers. The is, however, rather cooperative. More than 6 of companies cooperated with other companies on a continuous basis and more than 3 from time to time. Close cooperation both within the and with other industries facilitates knowledge transfer and improves the competitiveness of the in foreign markets. Competitiveness in foreign markets is very important for furniture manufacturers. More than three quarters of products are exported and export volumes are increasing year by year. In 21, exports of furniture exceeded imports more than four times and contributed significantly to the trade balance. The main target countries are the Scandinavian countries two thirds of total exports went to these countries in 21. Exports grew to all major target markets, the growth being fastest in exports to Denmark (76) and Sweden (46). Exports to Denmark increased mainly on account of seats the sales of which increased five times (by 2. million Euros). Seats were also the largest group of export products, accounting for more than two fifths of total exports. Wage increase was slightly slower in the furniture than in the manufacturing as a whole. However, wages increased faster than the national average (by about four percentage points) and the gap with the national average was reduced. The number of people employed in the sector increased also by a couple of per cent after two years of decline. Despite the growth of 1 all productivity indicators improved. Labour productivity per employee increased by 2 in a year. Although the Ministry of Economic Affairs and Communications Ministry of Finance 211

46 46 Economic Survey of Estonia 21 number of working hours increased by 7, productivity per working hour increased by a fifth. Investments increased considerably in 21. However, we must take into account the very low reference base. During the crisis investments in fixed assets decreased nearly seven times. Thus, the has overcome the low and the economic capacity of companies has increased but there are no signs of significant expansion. Nearly half of investments were made in machinery and equipment (growth 1). The main growth has come on account of investments in buildings and facilities. According to the survey conducted by Eesti Konjunktuuriinstituut furniture manufacturers are rather optimistic about their future prospects and expected the production and export volumes to grow. Capacity utilization rate is 7 which is comparable to the pre-crisis period. Main export commodity groups Wooden bedroom furniture 8 Living and dining room furniture 9 Goods of Estonian origin Other furniture 3 Seats 42 Parts of furniture 11 Value added, labour costs and productivity * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) With other production Number of employees and wages * Number of employed people Average wages (in Euros) Change in number of employees (r.s.) Change in wages (r.s.) Investments of companies * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

47 Economic Survey of Estonia Construction Estonian construction sector is strongly oriented towards domestic market and therefore depends heavily on the overall development Estonian economy. The construction sector reacts instantly to any changes in economy. Production volumes grow fast during an economic upturn and decrease significantly during a downturn. Thus, similarly to the stagnation of 1999 (mainly due to decreased demand for new office buildings), the last couple of years have been very difficult for the building sector and related fields of activity (spatial planning, architecture, design, real estate). One of the reasons why construction volumes have decreased, is the fact that local governments are not able to fund external projects in the same amount as in previous years. On the other hand, lower demand has reduced construction prices. There were less than 8, construction companies in Estonia in 29; more than 8 of them were small companies with less than 1 workers. The largest general construction companies in Estonia are Skanska EMV AS, AS Merko Ehitus, AS YIT Ehitus, AS Nordecon International and AS Koger & Partnerid. The largest road construction companies are AS Teede REV-2, AS Nordecon Infra (belongs to AS Nordecon International Group) and AS Talter. According to forecasts, the construction sector has started to stabilise. This, however, will not increase the number of jobs significantly as companies are focusing on increasing labour productivity. The number of people employed in the construction sector is expected to remain at a significantly lower level than during the peak years ,7 8,4 GDP Share of sector in economy employment 1,6 Ratio to average wage (r.s.) Developments in the building sector * Construction price index (l.s.) Construction volume index of buildings (r.s.) Construction volume index of facilities (r.s.) Construction works performed by own resources Construction in foreign countries Construction in Estonia (at current prices) Construction in Estonia (y-o-y, r.s.) Compared to pre-crisis years, 21 was still a year of depression although most indicators, in particular those related to construction volumes of buildings and facilities, wages and productivity, showed signs of improvement. The fact that the building market is on the way to recovery is confirmed by the growing number of building permits issued by relevant authorities. The number of permits issued for non-residential buildings continued to decline. Construction companies assessments of confidence and prospects were more positive in 21 than in 29 despite the fact that the stabilisation of the sector was slow and demand in the market insufficient. While in 29 the construction sector hit the rock bottom, in 21, the total turnover of Estonian builders was 1.92 billion Euros or 2 less than a year ago. The decline continued despite the fact that both construction price index and construction volume index started to improve. Estonian construction companies built in Estonia for 1.73 billion Euros and abroad for.17 billion Euros billion Euros accounted for construction with own resources and the rest were subcontracted. Due to the recovery of the main export markets and the reduced demand in the domestic market export volumes grew by 11 compared to 29. Despite the developments in the building market there were 6,42 building companies that were able to continue in 21. The number of building companies decreased by 31 compared to 29. Financial indicators, however, showed signs of improvement in 21: the total profit of construction companies was 31.9 million Euros or 1 more than in 29; total productivity based on added value increased by 3.2 and labour productivity increased by. At the same time, the sector s added value decreased by 14. Since demand and investments have not returned to the pre-crisis level, construction companies had fewer opportunities and less need for investments which decreased by 27.6 compared to 29. Decline was Ministry of Economic Affairs and Communications Ministry of Finance 211

