Ministry of Economic Affairs and Communications ECONOMIC SURVEY OF ESTONIA 2008

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1 Ministry of Economic Affairs and Communications Ministry of Finance ECONOMIC SURVEY OF ESTONIA 28 Tallinn 29

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3 Contents Macroeconomic situation... 4 Labour market... 8 Foreign trade... 1 Manufacturing Food and beverages Anne Mere: Economic crisis has also given positive results Textile... 2 Wearing apparel Wood processing and manufacture of wood products Production of pulp, paper and paper products Publishing and printing Manufacture of chemicals and chemical products... 3 Manufacture of rubber and plastic products Metal and metal products Manufacture of machinery and equipment Manufacture of electrical appliances and optical instruments Bo Henriksson: Exporters, look east! Manufacture of transport equipment Furniture Priit Tamm: Our aim is to increase exports by Construction Kaido Fridolin: We hope to maintain the level of Domestic trade... 2 Raul Puusepp: We are open to new business opportunities... 6 Tourism... 8 Transport Annexes Abbreviations in the text and diagrams: y-o-y year over year r.s. right scale * preliminary statistical data

4 4 Economic Survey of Estonia Economic growth in Estonia and Eurozone Estonia Eurozone1 Eurozone27, Eurostat Contribution to economic growth Consumption Net exports Investments and stocks Economic growth Domestic demand and imports real growth Imports Domestic demand (r.s.) Exports real growth Goods and services exports growth Weighted GDP growth of trade partners (r.s.), Eurostat Macroeconomic situation In 28, economy in Estonia dropped by 3.6 due to a 7.4 decrease in domestic demand. The latter was caused by plummeting investments and inventories and a decline in private consumption. Compared to 27, the share of domestic demand fell by 16.3 percentage points and dropped to 99.9 of GDP at current prices. Goods and services exports showed only a marginal decrease in 28 (-1.1). The weak domestic demand brought about a decline in imports, as a result of which the contribution of net exports to economic growth turned out to be positive. The consumption boom in Estonia finally came to an end in 28. The growth rate of private consumption that for the last six years had surpassed GDP growth, showed a sharp decline already in the second half-year of 27. Compared to 27, consumption diminished almost all through 28; in Q4 the decline rate was more than 1. The low real growth was the result of the population s shrinking confidence and the soaring consumer prices, as a result of which inflation remained at 11 during the first three quarters. Calculated for the whole year, private consumption costs still grew by 6 but consumption in real terms dropped by 4. Salary income and social transfers of the population still grew significantly in 28 (by 17) but consumption expenditure growth was three times lower. It may partly be attributed to the growing uncertainty among the population during the year, resulting from the continuing depression in the real estate market and the deepening global economic crisis. This made people save instead of consuming. As a second reason, the limited amount of free money due to more modest borrowing and high loan interest rates can be mentioned. Already in Q4, interest payments of the population significantly exceeded the growth of the loan stock. The rapidly increasing food and housing costs forced consumers to reduce the share of non-essential goods and services in their consumer basket. Consumption of semi-durable goods 1 plummeted (-2), partially due to the high level of previous years. The highest share of this decline is attributable to clothes and footwear. A downturn in the consumption of durable goods 2 (-14) was, in addition to the uncertain situation, related to the abating real estate market. As a result of a price decline in this segment the expenditure on durable goods fell even more (-16). 1 Wearing apparel, footwear, tableware, small home 2 Home appliances, home electronics, furniture, cars, motocycles, bicycles, leisure goods, jewelry, watches, etc. Ministry of Economic Affairs and Communications Ministry of Finance 29

5 Economic Survey of Estonia 28 Consumption of non-durable goods 3 has been much more stable because a large share of it is comprised of food and housing related products. In 28 it showed a 1. increase. Consumption of services fell for the second year in a row (-2) although expenditure on services still showed a significant increase. This was so due to the rapidly increasing service prices, resulting from wage increases, and the fact that nonessential services (e.g. catering) were used less. It is forecasted that private consumption will shrink both in 29 and 21 as a result of curbed income and growing unemployment. Since investments are especially sensitive to the situation in the market, investment volumes started to fall back, together with economic confidence indicators, already in the second half of 27. The decline is, however, much attributable to the record investments level of 26 reaching 34 of the GDP. Household investments, mainly related to housing, dropped by 2 in 28. Investments of enterprises dropped especially at the end of 28 while the total decline of 28 amounted to 7.. Investments in machinery and equipment and buildings and facilities shrunk at the same rate while investments in means of transport diminished much more. The number of computers purchased in Estonia in 28 was by 1 higher than in 27 but the growth rate was several times smaller than in previous years. The government sector s investments grew a little (by 3.7); more than half of these investments were made in buildings and facilities. In the coming years growth of government sector s investments will be restricted by budgetary means, while in the private sector investments will be much lower due to uncertainty about the future. In 28, exports of goods and services dropped by 1.1 at constant prices. The worsening economic situation of the main trade partners resulted in diminishing export volumes in Q4. The situation worsened even more at the beginning of 29. However, 28 also saw export growth for several commodity groups, such as electrical appliances and apparatuses, metals and metal products and chemical products. The export volumes of wood and wood products, means of transport and textile products were smaller than a year ago. Imports dropped by 7.9 in 28. The decline was much deeper than for exports. It is related to the fast decline in domestic demand, as well as a reduction in the imports of raw materials and semi-fabrcated products needed for exports. Imports dwindled mainly due to the ebbing imports of road vehicles. Among large commodity groups, imports of wood and wood products, machinery and 3 Food, alcohol, tobacco, renovation materials, water, electricity, gas, liquid and solid fuels, district heating, pharmacological and medical products, plants, pets, newspapers, household and beauty products, etc. equipment and metal and metal products dropped as well. As imports decreased more than exports, net exports contributed positively to economic growth in 28. of GDP Savings Private savings Foreign savings Public savings Domestic savings Contribution to value added growth Man. Retail and wholesale Construction Transport etc. Real estate etc. Financial interm. Other fields of GDP Current account structure Goods Services 28 Revenues Transfers Current account Source: Bank of Estonia, Statistical Office of Estonia The economic decline has brought about a reduction in external imbalances. In 28, current account deficit diminished to 9.2 of the GDP and amounted to only. of the GDP in Q4. These developments took place primarily due to a lower goods and services balance deficit resulting from a decline in goods imports. In the second half-year of 28, the income balance deficit started to fall due to the lowering profitability of foreign enterprises. Almost half of the current account deficit was financed by direct foreign investments as non-debt generating capital. Ministry of Economic Affairs and Communications Ministry of Finance 29

6 6 Economic Survey of Estonia 28 Domestic savings amounted to 2.8 of the GDP in 28. Private sector savings increased considerably, while the savings of the public sector sharply decreased, the reason being that the large budgetary surplus of 27 developed into a 3 budgetary deficit in 28. The private sector s increased savings resulted from lower consumption and investments because people were uncertain about the future. The financial sector, being careful in giving out new loans and showing more interest in reducing the remaining loan stock, also supported saving. Estonian and Eurozone CPIs Estonian CPI Estonian base inflation Eurozone CPI (MUICP), Eurostat th Employment and unemployment Change in number of employed Unemployment rate (r.s.) Labour productivity Real growth of wages Labour productivity GDP real growth Of all economic sectors, the enterprise sector had the strongest influence on the GDP downturn in 28 its value added fell by 4.6. The decline was provoked by the continuously weakening domestic market and sharp cutback in export demand in Q4. Value added diminished in most fields but had the strongest effect in manufacturing, commerce, construction and transport, storage and communication. The value added of manufacturing dropped by 4. due weak domestic demand and shrinking export volumes. Decline in the value added of wood processing, production of building materials and production of furniture, textiles and foodstuffs also had a significant impact. The decline in commerce (-8) was caused by a decrease in retail and wholesale volumes and rapidly degenerating profitability, especially in retail sales and car sales. The downturn in construction (-6) was due to the diminished construction volumes in the domestic construction market, accompanied by a fast decrease in sales revenues and profit. The cutback in transport and storage value added (-.7) was mainly caused by the weak demand for transport services due to the general depression of the market, both in the domestic and foreign markets. The role of the financial sector in generating economic growth also subsided considerably in 28; the 3.6 decline in the financial intermediation value added was mostly the result of the restrained lending and leasing activities. Inflation accelerated to 1.4 in 28. The two-digit figure of inflation was the result of both soaring food and oil prices in the global market and the rising indirect taxes. The price increase of crude oil showed strongly in the prices of natural gas and district heating. In 28, excise tax rates for energy (motor fuel, electricity), tobacco and alcohol were raised which pushed inflation up by 1.. However, as the market situation worsened and salary rises were cut, the base inflation rate decelerated strongly in the spring of 29 because prices for services and industrial goods could not rise any more. After the financial crisis started, global economy worsened rapidly, bringing about a fast decline in raw material prices. Lower raw material prices (foodstuffs and oil) in the global market resulted in a rapid deceleration of the consumer price index (CPI) in Q4 of 28. The trend continued in the first months of 29. The deepening economic slump and the waning confidence of the consumers have inhibited the price rise even more, as a result of which enterprises have started to lower their prices for goods and services due to the weak demand. Growth in the number of the employed decelerated to.2 in 28. Compared to 27, the number of employed persons was by 1,2 higher. Employment grew the most in retail and wholesale and education and decreased mainly in agriculture, transport, storage and communications and health care and social welfare. The unemployment rate went up to. in 28 (38,4 persons). Also, the number of inactive persons in the labour market fell considerably. Inactivity diminished (by 11,1 persons) primarily because the number of students and discouraged persons was smaller but also due to a decrease in the number of inactive persons taking care of retired persons, children or other family members. The salary rise trend started to decelerate in Q1 of 28. In 28, the average gross wage grew by 14.1 and real wage by 3.4. The highest salary rises took place in education, health care and social Ministry of Economic Affairs and Communications Ministry of Finance 29