48 48 Economic Survey of Estonia 21 most significant in the field of renovating and acquiring buildings for own use (-88 and -81 respectively). Construction companies also invested significantly less in means of transport, IT systems and land. While in 29 they bought land worth 17.6 million Euros, in 21 investments in land declined by 8. However, companies continued to invest in machinery and equipment and the value of investment increased as much as 28 million Euros. According to the labour survey, a total of 47,9 people were employed in the building sector in 21, which was 1,4 people less than in 29 and even less than in 2. Due to declining number of people the building sector dropped to the fourth place in the ranking of employers. Despite that, the average wages in the building sector exceeded the national average increasing by three percentage points in 29. Compared to other sectors, average gross wages in the building sector were at the same level as in the sectors of water supply and waste and pollution management. Construction prices continued to drop in 21, decreasing by the end of the year by 2.8 compared to a year ago. All price components contributed to the price decrease: labour costs decreased by.8, prices of construction machinery by.6 and prices of building materials by 1.7. Despite the decrease in the prices, 21 was more favourable for producers of building materials than 29 since their production volumes in constant prices increased by 13. In the after-crisis economic situation,,3 building permits were issued in 21 for construction of residential and non-residential buildings with total effective surface area 868, m 2, i.e. 22 permits more than in 29. A total of 3,139 permits for use of construction works were issued for effective surface area of 663 m 2, i.e. 88 permits less than in 29. 2,324 new or renovated buildings with total effective surface area of 286 m 2 were completed and put in use in 21. Permits for use of residential buildings were issued by 23 less than in 29 and by 6 less than in * EUR Number of workers Employed persons (labour survey) Number of employed persons Change in the number of empoyed persons (r.s.) Average wages (EEK) Wages Change in wages (r.s.) * Change in investments (r.s.) 2, Investments of companies Investments in fixed assets Labour costs productivity , 1,,, * Labour costs productivity based on value added Change in productivity (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

49 Economic Survey of Estonia Housing loan interests and dwelling put in use * 21* Area of dwelling put in use Loan interests of private individuals, Bank of Estonia thousand The majority of permits for use were issued for onefamily dwellings. The size of dwelling area per person continued to rise, indicating that dwelling quality will continue to improve. The majority of dwellings were put in use in Tallinn, Tartu and Viljandi County. Customers are mainly private homeowners and the private and non-profit sectors. Only two new municipal houses were put in use the same number as in 2. 2,81 new building permits were issued in 21, i.e. 24 more than in 29. This means that a total of 286 m 2 of new dwelling will be built. In 21, 2,449 building permits were issued for nonresidential buildings, which is 1.8 less than in 29. The effective surface area of new nonresidential buildings is 82 m 2 and the cubic content 4 m 3, which is respectively 28.8 and 19 less than in 29. The biggest number of building permits for non-residential buildings were issued in Harju County, Ida-Viru County, Tartu County and Saare County whereas the cubic content of buildings to be built in Ida-Viru County is considerably bigger than in other counties. The biggest number of building permits were issued for the construction of non-residential accommodation establishments and industrial buildings. m 2 The number of non-residential buildings put in use in 21was 81, i.e. 1. less than in 29. Total effective surface area of non-residential buildings put in use in 21 was 42,4m 2 and cubic content was 2,988,7 m 3. The biggest number of buildings were put in use in Harju County and Ida-Viru County. According to the purpose of use, most permits for use were issued for agricultural, forestry and fishery buildings and trade and catering buildings. According to the State Registry of Construction Works, a total of 7,143 permits were issued in 21 for construction, expansion, reconstruction and demolition of facilities and 4,191 facilities were put in use. The number of permits for facilities continued to increase in 21. Building permits were issued mainly for communication and power lines (1 997 cases) and water pipelines (1 692). The majority of facilities put in use in 21 were communication and power lines (1 98 cases). Permits for extension and reconstruction were issued mainly with regard to sewerage pipelines (49) and rail infrastructure (41). The majority of permits for building new infrastructures were issued in Harju County (1 73), Tartu County (722) and Ida-Viru County (67): The biggest number of facilities were put in use in Harju and Tartu counties. According to the survey conducted by Eesti Konjunktuuriinstituut, the expectations of building companies were low in 21, yet more optimistic than in 29. The main obstacles mentioned by respondents at the end of 21 were the declining number of clients and declining construction volumes, which meant that workforce would need to be reduced. The companies were more optimistic about the prices of construction works. Ministry of Economic Affairs and Communications Ministry of Finance 211

50 Economic Survey of Estonia 21 Domestic trade The trade sector include retail and wholesale companies, including companies selling motor vehicles and spare parts or vehicle trade companies. Trade creates 12.4 of added value and provides jobs for more than 8, people in 12, companies. Since internal market depends heavily on the general economic situation, the crisis shrunk the sector considerably. At the same time, chain stores continue expanding and the position of Estonian consumers should improve. The largest retailers in Estonia are ETK (including Maksimarket, Konsum, A&O), Maxima Eesti OÜ, Tallinna Kaubamaja AS (Selver), AS Prisma Peremarket, Rimi Eesti Food AS (Rimi, Säästumarket) and AS OG Elektra. Estonia is a small country and the market is divided between several large chains, none of them having dominant position. Economic recovery and declining unemployment has created good preconditions for further development of internal trade. If the macro-economic environment stays strong and Estonia maintains it competitiveness in foreign markets positive developments will reach also internal trade through increased purchasing power of consumers. 1 Share of sector in economy Sales volumes stopped declining in 21. Although economy started to recover but the effect has not reached domestic trade yet. 8 9,7 Domestic trade declined by 3 in ,4 14, value added employment Ratio to average wage thousand Number of people employed in trade * No of employed people (labour survey) No of employed people (business statistics) Change in number of employed people (labour survey; r.s.) Change in number of employed people (business statistics; r.s.) Wages in trade * Average wages (Euros) Increase in wages (r.s.) Estonian retail trade is concentrated to large chain stores. In 21, five chain stores - Selver, Maxima, ETK Group, Rimi (including Säästumarket) and Prisma accounted for a large part of total turnover in non-specialised food trade. The market situation is not likely to change in 211. In 21, the situation of Estonian trade companies improved by each quarter. However, companies had some unconventional expenses. In Tallinn, 1 sales tax was introduced on 1 June 21, reducing revenues of traders and increasing administrative burden. Companies also had some additional expenses related to the adoption of Euro. The number of new trading areas put in use in 21 continued to decline. Although the number of new shops and catering establishments declined by, the effective surface area decreased only by 1 and cubic content even increased by 9. Only large chains were able to expand and open new shops during the crisis. Rimi opened two supermarkets in Tartu and Tabasalu and Prisma opened hypermarkets in Narva and Tartu. Maxima opened X format shops in Muuga and Pelgulinn. Selver opened only one store in Haapsalu. The majority of stores were opened in North Estonia (6 of total new trading area). More shops than a year ago were also opened in Northeast, West and Central Estonia. Wages continued to decrease in 21, dropping by nearly 3. The number of people employed in trade decreased also by almost 4. The decline was biggest among companies with 999 employees where the number of employees decreased by a fifth. However, large companies employing more than 1 people did not reduce their workforce. Traders reacted relatively quickly to changes and their productivity indicators showed signs of improvement in 21. Productivity per employee increased by a fifth and labour productivity improved even more. Total profit of trading companies increased in a year more than 2. times. Ministry of Economic Affairs and Communications Ministry of Finance 211

51 Economic Survey of Estonia 21 1 With economy recovering, the sales period of goods in stock, which in 21 reached 44.2 days, has started to shorten. In the previous year, that period was 49. days. A reason for such shortening may be more efficient logistics, which helps traders to react more quickly to changes in demand. Fixed asset investments decreased b few per cent. A little more than a third of investments were made in machinery and equipment (growth 1). Decline was bigger in investments in real estate, buildings and facilities (-). Retail trade The first half of 21 was relatively difficult for retail traders but in the second half-year situation improved significantly. Sales volumes at constant prices decreased, however, by 3. The decline was compensated by increase in prices and sales revenue of traders increased by 4 as compared to previous year. The total volume of retail trade in 21 was 3.71 billion Euros. Sales of retail traders accounted for 3.4 billion Euros and the rest was related to trade in vehicles. Retail sale of household appliances and effects, ironware and building materials declined by more than a tenth. Retail sale of textiles, clothing, footwear and leather products recovered more quickly and increased by 4. Food sold at specialised or non-specialised shops generated about half of total retail sale. Sales volumes decreased in that sector by more than 4. Productivity indicators started to improve in 21. Costs increased slower than revenues and the sector started to earn profit again. Increased profit and decreased number of jobs resulted in increased labour productivity. Productivity per employee increased by nearly 2. Positive trend is expected to continue in 211. Although real wages are not likely to rise before 212, increased purchasing power should boost also internal trade volumes. Value added, labour costs and productivity * Value added Labour costs Growth in labour productivity (r.s.) Growth in labour costs productivity (r.s.) Investments of companies * Investments in fixed assets Other goods 33,1 Motor vehicles, spare parts thereof, motor fuel 14 billion Clothing, fabrics, footwear 9,1 Change in investments (r.s.) Share of retail trade by commodity groups Foodstuffs 32,1 Alcoholic beverages, tobacco products 12,2 Sales revenue at current prices * Trade in vehicles Wholesale trade Retail trade Change in turnover, companies trading in vehicles (r.s.) Change in turnover, wholesale comapnies (r.s.) Change in turnover, retail companies (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

52 2 Economic Survey of Estonia 21 Janne Lihavainen, manager of Prisma: decline continued in 21 Janne Lihavainen, executive manager of AS Prisma Peremarket, forecasts that Estonia s tiny trade sector will see consolidation in the future and some actors may leave the market. How was 21 for Prisma Peremarket? Decline continued at the beginning of 21. The situation became more stable in the second half-year when we saw some signs of improvement. We managed to increase sales in comparison with 29 more than the sector in general. Competition is very tough in Estonian retail market, taking into account the small size of the market and low purchasing power. I believe that Estonian market may consolidate and some retail traders may leave the market. How did the number of employees change in your company in 21? We opened new shops in Tartu and Narva, creating more than 2 new jobs. Which investments did you make? Prisma Peremarket invested 8.82 million Euros (138 million Estonian Kroons) in 21. We opened new hypermarkets in Narva and Tartu and renovated and expanded our hypermarket in the Kristiine shopping centre in Tallinn. We also renovated the restaurant in the Sikupilli shopping centre in Tallinn. Economic downturn was a favourable time for both expansion and renovation. Our advantage was the profit of previous years, which allowed us to invest without taking out a loan. Which external factors affected the trade sector most last year? The most important factor was the increase in food prices in the world market. Fast recovery of world economy from the crisis was also an important factor. This was a reason for a shortage of some consumer groups in this region. We have had Euro for three months now (the interview was conducted in April). Has people s shopping behaviour changed after the adoption of Euro? Today we can say that Euro did not bring along significant changes in the shopping behaviour of our customers. Photo: private collection What are your plans for this and the next year? We are going to renovate the Lasnamäe and Sikupilli hypermarkets in Tallinn and continue to focus on the new hypermarkets in Tartu and Narva. We will continue to seek opportunities for expansion. What can retail sector expect from coming years? You said that there might be consolidations... In retail trade, effectiveness is closely related to the size of the market and the chain. Estonian retail market is very small. The fact that is fragmented and divided between different chains makes it even smaller and less effective. Looking at the results of last couple of years of the largest chains, we can see that several of them have suffered great losses. Therefore, it is likely that in the future, there will be consolidations and some traders may leave the market. Stronger chains are those that did not expand at the peak of the real estate bubble and those that are a part of a larger international retail chain, which helps them to operate more efficiently. Ministry of Economic Affairs and Communications Ministry of Finance 211