7 Economic Survey of Estonia 28 7 welfare, forest management and electricity, gas and water supply. Construction, transport, storage and communications, manufacturing and retail and wholesale demonstrated salary rises lower than the average. Due to the economic recession, labour productivity (GDP at constant prices per employed person) growth turned out to be negative in 28 (-3.8). Government sector budget deficit amounted to 7.3 billion kroons in 28 (2.97 of GDP). Compared to 27, the budget position of the government sector worsened by 14.3 billion kroons (.8 of GDP). In the government sector, social insurance funds had a surplus (.2 of GDP), while a deficit was exhibited by the central government (-2.4 of GDP) and local governments (-.8 of GDP). The government sector s deficit was the result of a downturn in tax revenue due to the rapid economic slump and the higher level of expenditure. The amount of tax revenue collected in 28 totalled 8.6 billion kroons; tax burden amounted to 32. of GDP. Indirect taxes had the highest share (12. of GDP), followed by social insurance payments (11.9 of GDP) and direct taxes (8.1 of GDP). The government sector s debt burden was 4.8 of the GDP at the end of 28 - still the lowest in the EU. The debt of local governments constituted about 68 of the total debt of 11.9 billion kroons; its share has grown by almost 11 percentage points from 2. The debt burden of the central government was increased by public institutions and enterprises and foundations reclassified from the enterprise sector to the government sector. Economic forecast of the Ministry of Finance () Spring forecast risk scenario 28 29* 21* GDP at current prices (bn kroons) ,2 GDP real growth GDP nominal growth CPI GDP deflator Domestic demand real growth Goods and services exports real growth Goods and services imports real growth Employment growth Unemployment rate Real growth of wages Average wage (kroons) Current account ( of GDP) External assumptions Economic growth of main trade partners Source: Ministry of Finance. * forecast Comparison of economic forecasts 28 Risk scenario of European Commission Bank of Estonia Ministry of Finance GDP real growth, GDP level, bn kroons HICP, (-1.*) -2. (-2.*) Unemployment rate, Average wage growth, ** -3.** Budget position, of GDP Publication of forecast HICP harmonised index of consumer prices * CPI ** Benefits to employees or change in average wage with change in employment Ministry of Economic Affairs and Communications Ministry of Finance 29

8 8 Economic Survey of Estonia 28 th Number of employed Unemplpoyment rate (1-74 years) North-Estonia Central-Estonia NE-Estonia West-Estonia South-Estonia th Unemployed and discouraged Unemployed Discouraged Unemployment rate (r.s.) th Unemployed by unemployment duration II III IV 26 II III IV 27 II III IV28 II III IV Less than 6 months 6-11 months 12 months or more 24 months or more Labour market The labour market reacted to the changes of negative economic growth. The number of the employed grew by.2 or by 1,2 persons in 28. Unemployment rate rose to. and the number of unemployed persons to 38,4. The number of inactive persons fell by 11,1. In 28, employment grew the most in retail and wholesale and education and decreased mainly in agriculture, transport, storage and communications and health care and social welfare. The economic decline had the strongest impact on the number of sole entrepreneurs their number dropped by more than a fifth (-22.) compared to 27. The number of salaried employees grew by 1.. It is more and more difficult for sole entrepreneurs to cope under the complicated competition conditions. Changes in the employment demonstrate that companies show flexibility in arranging the working time, making it possible for the employees to work under partial time and thus to stay employed. The number of inactive persons also decreased considerably in 28, by 11,1 persons. Inactivity diminished mainly due to a decrease in the number of students and discouraged persons but somewhat also due to a decrease in the number of inactive persons taking care of retired persons, children or other family members. The number of unemployed persons started to rise sharply in the second half-year, increasing by 6, persons in 28. The unemployment rate of non- Estonians grew more than that of Estonians for non-estonians it increased from 6.9 in 27 to 8.2 in 28, and for Estonians from 3.6 to 4.2, respectively. As before, unemployment rate was the highest in NE-Estonia, rising from 9 to 1 in 28. Unemployment rate was the lowest in North- Estonia, amounting to 4.4. It is expected that the number of employed will drop by about 43, persons in 29 due to the economic depression. Employment will decrease mainly in manufacturing, agriculture, construction, transport, and commerce. Unemployment will significantly grow due to the weaker economic activity and the related decrease in demand for labour force. Q1 of 28 witnessed the beginning of a wage increase deceleration trend. It was inevitable for reducing economic imbalances. Gross wage increased by 14.1 in 28, while real wage growth, i.e. wage growth minus inflation, was 3.4. The average monthly gross wage calculated on quarterly figures amounted to 12,818 kroons in 28. As a result of economic depression, labour productivity growth was negative in 28 (-3.8). The decline in labour productivity (generated value Ministry of Economic Affairs and Communications Ministry of Finance 29

9 Economic Survey of Estonia 28 9 added per employee) was caused by the decelerating economic growth and the employment rate almost at the level of 27. Among sectors, wages grew the most in education, health care and social welfare, forest management and electricity, gas and water supply. The higher than average wage rise in education and health care was the result of administrative wage increases that took place at the beginning of the year. It compensated for the lower wage rises in previous years. Lower than average wage increase took place in construction, transport, storage and communications, manufacturing and retail and wholesale. In construction, a deceleration of average wage increase was expected because wages in this sector went up faster than the average during the construction boom and the wage level started to normalise in 28. In manufacturing, wage growth decelerated due to the reduced output volumes mainly in labourintensive branches, building materials and companies producing for the domestic market. After Estonia acceded to the European Union the labour markets of several foreign countries were opened for us, as a result of which some of the Estonian workforce found engagement in Finland, UK, Ireland, Sweden, Norway and other countries. Estimations of the Statistical Office show that 16, Estonians worked abroad in 28, making 2.4 of the total workforce. The number of people working abroad has grown since 26. The wage increase decelerated fast at the end of 28 and the worsening economic situation will bring about a decrease in wages in 29. There are several reasons: the reduced share of performance pay, smaller workload and changes in employment. The capacity of companies to pay high wages has dropped due to smaller revenues, and thus, their position in salary negotiations has become considerably stronger. Bigger changes in average wage are expected primarily in construction, manufacturing and commerce. Financial_interm. State administration Energy Wages by fields of activity Mining Construction Property, business Transport Health care Forestry Average Commerce Man. Education Other Fishing Agriculture Hotels and restaurants kroons Labour productivity Real growth of wages Labour productivity GDP real growth Ministry of Economic Affairs and Communications Ministry of Finance 29

10 1 Economic Survey of Estonia 28 Exports and imports growth Exports nominal growth Imports nominal growth bn EEK Trade dynamics Exports Imports Balance In 28, exports continued to show modest growth regardless of the global financial crisis that started in autumn 28 and resulted in a downturn for exports in Q4. As a result of the continuing decline in domestic demand imports had started to abate already at the beginning of the year. These developments brought about a significant decrease in trade deficit which, compared to 27, was lower by about a quarter. The economic climate continued to cool off in the second half of 28. In addition to general negative developments the global economy was strongly shaken by the financial crisis originating in the United States in autumn 28, as a result of which the economic situation of our main trade partners worsened considerably. The impact of the financial crisis was especially strong on our near neighbours Latvia and Russia. In Q3 the financial crisis influenced mainly the financial sector but had an impact on foreign trade already in November. As a result, exports showed a downward trend in Q4 for the first time in many years. Previously, exports had showed a slight decline as far back as 22 (nominally -1.). The considerable falloff in demand in the domestic market, mostly due to negative developments in the construction and real estate sectors, as well as the ebbing confidence of the consumers, had a strong impact on imports decline in the first half-year of 28. In Q4, imports falloff rate accelerated, in Foreign trade addition to the aforementioned reasons, by a substantial cutback in export demand. In 28, foreign trade turnover amounted to 32.4 billion kroons, which was by.8 lower than in 27. Due to the modest growth in exports (.4) and the downward trend in imports (-.1) the share of exports in the total turnover rose to 43.8, exceeding the corresponding figure of 27 by 2. percentage points. Exports totalled 132. billion kroons and imports billion kroons in 28. The trade deficit abatement that had started in the first half-year of 28 became even more noticeable in the second half-year, despite the downturn in exports in the last months of 28. The reason was that imports decreased faster. Foreign trade deficit amounted to 37. billion kroons in 28, being by 3 lower than a year before. The recovery of the trade balance was mainly supported by means of transport whose negative balance diminished by 6.3 billion kroons (to -8.3 bn kroons). The negative balance of machinery and equipment diminished by 4.3 billion kroons (to -7.9 bn kroons) and that of metals and metal products by 3.9 billion kroons (to -2.1 bn kroons). Trade in wood and wood products still showed the highest surplus (7.1 bn kroons); its positive balance increased by about a billion kroons. The balance of other industrial goods (furniture, log houses, etc.) was on the positive side with. billion kroons, and that of animal products with 1 billion kroons. It is expected that the trade deficit will continue to decline in 29 because foreign trade volumes will be much smaller than last year and imports downturn will still be faster than that of exports. The expectations of experts of the Estonian Institute for Market Research about trade balance recovery were even more positive in March 29. Exports Nominal growth of exports accelerated to.4 in 28; it was 4.1 in 27. Growth amounted to about in the first two quarters and accelerated vigorously in Q3 to 1. This is partly due to the low comparison base of 27. Exports continued to grow in October but the trend reversed in November, as a result of which exports in Q4 were by 3 lower than in Q4 of 27. Among the main commodity groups metal and metal products and chemical products supported exports growth the most exports of all these groups grew by about a quarter in 28. This high growth is partly attributable to the price rise of raw materials in the global market. In the metals group mainly crushed ferrous metal waste, steel and metal structures were exported. The chemical products exported the most were paints and mastics, fertilisers and benzoic acid. Ministry of Economic Affairs and Communications Ministry of Finance 29

11 Economic Survey of Estonia Machinery and equipment is still the commodity group of the highest share, giving more than one fifth of total exports. Exports of this group showed a decline in 27 but grew more than by one tenth in 28. Parts of mobile phones had the largest export volume; however, their exports stayed at the level of 27. They were followed by insulated electric cables whose exports also showed an increase by about one tenth. Exports of alternating current generators escalated considerably. Exports of mineral products demonstrated a strong decline in the first half of 28, mainly as a result of a considerable decrease in fuels processing in Estonia. The second half-year, however, witnessed strong growth in exports which is partly due to the low comparison base of the previous year. For the whole year, exports of mineral products only increased by 2. In 28, wood and wood products exports were the most affected by economic climate cool-off in our primary export markets and the diminishing volumes of the construction sector. Compared to 27, wood and wood products exports went down by 12, showing the strongest decline among all export commodity groups. Export volumes dropped the most for sawn timber, firewood and profiled timber. Exports of round timber stayed at the level of 27, while exports of building structures even showed a slight increase. The downward trend of means of transport exports that started in Q2 continued in the second part of 28. The considerable worsening of the economic climate in Latvia had the fastest effect as regards exports of cars to Latvia. In 27 Latvia was Estonia s biggest target market for passenger cars, giving almost half of the revenue. In 28 exports of cars to Latvia dropped by more than a half. Although exports of passenger cars to Russia increased considerably in the second half-year, the total exports for means of transport was by 4 lower than in 27. Exports of goods of the highest share in the category of other industrial goods did not grow in 28. Furniture and log houses exports stayed almost at the 27 level, while exports of pillows and blankets that had shown rapid growth in previous years, dropped by 7. Although exports of pillows and blankets to France increased considerably, there was a major fallback in the other important export markets, such as the UK, Germany and the United States. As previously, the share of the European Union in Estonian total exports was about 7. Exports to the EU grew by.1 in 28 but the annual growth rate was only about half of that of 27. In the second part of 28 economy started to cool off in most EU countries, as a result of which import demand fell considerably. Among the old member states the economy of Ireland was the most vulnerable exports from Estonia to this country dropped by half. The same decline took place as regards exports to Hungary. However, the share of these countries in the total exports of Estonia is marginal. Among the most important Estonian export partners only exports to Latvia showed a major downturn. Exports to the CIS countries increased vigorously (by 23). Exports to Russia grew by about a quarter, to the Ukraine by almost one fifth and to Belarus by half. Exports to the Ukraine were mostly backed by chemical and metal products, to Belarus by machinery and equipment. Exports to NAFTA countries increased by 18 due to growth in exports to the United States (by more than one fifth). Machinery and equipment Wood and products Exports by commodity groups Mineral products Metal and products Means of transport Furniture, log houses etc Finland Sweden Russia Latvia Lithuania Exports by target countries Germany The list of the six primary export target countries for Estonia has not changed in the last two years. Finland and Sweden still ranked the highest in 28, while Russia rose to be the third and Latvia, due to the rapid cooling of its economy, fell to the fourth place. Like before, they were followed by Lithuania and Germany. Finland s share in Estonia s total exports has been around 18 for the last three years. Exports growth to Finland accelerated to 9 in 28. As before, exports to Finland were mostly backed by metals and metal products (growth of 3), with metal structures having the highest share. Exports of machinery and equipment to Finland continued to Ministry of Economic Affairs and Communications Ministry of Finance 29

12 12 Economic Survey of Estonia 28 drop and the growth rate slowed down considerably (to -7). Although exports of communication equipment were still weak, exports of insulated electric cables, electric motors, static converters and power distributors to Finland increased significantly in 28. Exports of furniture and accessories grew at the rate of total exports growth, while exports of wood and wood products stayed at the level of last year. Machinery and equipment Mineral products Means of transport Metals and products Chemical products Imports by commodity groups Prepared food and beverages Finland Germany Sweden Latvia Lithuania Russia Imports by countries of origin Exports to Sweden grew by one tenth in 28, which is three percentage points lower than in 27. The share of machinery and equipment in total exports increased to almost half and their exports grew by one fifth. To Sweden, parts of communication equipment and insulated electric cables were sold the most. Exports of metals and metal products also increased quite strongly (13), supported mostly by metal structures and steel. Wood and wood products exports did not grow much in 28. Exports growth to Russia accelerated significantly in the second half of 28 and amounted to 24 for the whole year. It was mostly supported by means of transport (volumes doubled). Exports of the commodity group of the largest export share machinery and equipment also increased by one third. Exports of building materials, mineral products, plastic and rubber products and metals and metal products also advanced briskly. Among the most important commodity groups only prepared foodstuffs and beverages showed a decline due to a downturn in strong alcohol sales to Russia. Among Estonia s major export partners the general cool-off of the economic climate and the financial crisis in autumn 28 had the fastest impact on the economy of Latvia. This resulted in considerable changes in demand for Estonian products in Latvia, as a result of which exports to this country dropped by 9. Exports of cars fell the fastest. Exports of machinery and equipment also shrunk by 1. However, exports of chemical, mineral and animal products grew by about one quarter. It is forecasted that exports will continue to go down in 29. It is not expected that the global economy and the economy of Estonia s main trade partners will recover in the coming months, and thus, foreign demand will remain low. In March 29, estimations of the experts of the Estonian Institute for Market Research about the coming six months were more pessimistic than in December 28. The Estonian government has developed a support package to help exporting companies and to improve their financial situation so that exporters would survive in the present difficult economic situation. However, when there is not enough demand it is difficult to compete in foreign markets with the local producers who also benefit from support systems of their own countries. Imports Imports started its downward trend in Q1 of 28 when domestic demand cool-off deepened. The vigorous acceleration of exports growth in Q3 brought imports growth also to the positive side. The trend reversed strongly in Q4, caused in addition to the continuing weakness of the domestic market by the negative developments in exports. For the whole year of 28, imports fell by.1. Imports of most industrial goods dropped in 28, only the imports of chemical products grew significantly because most of the raw materials for the widely exporting chemical were imported. Imports of mineral products also grew modestly, due to the higher activity in fuels processing in Estonia in the second half of 28. Foodstuffs imports continued to grow moderately in 28. This can be explained by the fact that, in an economic downturn, people pay more attention to price advantages and reduce the consumption of more expensive domestic products. In 28, imports fell the most for wood and wood products (-37) and means of transport (-27). The decline in wood imports was mainly caused by the deepening depression of the construction market and Ministry of Economic Affairs and Communications Ministry of Finance 29