53 Economic Survey of Estonia 21 3 Transport Estonian transport system includes rail, road, maritime, inland waterway and air transport, urban electric transport and transport through pipelines. More than 4, people or 6. of the total workforce work in the transport sector. Transport makes substantial contribution to export revenues and the trade balance of Estonia. The largest carrier of passengers by land is Tallinna Autobussikoondise AS, a provider of public transport in the capital. Electric transport services are provided by two companies Elektriraudtee AS and Tallinna Trammi- ja Trollibussikoondise AS. The largest company in the rail transport sector is AS Eesti Raudtee. Estonian rail transport market is open and there are a number of operators in the market, such as EVR Cargo (Eesti Raudtee), AS E.R.S, GoRail AS, Edelaraudtee AS and Elektriraudtee AS. The leading logistics companies are AS Schenker, DSV Transport AS and Transpoint International (EST) AS. The largest company in the transport sector is AS Tallink Grupp, a maritime transport company and carrier of passengers and goods. The company became the largest shipping company in the Baltic Sea region after acquiring the shares of Silja Line. The largest company providing port services is AS Tallinna Sadam, the owner and administrator of the Muuga, Vanasadama, Paldiski Lõunasadam, Paljassaare and Saaremaa ports. The largest air carrier is AS Estonian Air that operates in the field of international carriage of passengers and goods. Employment has declined in transport sector similarly to other sectors. The decline continued at the beginning of 21. Transport capacities that decreased during the crisis have started to increase. However, companies are rather cautious and looking for more efficient ways of operation and therefore are not hiring more people. Further developments in the field of employment depend on the overall development of economy. However, expectations of companies are mainly positive ,7 7,6 value added Water transport 29 Share of sector in economy employment 14,2 Ratio to average wage (r.s.) Estonian transport based on sales revenue in 21 Air transport 6 billion Railway 9 Road transport * Sales revenue Source: Statistiucs Estonia Sales revenue Growth (r.s.) In 21, the transport volumes and revenues were restored in transport sector. Growth was seen in most subsectors, except domestic passenger transport that seems to continue declining. Recovery of air transport was also rather slow. The volume of rail transport increased by 22 or from 38.4 million to 46.7 million tonnes compared to 29. Growth was spurred on by transport of oil shale that increased by a third. As regards most important product groups, transport volumes of chemicals and chemical products, calculated as a percentage, increased most; however, increase in absolute volumes was several times smaller. Transport volumes of oil products increased by nearly 1. Oil products account for nearly half of all goods transported. Economic recovery and the resulting growth in trade increased transit, despite Russia s efforts to decrease its dependence on the transit corridors of neighbouring countries. Transit growth (14) was still significantly smaller than the growth in internal transport (3). Growth in export transport was similar to that in transit, import transport, on the other hand, decreased by 13. Some progress has been made in achieving the objective of reorganising container transport. Rail transport of full containers increased from 14,43 TEU 6 in 29 to 2,441 TEU in 21 (growth 42) which is the best result so far. Majority of containers are transit containers that are transported by rail out of Estonia; transit of containers to Estonia has stopped at the moment. However, we can expect positive developments in this area as the Port of Tallinn has completed the construction of the 6 TEU: twenty foot equivalent unit Ministry of Economic Affairs and Communications Ministry of Finance 211

54 4 Economic Survey of Estonia 21 infrastructure for a new container terminal and selected an operator. However, the operator will have to invest in the operation of the terminal. Shipping traffic became also more active in 21. While in 29 Estonian ports received 1,271 ships, in 21 the number of ships was 1,883 (growth 6). The number of Estonian ships entering Estonian ports did not change significantly and therefore the share of Estonian ships among all ships visiting our ports decreased slightly (from 4 to 38). The number of ships increased most in the category of bulk carriers from 1,384 to 2,22; the number of liquid bulk carriers continued to increase (from 886 to 97). The biggest contributors are still passenger ships, the number of which (6) remained at the level of the previous year. The number of container ships continued to fall in 21 (from 399 to 338) and the number of cruise ships remained below the last year s level (28 and 39 respectively). The number of international ship passengers increased by 8 in 21 (from 7.62 million to 8.23 million). The majority of passengers 3,463,94 in total came from Finland. 46,827 passengers came from Sweden and the number of passengers from other countries was considerably smaller. The number of cruise ship tourists was 391,64, decreasing by 6 in a year. Estonian ships were used by,169,8 people or approximately 63 of all passengers (62 in 29). Estonian maritime carriers transported 7.72 million passengers on regular routes, which is 3.9 more than in 29. The share of users of international routes remained stable they accounted for about two thirds of all passengers. The number of trips on domestic routes decreased by and the number of trips on international routes increased by 2. Trade flows through ports increased significantly in 21 and reached 46.1 million tonnes. Annual growth was nearly 2 (in 29 trade volume was 38. million tonnes) reaching nearly the level of the record year (49.7 million tonnes in 26l). The most important product group was refined oil products although the growth in the trade of these products was below the average and the share of oil products fell from 6 to 6. Loading volumes of goods increased by 16 and unloading volumes by 34. Loading volumes are still three times bigger than unloading volumes. Transit, which accounts for more than 7 of all shipments, continued to increase at a speed similar to that of 29 (by about 16) from 28. million tonnes to 33.2 million tonnes. Inward transit increased as much as 32, which is a very good result, taking into account that transit should become more diversified. Although outward transit still accounts for more than 8 of total transit, the situation is better than in the middle of the 2s when the share of outward transit was 99. Container transport increased significantly from 131,278 TEU to 12,6 TEU (+16), including 6, TEU of outward transit and 6, TEU of inward transit; transit transport remained at the same level (31, TEU). Air transport has not recovered from the crisis yet. Freight transport through Estonian airports declined for a second year by nearly or from 21,72 tonnes in 29 to 12,3 tonnes in 21, which is similar to the level of 26. The number of air travellers increased slightly. 1,439,81 people used Estonian airports in 21, i.e. 4 more than in the previous year. Growth was more significant in the second half-year. Domestic air travellers represent a marginal part of all air travellers they used airports,171 times in 21. The number of domestic air travellers grew by 11. The development of Tartu Airport and opening of regular routes from and to Tartu is a positive trend but the most important air gate in Estonia is still Tallinn Airport that was used by 1.38 million passengers in 21. The number of air routes increased from 31 to 3 destinations. The number of regular services in a week increased slightly from 26 to 274 departures and the number of flight operations remained at the level of the previous year. Both are significantly below the level of 22. Downward trends stopped also regarding indicators of Estonian air carriers. The number of people travelling by Estonian planes (664, passengers) remained at the level of 29 (661, passengers). TEU Transport of containers through Estonian ports Freight transport by Estonian transport companies in 21 (in thousand tonnes) Maritime transportt 211 Road transport 332 Railway transport 467 Ministry of Economic Affairs and Communications Ministry of Finance 211