13 Economic Survey of Estonia the weakening export demand. Wood imports were also affected when Russia raised its export duties for the second time in the first half of 28. In the imports of means of transport cars form the largest share. However, under the conditions of economic downturn, purchase of a car is not the first necessity for consumers in Estonia or in other countries, thus imports of passenger cars have dropped considerably. Imports of both machinery and equipment and metals and metal products fell by in 28. The substantial decrease in investments resulted in lower imports of capital goods, while persistent export demand for machinery and apparatuses products pushed up imports of semi-fabricated goods. Imports of metals and metal products dropped mainly due to the weakness of the domestic market, at the time when metal continued to demonstrate strong exports growth. The share of the European Union in Estonia s total imports grew to 8 in 28 although the volume of imports from the EU countries fell by 4. The share of the CIS countries fell to 12 and imports volumes from these countries also continued to decrease (-11). Estonia s primary partners for imports are mostly the same as its main export markets, explained by their geographical closeness. Finland, Germany and Sweden still ranked the highest in 28, while Russia fell back by two places and ranked sixth. Latvia and Lithuania occupy the fourth and fifth places with equal shares. Finland s share in Estonia s total imports has dropped from year to year. In 2, imports from Finland constituted more than one third of Estonia s total imports; by the end of 28 the figure had fallen to only 14. The reasons are a decline in subcontracting orders in Estonia by Finnish companies, as well as rearrangement of supply chains. Imports from Finland fell by 13 in 28. Imports of means of transport dropped the fastest (-48). This is so because in previous years most passenger cars of Japanese origin were imported to Estonia and from there to other Baltic countries through Finland. Imports of machinery and equipment and metals and metal products decreased by one tenth. Imports from Germany stayed almost at the level of 27. Imports of metals and metal products showed strong growth (1.6 times), backed by large import volumes of unprocessed steel. Imports of agricultural products also grew significantly. Imports of cars dropped by one quarter and that of machinery and equipment also fell slightly. After vigorous growth in recent years imports from Sweden turned downwards in 28 (-11). Imports of means of transport and metals and metal products decreased by about one quarter. Imports of machinery and equipment which made up one third of total imports still grew strongly in the first halfyear; however, the continuing cool-off of the economic climate diminished this growth to nil. Imports from Latvia and Lithuania continued to show powerful growth in 28, by 14 and 21, respectively. For both countries oil products backed the growth the most. From Latvia, imports of metals and metal products, textiles and textile products and chemical products also continued to grow rapidly. From Lithuania, imports of chemical products increased considerably. In the first half of 28 imports from Russia were still only half of the same period in 27 but showed a slight growth in the second half-year. It can be explained by the levelling of the comparison base for oil products. However, total imports from Russia declined by 28 in 28. Imports of mineral fuels had about the same decline. Imports of wood and wood products dropped three times. However, imports of chemical products from Russia grew by two and a half times due to vigorous growth in organical chemicals imports. It is expected that imports will continue to decrease in 29, caused by the weakness of the domestic market and the low demand for exports in foreign markets. Most of the experts of the Estonian Institute for Market Research (88) forecast a decline in imports for the next six months. Ministry of Economic Affairs and Communications Ministry of Finance 29

14 14 Economic Survey of Estonia 28 Manufacturing Manufacturing output volumes have doubled during the last five years but the number of employed has stayed the same. Manufacture of electrical and communications equipment, metal, production of machinery and equipment and chemical have shown rapid growth. Food and wood have contributed the most to the sales growth of the manufacturing during the last five years. A considerable part of the production is exported; in 28, 6 of the output was sold in foreign markets. The main target markets have been Finland and Sweden, countries that have invested considerably in the Estonian manufacturing. The continuous modernisation of equipment in manufacturing has made it possible to significantly raise productivity, as a result of which output has grown without increasing the number of employees. In 2, Finland s manufacturing created nine times more value added per employee than in Estonia but in 28 the gap was only fivefold. In order to raise productivity investments have to be made and changes in work organisation and the structure of branches have to be initiated. The number of employed will probably decline in the future but in some sectors more jobs are expected. In 28 more than,6 enterprises belonging to manufacturing by their principal activity operated in Estonia. About 3 of them have more than 1 employees but three quarters of the companies employ fewer than 2 persons. As of the end of 28, the largest manufacturing enterprises were AS Elcoteq Tallinn (communications equipment), Kreenholmi Valduse AS (textiles) and PKC Eesti AS. Other companies employing a rather high number of labour force were the shipbuilding and metal processing group AS BLRT Grupp, producer of electrical appliances ABB AS, safety belts manufacturer AS Norma, and AS Rakvere Lihakombinaat (meat processing) ,9 Sector's share in Estonian economy 6,3 21,1 Share in value Exports share Share in added in sales employment bn EEK 1 1 Sales and exports 92, Ratio to average wage * 28* Sales Change in sales (r.s.) Share of sub-branches sales Apparatuses Furniture 14 Metal 4 12 Building materials 6 Food 16 Chemical 6 Light Exports Change in exports (r.s.) Wood 13 Other industries 19 Rubber and plastic 4 Manufacturing s output fell in 28 as a result of the decreased demand in the domestic market. Exporting companies also experienced difficulties at the end of the year due to the global economic crisis. Enterprises reacted to the changes by reducing the number of employees, stopping any wage increases and making less investments than a year before. In 28, especially by the end of the year, decreasing production volumes were noticeable practically all over Europe. Insufficient demand became the main problem for most Estonian industrial enterprises. In branches focused more on the domestic market production volumes decreased already at the beginning of 28. Exporting branches still showed an upward trend but declining demand in the global market due to the economic crisis brought about shrinking exports and production volumes at the end of the year. The output of manufacturing dropped by in 28. Sales revenues maintained the level of 27 due to increased prices. Sales in the domestic market dropped by 7, exports grew by 6. In 28, producer prices grew by 6 on the average. The price rise started to slow down rapidly at the end of the year, resulting from a decrease in demand and cost items (raw materials, labour). Production of foodstuffs and beverages had the highest increase in producer prices (1). Output volumes dropped the most in building materials (-28), caused by problems in the construction sector. Wood also shrunk considerably (-19). Wood s output started to fall already in 27 due to problems related to availability of raw materials, but prices rose rapidly. At the same time demand in Europe already started to decline. Paper, furniture, rubber Ministry of Economic Affairs and Communications Ministry of Finance 29

15 Economic Survey of Estonia 28 1 and plastics, office machinery and dairy and beverages all showed a decrease in output of one tenth or even more. In 28, output volumes grew in chemical, metal and machine engineering, manufacture of electrical equipment and production of medical, optical and precision instruments. However, at the end of the year demand fell also in these branches. In 27, the keyword was lack of labour; in 28, due to weakening demand, this problem manifested itself only slightly. Enterprises reacted to the changed situation by reducing the number of workforce. By the enterprise statistics the number of employees in manufacturing fell by more than 3. Although labour force survey still showed an increase in workforce for 28, it could be noticed that the trend reversed at the end of the year. Jobs were cut also in light, wood and furniture. Workforce has been reduced also in some other industries due to lower output volumes or improved efficiency. The salary rise in manufacturing was lower than the Estonian average in 28; wages rose by 1.6. Q4 exceeded the level of Q4 in 27 by only a few percent; in some branches wages were already going down. The total costs of enterprises increased less than labour costs in 28 which is partly attributable to reduced output. As revenues did not increase, the total profit of the fell by one fifth compared to 27. The profit/turnover ratio fell to 7 and the generated value added also decreased. Productivity indicators worsened. In 28, enterprises of manufacturing invested by 4 less than in 27 and investments fell in almost all branches. These developments were caused by gloomier growth expectations and difficulties in getting loans. Investments in fixed assets dropped for all asset types. The largest investments were made in machinery and equipment; thus, these investments fell less than the average, only by one third. Two fifths of all investments were made to purchase, build and reconstruct buildings and facilities. Manufacturing s outlook for 29 is relatively grim. Estonia and its primary trade partners are in economic recession. Production figures and estimations of companies at the beginning of 29 showed that the downward trend was sharply deepening. A survey made by the Estonian Institute for Market Research indicated that the number of orders had dropped considerably; companies also forecast a further reduction in jobs. There is a lot of pressure to lower prices due to the decreased demand. Although in general it is expected that the situation will slightly improve in 21 and governments have developed several support packages to improve the economy, it is still feared that impacts of the economic crisis will be felt for several years. 2, 1, 1,, Productivity, * Labour costs productivity based on value added Total costs productivity based on value added Change in labour costs productivity (r.s.) Change in total costs productivity (r.s.) th Number of employed * Number of employed by labour force survey Number of employed by enterprise statistics Change in number of employed (r.s.) Change in number of employed in enterprises (r.s.) 1 bn EEK Investments by enteprises * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

16 16 Economic Survey of Estonia 28 Food and beverages Food is the biggest in Estonia by production volume; food production is the principal activity for almost 4 companies. Its production is mainly sold in the domestic market, export share in sales is less than one quarter. During the last five years the output of food has increased by almost a half. Still, due to the increased efficiency, as indicated by enterprise statistics, the number of employed in this sector has dropped to 16,1 people. Food enterprises are geographically located quite evenly over Estonia. Among the large companies in all regions of Estonia there are also food producers. Meat processing enterprise AS Rakvere Lihakombinaat in Lääne- Viru county is the largest enterprise in food, followed by meat processing companies Atria Group (AS Wõro Kommerts, AS Vastse-Kuuste Lihatööstus) and AS Maag Lihatööstus which are somewhat smaller. AS Leibur, AS Pere Leib Tootmine and AS Eesti Pagar are the major bakeries. The major food enterprises also comprise the breweries AS Saku Õlletehas in Harju county and AS A. Le Coq in Tartu county, and dairy company AS Tere and dairy cooperative E-Piim. AS Maseko operating in Harju and Pärnu counties is the largest fish processing company. Competition in the Estonian food market has grown from year to year. In addition to the expansion of local companies several companies from the neighbouring countries (Latvia and Lithuania) have entered our market. In spite of tight competition, however, the more expensive inputs and the higher domestic purchase power have brought about a rapid growth in food prices. Merging of outlets into larger chains has given an advantage to big producers and forced smaller companies to merge. In the coming years the general economic situation will have an impact also on food, thus it is expected that profit margins will drop and the number of employees will continue to fall Sector's share in Estonian economy 2,3 8,2 Share in Share in value added man. exports 28,4 Share of exports in sales mln EEK Sales and exports 14,6 Share in man. employment 88, Ratio to average wage * Sales Exports Change in sales (r.s.) Change in exports (r.s.) Share of sub-branches in sales Meat Other 1 2 Fish Beverages 16 Bakeries and pastry 17 8 Dairy Prepared feed Sales volumes continued to grow in food in 28, supported mainly by the high demand in the domestic market. Sales growth was primarily backed by the increasing prices; at constant prices production volumes fell by 8.4 compared to 27. Rapid growth in the first half of 28 could not balance the downfall of output at the end of the year. Thus, sales growth was the smallest since 24. In the second half of 28 food as an focused on the domestic market became a victim of the population s decreasing purchasing power. Exports grew a little more (7.1) but its growth was the slowest in recent years. Sales figures were on the positive side thanks for the more than 1 rise in producer prices. The prices of most inputs started to fall in the second half-year, thus alleviating the average for 28. Sales grew in all branches except beverages. The decline in beverages sales was mostly caused by the increased excise tax at the beginning of the year that had a restraining effect on sales. Meat and bakeries had growth exceeding one tenth, 12 and 1, respectively. In both industries exports contributed to the growth the most but sales in the domestic market were also strong. Major growth in total exports was inhibited by the weak sales of dairy, the reason being a significant decline in global demand in the second half of 28. Although exports have a small share in food (less than 28), the still accounts for more than of the total exports of manufacturing. Beverages make up almost one third and dairy products more than one quarter of food s exports. In 28, food increased Ministry of Economic Affairs and Communications Ministry of Finance 29

17 Economic Survey of Estonia exports to Finland, Lithuania and Latvia. Exports to Germany, the Netherlands and Switzerland dropped. Dairy is the biggest branch in food. In the first half of 28 its production growth was inhibited by the rapidly increased prices, and in the second half-year, by the considerably weakened demand. Most of the growth came from the domestic market; in export markets demand dropped significantly in the second half-year (especially for cheese products and milk powder). The main target markets were Finland, Latvia and Russia. Exports of dairy products to Finland almost doubled. However, exports to Germany fell by 6. In total, sales growth in 28 originated from the domestic market. Until now, meat s sales have mainly increased on account of the domestic market. In 28 exports also started to grow (3), bringing the share of foreign markets in meat s sales to 1. Besides, it is positive that production volumes also grew at constant prices (1.). Meat products were mostly exported to Latvia, Lithuania and Finland. Beverages sales dropped by almost 16 in 28. This was mostly the result of the weak domestic market in the second half-year. Exports remained at the level of 27. Sales of strong alcohol fell at the beginning of 28 due to the increased excise tax; people replenished their supplies at the end of 27. The most important export partner was still Russia, accounting for over two thirds of beverages s exports, followed by Latvia and Lithuania. Bakeries and pastry showed a 1 growth in sales in 28, mainly on account of exports whose share exceeded one fifth. This growth was the result of increased prices; at constant prices output fell by 2. Although the share of exports is small, it grew rapidly to the neighbouring countries Russia (2.7 times), Lithuania (4) and Latvia (27). Fishing had a somewhat better year than the previous years. Sales grew by more than 4 and output at constant prices by 1. The growth came mainly from foreign markets since exports amounted to three quarters of the s sales. Fishing has the highest export share among food s branches. Export volumes with the most important export partners remained the same. It is important that export volumes to the Ukraine and Russia, countries which in previous years were unstable export partners, did not change. Those two countries are the primary export partners for the Estonian fishing, taking together 44 of the sector s total exports. Employment in food continued to decrease slowly. In recent years large investments have been made to improve efficiency, the result being less need for labour. In 28, the sector s gross wage grew by 18 and employment fell by 3. Germany Ukraine Finland Lithuania Latvia Russia Exports by target countries Fish products 1 Main export commodity groups Other 2 Beverages Goods of Estonian origin Dairy products 26 Number of employed and wages Meat products * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Share of sub-branches in employment Beverages 13 Meat 2 Other foofstuffs 36 Prepared feed Fish 14 - Dairy 16-1 Ministry of Economic Affairs and Communications Ministry of Finance 29

18 18 Economic Survey of Estonia 28 mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Food producers are still the biggest investors in manufacturing, making almost 19 of the s total investments. However, investment volumes fell considerably in 28, by 43. More than two thirds of all investments (over 6 million kroons) were made in machinery and equipment. Companies questioned by the Estonian Institute for Market Research were much more pessimistic about the future than a year ago. Only one third of the respondents expected output volumes to grow in the coming months. One quarter of the respondents thought that the workforce would decrease. Also, more than half of the companies had fewer export orders than usually. mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) Anne Mere: Economic crisis has also given positive results Anne Mere, CEO of AS Rakvere Lihakombinaat (meat processing enteprise) finds that, in addition to its negative consequences, the economic crisis has also had positive results: labour turnover has halted and, instead of constant recruitment, the company can now focus on the training of its staff. What was the year 28 like for Rakvere Lihakombinaat? Which of your objectives were met and what is still to be achieved? Putting the new frankfurter line in operation was our most important achievement last year. Besides being one of the biggest one-time investments in the history of Estonian food it also has the most stateof-the art technology in Europe. Thus, we can say it was our major achievement and we succeeded 1. The market share of our company s frankfurters has been increasing after the new line was commissioned. The whole year was full of adjustments, both to the internal and external changes. It all started with changes in the management a new chairman of the management board started to work at the beginning of the year; new people came to work with us. New managers brought new breath and thinking to the whole company. In order to adjust to the changes in the external environment we decided to make our internal processes more efficient. Today s figures prove that our decisions were right. Unfortunately there are also some negative developments due to the falling economy and financial crisis our export volumes to Russia and the Ukraine fell short of the expected level. Ministry of Economic Affairs and Communications Ministry of Finance 29