55 Economic Survey of Estonia 21 million t Freight transport through Estonian ports Total cargo Transit Change in cargo (r.s.) Change in transit (r.s.) million t Cargo Transported goods Change (r.s.) Passengers transported by Estonian companies by mode of transport (million people) Railway (l.s.) Water (l.s.) Air (l.s.) Road (r.s.) Traffic accidents Traffic accidents Injured Killed (r.s.) Road transport volumes increased at a pace similar to that of other modes of transport. Transport volume was 3 million tonnes, which is 7. more than a year ago. The volume of international freight transport (6.9 million tonnes) practically did not change. Transport turnover continued to decrease for all carriages (-) and for international transport (-4). The number of passenger cars registered in the national motor vehicle register increased in 21 from 46, to 3,, being at the level of 26. The number of lorries and busses (81,2 and 4,2 respectively) did not change and the number of motor cycles increased from 18,6 to 19,7. The number of registered traffic accidents decreased from 1, in 29 to 1,344 in 21. The number of people killed in a traffic accident was also smaller (1 and 78 respectively), the number of injured people decreased from 1,93 to 1,716 people. Rail traffic safety has not improved unfortunately. In 21, there were 3 accidents on railways (19 in 29). The number of collisions of vehicles with trains increased most (from 7 to 17e). Eleven people died (1 in 29), nine of them as a result of being hit by a train and two as a result of a train-car collision. 14 people were injured (7 a year ago), ten of them as a result of a train-car collision and four as a result of being hit by a train. Passenger carriage by road has declined since 27. In 21, the number of passengers was 16.4 million or more than 8 less than a year ago. Urban transport accounts for the largest part of road transport the number of passengers decreased by more than 1 to million people, determining the overall downward trend in domestic passenger transport. The situation of county lines that hit the bottom in 29 has improved somewhat the number of passengers increased by 8 to 18 million people. The number of passengers on long-distance bus lines continued to decline and came down to 4. million people (-). The number of passengers using international bus transport has jumped up to half a million (+22). Passenger carriage by railway experienced some difficulties in 21 due to railway reconstruction works, which affected the convenience of passengers, time of travel and reliability of service. The number of rail passengers continued to decrease in 21 (although at a slower pace); the number of passengers 4.8 million, which is the lowest of the last two decades. Decline was 2 compared to 29 and the only international line (Tallinn-Moscow) managed to increase the number of passengers by the same amount (98, passengers). Passenger turnover was 247. million passenger-kilometres, maintaining the level of 29. While rail transport represents merely 3 of total passenger carriage by land, its share in the total passenger turnover is nearly 1. Therefore, it can be said that the express trains introduced during Ministry of Economic Affairs and Communications Ministry of Finance 211

56 6 Economic Survey of Estonia 21 recent years have been justified and people have started to use trains for longer trips. According to the labour survey, the number of people employed in transport sector (including auxiliary activities and warehousing) decreased from 49,7 people in 29 to 43,6 people in 21. The 12 decline was significantly bigger than the average of all economic activities (approx. 4). Transport companies investments increased by nearly 8 compared to 29, reaching 1.26 billion Euros. In the sector of water transport, investments increased more than 3. times while in the field of air transport investments decreased by 9. Average gross wages in the transport sector were slightly above the national average (796 Euros), reaching 826 Euros. Wages increased in transport sector by 3 in 21. Transport volumes, including transit, are expected to grow in 211. Recovery of demand in the domestic market increases the use of domestic transport services and increasing freight transport has a similar effect on international transport volumes. Passenger carriage is also expected to recover as a result of positive developments in the labour market. Increased demand should also have a positive effect on the sector s revenue and employment indicators Number of employees * Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) Value added, labour costs and productivity Investments of companies* * Investments in fixed assets Change in investments (r.s.),* without warehousing Investments in fixed assets in the transport sector in 21 Water transport 11 Air transport Railway transport Number of employees Change in the number of employees (r.s.) Wages of employees Road transport 8 Average wages (in Euros) Change in wages (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 211