19 Economic Survey of Estonia How did the financial crisis impact Rakvere Lihakombinaat in 28 and how does it impact the company this year? Wages were cut on 1 April 29 will this be the only consequence of the crisis? The economic crisis has both negative and positive consequences. Declining demand is a negative consequence. It has resulted in several cost saving projects, including cutting the wages. The halting of labour turnover is, however, a positive aspect, enabling us to focus on training and developing our employees instead of constantly recruiting new people. Moreover, in difficult times people pay more attention to improving their performance. Rakvere Lihakombinaat invested 13 million kroons in the new frankfurter line in 28 and 7 million kroons in the new minced meat packaging line at the beginning of 29. Have these investments already paid off? Our company has made long-term investments in those fields where we expect the market to grow. Economic decline has forced people to prepare their food more at home hence, consumption of fresh minced meat has grown. The economic depression has the largest impact on our export figures, especially exports outside the Baltic states. We still expect our exports to Latvia and Lithuania to grow. Which important developments had the strongest impact on food in 28? As in all economy, declining consumption affecting food is the most important factor for our development. The power of retail chains is also growing; from year to year, trading conditions become more expensive for the producers. Under the conditions of the decreasing demand competition has also become tighter. Photo: private collection What will be the challenges for food in 29? Last year, Artia bought Wõro and Vastse- Kuuste meat processing plants do you expect other similar purchases or disappearance of some operators from the market? Principally, all enterprises have two choices to increase their revenues through new products and markets or to cut their costs. Those who do not achieve this need to leave the market. However, food has an advantage over other industries people need to eat at all times and the demand will never drop as radically as in real estate or car. What are the objectives of Rakvere Lihakombinaat for 29? AC Nielsen s recent survey showed that, in spite of the difficult economic situation, Rakvere Lihakombinaat is constantly increasing its market share (32.2 in March 29). We intend to follow this path. Surely it is important to achieve more synergy with the affiliates operating in Latvia and Lithuania to optimise production, find a common share in the product portfolio and, through this, to increase our sales and retain profitability. How did the consumers purchase behaviour change in 28? Purchase behaviour has become much more rational compared to the consumption boom at the time of economic growth. Expensive goods are replaced by cheaper ones, more campaign goods are bought, and preparing food at home has also become more popular. Ministry of Economic Affairs and Communications Ministry of Finance 29

20 2 Economic Survey of Estonia 28 Textile Estonian textile is an mainly focused on export markets, comprising over 2 enterprises. The has retained the level of its sales in recent years. The share of exports in sales amounted to 84 in 28. The number of employees in this branch has dropped rapidly in the last five years, being less than two thirds of the 24 level in 28. There are large textile companies in several regions in Estonia. Companies making home textiles AS Wendre and AS Toom Tekstiil are located in Pärnu and Viljandi counties, respectively, technical textile producer AS Mistra-Autex is located in Harju county, Baltic Fibres OÜ is situated in Lääne-Viru county and Kreenholmi Valduse AS and some others are in Ida-Viru county. Next years should bring some changes in textile ineffective companies will be closed or forced to merge with stronger ones. At the same time it will be necessary to compete with cheaper Asian products in foreign markets it will put pressure on profit margins. Being able to cope in this competition situation will also depend on the textile s ability to find its own market niche and to use its competitive edges Sector's share in Estonian economy,6 4,7 Share in Share in value added man. exports 83,6 Share of exports in sales USA UK France Germany Sweden Finland 6,1 Share in man. employment Exports by target countries 66,2 Ratio to average wage mln EEK Sales and exports * Sales Exports Change in sales (r.s.) Change in exports (r.s.) The output of textile fell by almost one tenth in 28. Workforce continued to decrease but wages rose by more than 2. Problems at Narva Kreenholm continued and several smaller companies went into bankruptcy. Kreenholm and Pärnu Linavabrik were also the companies with the largest number of persons made redundant in 28. Being focused on exports, the sector suffered under the weakness of foreign markets. The share of exports in textile s sales is high in of the output was sold in foreign markets. In manufacturing only branches of electronics have a higher share in exports. Therefore, competitiveness in foreign markets is essential for the development. Finland and Sweden are still the leading export markets for textile, taking more than one third of its exports. Exports to France increased by more than twice as a result of growing exports of pillows and blankets. This commodity group forms more than half of the total exports of the sector. Sweden s share somewhat decreased by one fifth. The number of employed in this sector continues to fall relatively rapidly. Tighter competition in the global market has forced Estonian companies to become much more efficient. In 28 textile reduced its workforce by one fifth, showing the biggest decline in the number of employed among all other sectors. The rapid decline in workforce helped to increase the wages which grew by more than one fifth. Although the wage increase was faster than the Estonian average, the sector s average wage still made only two thirds of the Estonian average. Investments in textile continued to fall in 28. Compared to the highest investment year the investment volumes have dropped by more than four times. In 28, investments were the largest in machinery and equipment, amounting to 82 of all investments. Forecasts about the coming months made by textile companies at the beginning of 29 were quite negative. More than half of the respondent company managers expected output to decrease and the Ministry of Economic Affairs and Communications Ministry of Finance 29

21 Economic Survey of Estonia situation in export markets to worsen. Lack of demand was mentioned as the main obstacle to output growth (by more than 9 of the companies), showing vividly the difficult situation in this sector. Other textile finished products Main export commodity groups Cotton textiles 18 Other textile products 21 Flaxen threads and textiles 3 Goods of Estonian origin Carpets and other textile floor covers Blankets and pillows Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

22 22 Economic Survey of Estonia 28 Wearing apparel In recent years, wearing apparel developments have been rather modest. Sales and workforce have decreased. The number of companies in this sector has been quite stable in recent years almost 4. However, as economic difficulties continue and export markets become even weaker, the number of companies may start to decline. Export share in the sales of this sector is still about two thirds, making the sector quite vulnerable to developments in foreign markets. The largest wearing apparel producers are AS Baltika and AS Silvano Fashion Group in Tallinn and AS Sangar and AS Ilves-Extra in Tartu. Companies in wearing apparel have not been able to expand and have instead undergone constant specialisation. Subcontracting is decreasing and more output is sold directly to the final consumer under the companies own brand names. Companies try to increase the value added of their products to get higher margins. It is expected that these trends will continue. There is a constant transfer from the cheap subcontractor status to direct marketing to the final consumer. In short-term the next years will be difficult because competition is tight and retail consumers have cut their expenses. However, strong product development may give a good starting position for the time the economy goes upwards again Sector's share in Estonian economy, 1,9 Share in Share in value added man. exports 66,2 Share of exports in sales mln EEK Sales and exports 8,1 Share in man. employment,8 Ratio to average wage * Sales Exports Change in sales (r.s.) Change in exports (r.s.) Lithuania Germany Latvia Norway Sweden Finland Exports by target countries was a difficult year for wearing apparel both sales and production fell. The number of employees and investments continued to go downwards. Sales of wearing apparel dropped by in 28, output at constant prices fell by 8.6. Sales figures decreased mainly due to a 6 decline in exports but domestic sales fell as well. The sales decrease was somewhat alleviated by an increase in producer prices (8.1) which in this sector was the highest in recent years. AS Baltika ja AS Silvano Fashion Group, the largest companies of the sector, have invested heavily in recent years in restructuring and in creating their own retail chains. This trend is positive but the expansion will probably be halted for some time due to the difficult economic situation. The share of cheap subcontracting is, however, decreasing, improving the outlook of the sector in long-term. The main target markets of this sector are in foreign countries, accounting for two thirds of the s output. Strong competition and the economic crisis commencing in the second half-year of 28 brought about a 6 decrease in exports. Finland and Sweden are still the main target markets receiving two thirds of the s export volumes. Finland s share has already risen to over 4, making the sector too dependent on only one target market. Due to Latvia s difficult economic situation exports to this country fell by half. Exports of the largest commodity group, men s and boys shirts, dropped by almost one third, while exports of women s clothes showed slightly better developments. Employment figures continued to go down in this sector in 28 but the pace was slower. In previous years the decline had amounted to 1 but last year employment decreased by only 1. However, it is still too early to look for signs of stabilisation since several companies announced redundancies and financing difficulties in the second half-year. Average wage grew less than the Estonian average but the growth still exceeded 11. Ministry of Economic Affairs and Communications Ministry of Finance 29

23 Economic Survey of Estonia Investments continued to decrease, being less than 7 million kroons in 28 and making only 2.2 of sales revenue. This very low investment activity may start to impact the sector s long-term competitiveness. 8 of the investments in 28 were made in machinery and equipment. It was the only field showing an increase in investments. At the beginning of 29 companies questioned by the Estonian Institute for Market Research expressed rather pessimistic expectations about the near future. More than half of the respondents expected output volumes to fall and more than two thirds planned to reduce workforce. Lack of demand was mentioned as the main obstacle to growth. The general confidence indicator was the lowest in all survey history. Men's working clothes Main export commodity groups T-shirts and under-shirts 6 Women's wearing apparel 37 Goods of Estonian origin Other 22 Men's wearing apparel 3 Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) -4 mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

24 24 Economic Survey of Estonia 28 Wood processing and manufacture of wood products Besides food, wood is one of the largest industries in Estonia. Over 1, enterprises engage in wood processing and manufacture of wood products, the total employment in the sector is about 16, people. In output volumes almost doubled; share of exports in total sales is 6. The number of employed in the sector has dropped by one tenth which shows an increase in production efficiency. Estonian wood is closely related to the Scandinavian wood sector through ownership relations. The product mix of wood is comprehensive, ranging from sawn timber production and processing to manufacture of log homes, windows and doors. Veneer factory AS Balti Spoon, plywood products manufacturer AS Technomar & Adrem and laminboard factory AS Repo Vabrikud employ the highest number of people. The largest plywood manufacturer is UPM Kymmene Otepää. The largest sawmills are Imavere Saeveski (belongs to Stora Enso Eesti AS) and AS Toftan. Wood has exhibited rapid development in recent years but was one of the first to suffer under the changed economic situation when the real estate bubble popped. Most of the exports still go to the large and so far stable Scandinavian markets but the economies of these countries also go downwards. Thus, wood s short-term prospects may not be that positive ,9 Sector's share in Estonian economy 13,6 Share in Share in value added man. exports 64,8 Share of exports in sales mln EEK Sales and exports 11, Share in man. employment 9, Ratio to average wage * Sales Exports Change in sales (r.s.) Change in exports (r.s.) UK Germany Denmark Sweden Norway Finland Exports by target countries was a year full on challenges for wood. The prices of raw materials that until then had been a problem, started to fall, but demand also decreased considerably. Exports declined as well. In 28, sales of wood at current prices fell by Output at constant prices decreased by The downturn was mostly caused by lower sales in the domestic market (-3), while exports decline was somewhat slower (-.). Exports remained strong longer because the economic downturn hit the main export partners later. Taking into account the recent developments it may be forecast that 29 will be a difficult year for wood also in foreign markets. Due to the price decline of several inputs the producer price index also showed a slowing trend, rising only by 1.7 in 28. With this figure, wood has the slowest price growth after textile in the manufacturing group. The.1 reduction of labour costs compared to 27 was also an important factor in 28. Raw wood prices also fell rapidly in 28. An increase in export duties for wood to euros/m 3 which Russia planned to impose in 29, a matter of serious concern for Estonian wood companies in recent years, was postponed by the Russian government. If the intended high increase in tariffs had been implemented, it would probably have stopped any exports of Russian wood to foreign countries. The postponement was partially the result of resistance by large importers of Russian wood Finland and China. In the past years the felling volume in Estonian forests has been about 6-7 million cubic meters per year. In 28 about 6 million cubic meters (of that ca 4 million in private forests and the rest in state forests) were felled. The total felling volume forecast for 29 is 4-4. million cubic meters but the figure may be even smaller if the market situation does not start to improve at the end of the year. The annual increment of Estonian forests is 1-12 million cubic Ministry of Economic Affairs and Communications Ministry of Finance 29

25 Economic Survey of Estonia 28 2 meters, making it possible to substantially increase felling volumes, if necessary. In previous years private forest owners mentioned unfavourable tax conditions and complicated administrative procedures as the main reasons to their inactiveness but now the lower purchase price for wood has a more important role. Difficulties in wood are also experienced in our nearby countries. To alleviate the situation the taxation system for forest owners has been changed in Latvia and Finland. The Swedish forest is backed by the cheapening Swedish krona that makes all Swedish products more competitive in the global market. Two thirds of the Estonian wood production is exported; in recent years there has been an upward trend here. In 28, sales decline in this sector was softened by the better situation in export markets exports fell only by while domestic sales dropped by almost 3. The main export articles of wood are construction details (windows, doors, glued laminated timber) and log houses. In spite of the recession in the construction market the commodity group of construction details showed an increase (3.6). In 28, the main target markets for wood were Finland (firewood, construction details), Norway (log houses) and Sweden (construction details). Exports to the UK fell the most sales of sawn timber in this market dropped by almost half a billion kroons. By enterprise statistics the number of employees in this sector decreased by more than two thousand persons in 28, falling lower than 16,. Workforce was reduced in all sizes of enterprises and almost one quarter of the jobs were cut in companies employing 2-49 persons. Average wage grew by 7.7, slower than the Estonian average. Wood s investments in fixed assets fell by almost half in 28 and amounted to 669 million kroons. This low investment level was last seen in the 2th century. Investments in machinery and equipment fell the most, by 3 million kroons. At the beginning of 29 the expectations of companies questioned by the Estonian Institute for Market Research were much more optimistic than at the end of 28. Companies expected production volumes to grow (maybe they expected the construction market to become more lively in spring) but forecast that prices would continue to fall. On the other hand, in addition to lack of demand, companies have started to mention financial problems as factors inhibiting growth. These factors did not exist before. Main export commodity groups Construction details 24 Firewood 1 Sawn timber 2 Goods of Estonian origin Profiled timber 7 Log houses 19 Other products 2 Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Value added, labour costs and productivity Ministry of Economic Affairs and Communications Ministry of Finance 29

26 26 Economic Survey of Estonia 28 Production of pulp, paper and paper products Paper is an with long traditions, established in Estonia already in the 17 th century. Currently there are about 7 paper, pulp or paper products enterprises in Estonia, with a workforce of almost 2, people. In the years the output of paper grew by two times. More than three fourths of the output is exported. Exports, the main driver of growth, is being more and more replaced by domestic consumption. This is expected because consumption of paper per person in Estonia is still lower than the EU average. Paper is a heavily concentrated in Estonia the two larger companies employ more than half of the workforce and give over half of the total turnover. AS Estonian Cell, aspen pulp factory in Kunda, launched in 26, is the largest pulp producer. "HORIZON" Tselluloosi ja Paberi Aktsiaselts is the largest paper and cardboard producer. AS Räpina Paberivabrik is a smaller manufacturer producing paper and cardboard from waste paper. Most of the companies make paper products from imported paper Sector's share in Estonian economy,4 3,2 Share in Share in value added man. exports 76,1 Share of exports in sales mln EEK Sales and exports 1,4 Share in man. employment 16, Ratio to average wage (r.s.) * Sales Exports Change in sales (r.s.) Change in exports (r.s.) India Egypt Netherlands Italy France Germany Exports by target countries The output growth of paper stopped in 28, total sales and exports fell. Productivity figures also started to decline. It is expected that these developments will continue in 29 until global demand turns upwards. Sales of paper at current prices fell by 4.3 in 28, output volume at constant prices decreased by Weakness of foreign markets was the main reason for the downturn. Sales in the domestic market increased by 18. The cheapening raw materials were a positive development for paper in 28, especially because raw material prices had previously undergone a rapid price increase. However, decreased demand affected the economic results of the sector even more, bringing about a decline in output volumes. Paper industries in our neighbouring countries have also difficult times. Workforce in this sector has significantly dropped in Finland, several paper factories have been closed and production has been transferred to countries where the cost base is lower (smaller labour costs, depreciating currencies). Due to energy-intensive production processes also the high energy prices in 28 had a negative impact on paper. More than three fourths of paper s output is exported. Exports to Germany grew the most by a quarter. The largest target markets for mechanical pulp, export volumes of which were the same as in 27, were Germany, France and Italy. The other important export group was uncoated paper or cardboard, exported mainly to Egypt, Poland and the Netherlands. Paper s employment rate dropped below 1,8 persons the average of the sector s employment in recent years (in 27 there was an upsurge to almost 2, persons). Redundancies had a strong effect on the number of employees (closure of Atlanta Office Products AS that previously employed over 4 people). Wages continued to increase moderately, augmenting by 11. Investments in fixed assets continued to drop in 28. Regardless of the low comparison base investments fell below 4 million kroons. More than 8 of investments were made in machinery and equipment. It is, however, understandable that the Ministry of Economic Affairs and Communications Ministry of Finance 29