57 Economic Survey of Estonia 21 7 Tõnis Rihvk, manager of SLK: super long queues for ferries have become a thing of the past According to Tõnis Rihvk, executive manager of Saaremaa Laevakompanii, last year was very special for his company the company purchased three new ferries and the level of service improved remarkably. How was 21 for Saaremaa Laevakompanii (SLK)? Year 21 was a very special year for Saaremaa Laevakompanii, both historically and emotionally. In 27, we launched a project worth 1.4 billion Estonian Kroons to build three new ferries for the lines operating in the Väinameri Sea. The building of two ferries, the Muhumaa and the Saaremaa, was completed last year. Thus, our investments were biggest during the crisis. These new ferries have significantly improved the quality of service. Passenger carriage between the islands and the mainland is now safe, precise and reliable. The technical characteristic of our old ferries did not enable us to guarantee such service in the past. New ferries are weather-proof and practically no trips were cancelled because of strong wind or thick ice. Reliability of ferry service is very important for the inhabitants of our islands. New port systems have made travelling more convenient and fast. Super long queues for ferries at peak times have become thing of the past. The third ferry, the Hiiumaa, is about to start operating, enabling us to guarantee fast and smooth service even at peak times in summer. Our subsidiary OÜ Väinamere Liinid, the operator of the ferry lines, carried 3.7 less vehicles in 21 than in 29. We are hopeful that with the introduction of new ferries the number of passengers will also increase. How did the number of jobs change in your company? The updating of our fleet and replacement of old small ferries for new ones that are more economic meant that we also had to relocate our employees and re-staff ferries. We care about our people, most of them have been with us for a long time, and we have tried to find a suitable solution for everybody. Which other investments did you make beside the new ferries? The putting in use of the Hiiumaa means that we have completed the EEK 1.4 billion project for building three passenger ferries with identical parameters for operation between the islands and the mainland Estonia. Investments made together with the operator of ports AS Saarte Liinid in the expansion and modernisation of ports the total sum invested in the new ferries is Photo: private collection 2 billionkroons. The ferries were built by BLRT Grupp. Tuule Piletikeskus OÜ has invested approximately 1 million Kroons in order to modernise port and ticketing systems. The last module of the ticketing and customer service system became operational at the beginning of May. Although this marked the end of our biggest investments so far, the development does not stop here. In acknowledgement of these important projects, Saaremaa Laevakompanii and our subsidiary Väinamere Liinid were given nearly all awards that can be awarded based on economic indicators of 21. This was very heart-warming. For example, the Royal Institute of Naval Architects (UK) included the prototype of the Saaremaa and the Muhumaa in the list of significant ships of 21. Which external factors affected the transport sector most in 21? The key words of 21 were: oil prices, demand for Estonian qualified naval workforce in Europe and administrative price changes (e.g. port dues). What are your plans for this and the next year? We have gained priceless experience in shipbuilding and we will share this experience and use it in building other ships that Estonia needs. In 21, Saaremaa Laevakompanii won a tender organised by the Ministry of Internal Affairs for exercising construction supervision over the construction of a new multifunctional spill response vessel. According Ministry of Economic Affairs and Communications Ministry of Finance 211

58 8 Economic Survey of Estonia 21 to the contract, we will prepare the technical drawings of the spill response vessel and exercise supervision over shipbuilding works. Now, after investing huge sums in technology, we can focus on creating stability. We want to develop more close cooperation with our main partner, the Ministry of Economic Affairs and Communication. The price list of public regular services needs to be reviewed in order to support further development of the economy of our islands and simplify the service for our customers. The key words here are focusing on finding common ground and on effective cooperation. Our social role and liability for the development of the economy of our islands are growing. Ferry traffic is something that affects everybody and everything on the islands. Ministry of Economic Affairs and Communications Ministry of Finance 211

59 Economic Survey of Estonia 21 9 Tourism Tourism is an important contributor to Estonia s GDP and export revenues and its share in employment is about 7 8. Estonian tourism sector depends mainly on foreign tourists. Fast growth in domestic consumption in reflected also in domestic tourism but in recent years, the importance of external demand has increased. The majority foreign tourists are one-day visitors from Finland. However, dependence on Finnish tourists is gradually decreasing. The main tourist attraction is Tallinn also the location of the majority of companies of tourism. Interest in other regions is also growing thanks to new rehabilitation centres, tourist accommodation establishments and other service companies. There are about accommodation establishments in Estonia (plus numerous self-employed persons offering accommodation services and companies whose main field of activity is other than tourism), around 1 catering establishments and nearly 3 travel agencies and tour operators. The largest companies providing accommodation are Hotell Olümpia AS, AS Sokotel (Hotell Viru) and OÜ TLG Hotell (Tallink, Pirita TOP SPA Hotell). The largest catering companies are Premier Restaurants Eesti AS (McDonald s), AS Hesburger and Fazer Food Services AS. Among the largest travel agencies and tour operators are AS ESTRAVEL, Novatours OÜ, OÜ TEZ Tour, OÜ Estour and OÜ Horizon Travel. Nearly 6 of people working in the tourism sector work in Tallinn; other important regions are Tartu and Pärnu. The economic crisis affected also Estonian tourism although the situation is improving. Although both domestic and foreign demand is growing, the long-term growth is expected to be slower than in the past. Increasing demand means that the tourism sector will need more people. The number of one-day visitors is expected to decrease but the increasing number of overnight stays means that export revenues are going to increase. Growing incomes will increase the number of domestic and foreign tourists ,4 8,8 3,4 added value* Share of tourism in exports employment* 63, Ratio to average wage* * indicators characterise the accommodation and catering companies not the whole tourism sector Share of sector in economy Tourism services Exports Imports Balance of tourism services, Bank of Estonia Like in other sectors, the success of the tourism sector was based mainly on export, i.e. foreign tourism although domestic tourism contributed also to the growth. Accommodation establishments benefitted most from increased demand; the results of catering establishments and travel agencies were more modest. With economic prospects improving, year 211 is going to be more successful also for the tourism sector. The adoption of Euro facilitates international tourism. While in the first half-year the value added created by hotels and restaurants decreased, the second half-year was much better and by the end of the year, the sector s value added increased by was a relatively good year for accommodation establishments but for catering companies and especially for travel agencies it was a difficult period. Foreign tourists left more money in Estonia than in 29. Estonian transport companies also benefitted more from foreign tourists. Export grew by 4. However, Estonians started to travel abroad again in 21 and therefore, import increased even more than export. In general, Estonia enjoyed a surplus of million Euros on its tourism balance. Demand increased mainly in the sector of accommodation. The number of tourists and overnight stays exceeded the record level of The number of accommodated people increased by 12 and the number of overnight stays by 14. Thus, after several years of decline, the average length of stay also increased (to 1.96 nights). The number of foreign tourists increased significantly and domestic tourism showed signs of recovery. Ministry of Economic Affairs and Communications Ministry of Finance 211

60 6 Economic Survey of Estonia 21 The situation of rehabilitation centres was slightly better than that of traditional accommodation establishments demand for their services increased by a fifth. Other tourist accommodation establishments had about 1 more visitors than a year ago. Although the number of customers increased, competition remained tough and this put pressure on prices of services. Prices fell for a second successive year to 27 Euros per night (-). In the second half-hear, price decrease stopped and with demand and costs growing, we can expect that prices will stabilise or even start going up again. The provision of accommodation services increased by a couple of per cent. The majority of new accommodations were created in Central, West and South Estonia. In other regions, including large towns, there were no changes. Since almost all regions of Estonia benefitted from the increase in demand, the average room occupancy rate of hotels was 4 and the bed occupancy rate 32. Seasonal and regional differences are still huge. While in winter, the average room occupancy rate was below 3 then in summer it was more than and in July even more than 7 in Tallinn and nearly 9 in Pärnu. Although tourist accommodation establishments had more customers, the number of employees decreased similarly to previous year. The number of people employed by catering companies and travel agencies decreased. According to the Labour Force Survey, the number of people employed by catering and travel agencies dropped by 3-4 and according to the business statistics even more than that. Wages stopped falling at the end of 21. Average wages in accommodation and catering fell by a couple of per cents in 21. As a result, companies labour costs decreased but total costs increased (except for travel agencies). Revenues of accommodation establishments increased in 21 by a tenth and revenues of catering companies by a couple of per cents. Accommodation establishments cut costs and even earned some profit; the situation of catering companies improved slightly. The results remained, however, below the level of the pre-crisis years. Productivity of labour and costs also improved. Year 21 was still a difficult year for travel agencies sales revenues and profit decreased and productivity indicators were weaker than a year ago. On the one hand, the crisis had a huge impact on travelling, but on the other hand, people have started to travel without using the services of travel agencies or tour operators. The Iceland volcano eruption in April caused problems for air carriers and travel agencies by suspending air traffic. Such effects were, however, short-term. Investment activity of accommodation and catering companies nearly doubled in 21 but the increase started from a relatively low level. The largest investments were made in buildings and facilities and in case of catering companies in machinery and equipment. Travel agencies differed in this regard too their investments in fixed assets were insignificant. The opinions of tourism companies were in line with the developments in the sector. According to the survey conducted by Eesti Konjunktuuriinstituut, the managers of both hotels and restaurants were more positive about 211 than about 21. Travel agencies were, however, less optimistic. At the beginning of 211, companies expectations regarding demand and the number of employees were almost as high as at the peak time a few years ago. The survey also indicates that prices may start growing. Tourism sector benefits from overall economic recovery. Therefore, consumption of tourism services is expected to increase in 211. Foreign demand will continue to drive the growth. Adoption of Euro at the beginning of 211 made travelling to other Eurozone countries easier (there is no need to exchange currency and comparing prices is easier). We can also hope that foreign tourists will spend more money in Estonia * Investments in fixed assets Change in investments (r.s.) * accommodation, catering, travel agencies and tour operators Investments of companies * Value added, labour costs and productivity Value added Labour costs Growth in total productivity (r.s.) Growth in labour costs productivity (r.s.) * accomoodation, catering, travel agencies and tour operators Ministry of Economic Affairs and Communications Ministry of Finance 211

61 Economic Survey of Estonia thousand 2 Number of employees * Number of employees according to labour survey Number of employees according to business statistics Change in the number of employees (r.s.) Change in the number of employees in companies (r.s.) * Labour survey: accommodation adn catering comapnies; business statistics: plus travel agencies and tour operators Wages * Average wages (in Euros) * accommodation and catering establishments thousand Change in wages (r.s.) Number of foreign tourists and overnight stays Number of visitors Number of overnight stays Change in the number of visitors (r.s.) Change in the number of overnight stays (r.s.) France 1,4 Overnight stays by foreign tourists (by Poland 1,1 USA 1,4 Italy 1,7 Lithuania 1,7 UK 2,6 Latvia Norway 3, 3,2 Germany,2 Other countries) 1,8 Sweden,2 Russia 1,3 Finland 1,9 thousand Number of Estonian tourists at accommodation establishments Number of people Number of overnight stays Change in the number of people (r.s.) Change in the number of overnight stays (r.s.) This regards mainly short-time and transit visitors, e.g. cruise ship tourists who may not have bothered to exchange currency in the past since they stayed for such a short time and therefore did not buy anything. In December 21, Ryanair started operations in Tallinn, increasing travelling opportunities for both Estonians and visitors from foreign countries. Tallinn is the European capital of culture in 211 and the related events help to attract tourists from both abroad and Estonia. Although the tourism is recovering from the crisis, no large investments are expected to be made in the sector. Investment activity may grow if demand continues to increase. Inbound tourism The number of foreign tourists who stayed overnight in Estonia reached a new record high in 21. According to estimates, Estonia was visited by 2.12 million foreign tourists or by 12 more than a year ago. About 2 of these tourists did not use paid accommodation (they stayed with relatives, in their own apartments or summerhouses). As regards oneday visitors, there are data only for cruise ship tourists whose number was by about 6 lower than in 29. According to the Tallinn Port, Estonia was visited by more than 39, cruise ship travellers. Export of tourism services increased in a year by 4 (to 1.8 billion Euros). Expenses made during both private and business trips increased. Growth in transport services was based mainly on maritime transport. At the beginning of 21, the tax free limit was reduced from EEK 2 to EEK 6 or from 128 to 38. As a result, tax free sale to citizens of third countries increased. For the accommodation sector, year 21 was one of the best. The number of tourists who stayed overnight, increased by 12.3, the number of overnight stays increased even more by 17. Demand for the services of rehabilitation centres increased by more than 2. The main contributors to the growth were holidaymakers. Overall number of visitors who stayed overnight for other reasons increased. The number of conference participants decreased slightly. The majority of customers came from neighbouring countries, such as Finland and Russia. The number of overnight visitors from Finland increased by a tenth Ministry of Economic Affairs and Communications Ministry of Finance 211

62 62 Economic Survey of Estonia 21 and the number of tourists from Russia increased by as much as. In case of Finnish tourists, it is worth mentioning that the time of their stay has increased. While in the past, Finnish tourists stayed in Estonia for shorter time than tourists from other countries did, in 21, they stayed for almost as long as others (2 days as an average). One reason is the increasing popularity of rehabilitation centres (growth 2) where people spend more time. The number of customers from other countries increased as well; however, the number of tourists from Norway continued to fall. By regions, the majority of tourists visited the most important tourist attractions Tallinn and Pärnu. The number of foreign tourists decreased only in some regions (Rapla, Viljandi and Võru counties); at the same time, the number of domestic tourists increased in these regions. Demand is expected to continue growing in 211. The situation of accommodation establishments is expected to improve in both Europe and elsewhere in the world. Although the World Tourism Organisation predicted the growth of tourism in Europe to be modest (2-4) the developments of the first months of the year have been encouraging. Estonia is expected to benefit from improved air travel opportunities. Tallinna Sadam is expecting a growing number of cruise tourists (more than 4,). Domestic tourism After two years of downward trend, demand for accommodation services started to increase in 21. Developments in domestic tourism are closely related to the general economic situation. By the end of 21, unemployment rates fell and the number of employed people increased. Companies results improved and people became more confident. The number of domestic tourists stopped declining in the first half-year and consumption of accommodation services increased. The number of domestic tourists who stayed overnight increased by 9, the number of overnight stays increased by 8. Demand is comparable to that of 26, being by one fifth lower compared to the peak level. Estonians used more the services of both traditional accommodation establishments and rehabilitation centres. The number of customers of health centres increased by and the number of visitors of other accommodation establishments increased by 1. Domestic tourism is on rise throughout Estonia, only in few counties the results were worse than a year ago. The largest attraction centres were Tallinn, Pärnu, Tartu and Ida-Virumaa. More than half of all users of accommodation services were holidaymakers. Demand grew fastest in that sector. The number of Estonians on a business trip increased. A survey on Estonian s travelling habits indicates that domestic travel is increasing; unfortunately, the methodology of the survey does not enable us to compare the results with previous years. According to the survey, Estonians made 1.9 million domestic trips with overnight stay in 21. The majority of domestic travellers stay with relatives or friends (2/3 of all cases); therefore, the statistics reflect only part of domestic tourism. The main reason for travelling is visiting relatives and friends (more than half of all trips). 4 of trips are holiday trips. People staying overnight spent less than Euros as an average. Holidaymakers spent slightly more. The prospects of domestic tourism are rather good. People s financial situation has improved and they are willing to spend more. Outward tourism Estonians made nearly one million trips abroad in 21. The main purpose for such trips was holiday and people travelled more in summer. More than half of these trips involved staying at least four nights in a foreign country. The main destinations were Finland, Sweden and Russia. According to the Finnish Statistical Office, the number of Estonians who stayed overnight in Finland and the number of overnight stays increased by a fifth in 21. Import of tourism services increased by 6, mainly due to increased expenditures during private trips. Travelling to foreign countries is expected to increase. Destinations may change, mainly due to unrest in the countries of North Africa, such as Egypt that used to be one of the most popular holiday destinations. Ministry of Economic Affairs and Communications Ministry of Finance 211

63 Economic Survey of Estonia Anu Soosaar, manager of Sokotel: we saw record occupancy rates Anu Soosaar, executive manager of AS Sokotel, says that the key to the Estonian tourism sector s success is transport improved travelling opportunities will bring tourists not just from neighbouring countries but also from elsewhere in the world. How was 21 for Viru Hotel have you recovered from the crisis and have tourists returned? The market is recovering and so is Viru Hotel. The average occupancy rate at Viru Hotel was 9 in July - a record level for Tallinn. Occupancy rates increased by 16 compared to 29 and occupancy rates at Viru Hotel followed the overall trend. We are reaching the pre-crisis occupancy rates though prices have not reached the peak level yet. Prices continued to fall last year but the decline was smaller than in 28 and 29. At the end of the year, prices started to stabilise. Occupancy rates and stabilised prices indicate that the number of customers has increased. How tough is competition in the hotel market in Tallinn? Competition is tough and this is good you cannot become too comfortable. The prices hit the rock bottom and are now on the way up. People who work at Viru Hotel are very efficient and this helped the hotel to survive the crisis without the need to make anyone redundant. Efficiency has been our main goal for years and has improved year by year. This summer s high occupancy rates and the end of the year helped us to achieve our objectives. Sokos and Viru are very strong trademarks. Customer surveys indicate that what brings tourists to us is the strong and reliable trademark and high quality service. We are trying to offer something extra for everybody and the questions to whom?, what? and how? are very important for us. Which external factors affected the tourism sector most last year? Last year was characterised by increased demand. One reason is definitely the fact that Tallinn is a safe destination compared to other regions and cities that have witnessed political unrest and natural disasters. Companies are recovering from the crisis and willing to spend more on business trips. This helped the conference market. The price level is lower in Tallinn than in our neighbouring countries and that is an additional attraction very cheap hotel prices were the reason why people decided in favour of Tallinn. The Russian market has made a jump Enterprise Estonia (EAS) has done a good job in Russia. Photo: private collection Companies, Sokos and Viru among them, have been active and shown initiative. We have created new opportunities for families with children (family rooms) and the share of such families has grown remarkably. What are Viru Hotel s plans for this and the next year? High occupancy rates and tough competition mean that Viru as the largest hotel in Estonia has to keep pace with time. This spring we renovated 8 standard hotel rooms and added de lux rooms with a sauna and family rooms. This work will continue next year. One of the reasons for our popularity is definitely the availability of family rooms because there are few hotels that can accommodate a five-member family in one hotel room. We have modernised our conference facilities and restaurants so that the whole building would meet the promise of high quality service. Our new hotel museum Viru Hotel and the KGB that was opened within the programme Tallinn 211 the European capital of culture has attracted media attention and many visitors. Active cooperation with the Tallinn 211 programme is very important. This year s big number of visitors Ministry of Economic Affairs and Communications Ministry of Finance 211