27 Economic Survey of Estonia current economic and credit markets situation have lowered enterprises confidence and they do not risk to expand. Next years will probably be difficult for paper. There is strong excess supply in the market and margins have dropped to a relatively low level. However, cheapening wood prices make paper s prospects more positive by enabling it to save costs. mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) Main export commodity groups Other products 3 Recycled paper and carboard waste Wood pulp 3 Uncoated paper and paper-board 3 Boxes, bags and other packaging 4 Goods of Estonian origin 1 1 Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

28 28 Economic Survey of Estonia 28 Publishing and printing Publishing and printing has developed rapidly in the past five years. In 28 the production volume of the exceeded the volume of 23 by about two times. Publishing is the principal activity for over companies, the largest of which are located mainly in Tallinn and Tartu. The has two main sub-branches: publishing and printing. The sector employs almost 6,1 people. Although the sector has mainly produced for the domestic market, it has also started to pay more attention to exports. In 28, exports exceeded already 2 (in 2 less than of the production was sold in foreign markets). Domestic market is, however, rather limited, and export markets are therefore essential for the development of the sector. This was also one of the few to maintain the previous level of investments in 28. The largest companies publish newspapers, magazines and periodicals, e.g. AS Äripäev, Eesti Päevalehe AS, AS Ajakirjade Kirjastus and AS Postimees. Telemedia Eesti AS and AS Infopluss Eesti publish telephone directories. The largest printing enterprises are AS Printall and AS Kroonpress, focused mainly on printing periodicals. The largest companies engaged in book printing are OÜ Tallinna Raamatutrükikoda and OÜ Greif. Printing of advertising matter is also an important part of the printing Sector's share in Estonian economy 1, 1,3 Share in Share in value added man. exports 2, Share of exports in sales mln EEK Sales and exports, Share in man. employment 122,2 Ratio to average wage (r.s.) * Sales Exports Change in sales (r.s.) Change in exports (r.s.) Netherlands Exports by target countries UK Russia Norway Finland Sweden y-o-y After years of rapid growth publishing also showed a slight slowdown in 28. Sales in foreign markets were much more successful than in the domestic market. The production volume of publishing fell by 2.3 in 28. Sales in domestic markets dropped by., export volumes grew by more than one fifth. The success of the sector depends currently most of all on the strength of the domestic market. Export share has grown from year to year but there has been no decisive breakthrough. It may be difficult to increase the share in foreign markets in the coming years since the sector does not produce primary consumer goods and consumers may save more on this sector s products if the financial situation becomes worse. Exports of this sector showed a growth trend again in 28. It is positive that companies have been able to compete in foreign markets considerably larger than the domestic market. The main target markets, however, are still the same. More than half of the s output is exported to the Nordic countries; their share increased even more in 28. The commodity group of exercise books considerably increased its exports to the UK. However, in all probability goods flows were simply reorganised because exports of exercise books to Ireland dropped significantly. Among larger commodity groups exports of periodicals increased the most by almost 1 compared to 27. By enterprise statistics the employed 6,1 persons in 28 and there were no major collective redundancies. Wage growth rate continued to drop and fell to 6.4. Some levelling with wages of other industries was expected because wages in publishing and printing were still substantially higher than the average of other industries. Slowing of wage growth helped the to keep labour costs growth under control, as a result of which they dropped as much as value added. Investments in fixed assets were slightly higher than in 27 (by 4.6). It is positive that the Ministry of Economic Affairs and Communications Ministry of Finance 29

29 Economic Survey of Estonia could maintain the investments level in spite of the complicated financial condition. As printing is heavily technology-intensive, single investments may significantly change the overall picture. Next years will be somewhat more difficult for the publishing and printing than the previous years. Circulation numbers of books and subscription to periodicals will both drop under the conditions of economic crisis. Other 9 Exercise books 16 Main export commodity groups Periodicals 37 Goods of Estonian origin Folders, portfolios 11 Books, brochures and other printed material 14 Commercial advertising, product catalogues 13 2 Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

30 3 Economic Survey of Estonia 28 Manufacture of chemicals and chemical products The Estonian chemical has been tightly linked to oil shale but other chemical branches are also being developed. Due to restructuring of production, employment has dropped in this sector. In 28 more than 4, people worked in this. Sales and output volumes have increased due to higher productivity. Although productivity has shown rapid growth, it is still significantly below the level of productivity in developed countries. In 27, value added per employee in Estonia and Finland were less than half a million kroons and over 2 million kroons, respectively. More than half of the Estonian chemical is located in Ida-Viru county, one third of the workforce is in Tallinn and Harju county. The largest chemical companies are VKG Oil AS (shale oils) and VKG Resins AS (adhesive resins) both affiliates of Viru Keemia Grupp, Kiviõli Keemiatööstuse OÜ (shale oils), ES Sadolin AS, AS Tikkurila-Vivacolor and AS Eskaro (paints and varnishes), AS Silmet (rare metals), Henkel Makroflex AS and OÜ Krimelte (assembly foams), Genovique Specialties AS (former Velsicol Eesti AS benzoic acid, sodium benzoate), AS Nitrofert (mineral fertilisers, ammonia and carbamide), Orica Eesti OÜ (explosives) and AS Nycomed Sefa (pharmaceuticals). The sector has low productivity, therefore labour productivity has to be increased. That may bring about lower demand for labour. The need to raise efficiency derives from the more expensive production inputs but in the chemical increased costs related to environmental protection also play an important role. On the other hand, growth in oil prices has boosted interest in alternative fuels, including shale oil, which may result in more employment in the sector Sector's share in Estonian economy 4 2 1,4 8,9 Share in Share in value added man. exports 84,2 Share of exports in sales mln EEK , Share in man. Sales and eksports employment 18, Ratio to average wage (r.s.) * 28* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Allikas: Eesti Statistikaamet Latvia Russia Sweden USA UK Ukraine Belgium Germany Lithuania Finland Denmark Exports by main target countries was a relatively good year for chemical 4 although the economic crisis was felt by the end of the year also in this sector. Output volumes, sales and exports of chemical increased at the same pace or even faster as in recent years, profits increased and productivity figures improved. However, due to the overall worsening of economy the prospects of chemical have also deteriorated. Production of chemical increased by 12 in 28, being one of the highest of all industrial sectors. The sector showed rapid growth almost all year but at the end of the year a decline in foreign demand brought about lower export and output volumes. Exports increased by one fifth in 28, sales in the domestic market grew two times slower. Sales figures were backed by price increases. Producer prices grew by more than 6, export prices even more. The price rise is related to the increased production costs but higher oil prices also play a role because the prices of several chemical products follow the fluctuations in oil prices. Sales in foreign markets grew strongly in most commodity groups. Exports of fertilisers (urea), ammonia, mastics and paints and varnishes grew by one fifth. Due to the higher oil price more revenue was generated from exports of shale oil, although the volumes exported were smaller than in 27. Of the most important export articles, sales of benzoic acid dropped. Production figures indicate that benzoic acid derivates are partly reflected under other 4 This sector embraces, besides production of chemicals and chemical products, the production of coke, purified oil and oil shale products and atomic fuel. Due to the existing data, output and sales figures reflect only the production of chemicals and chemical products. Ministry of Economic Affairs and Communications Ministry of Finance 29

31 Economic Survey of Estonia commodity groups and, therefore, export figures are not quite in accordance with production. The target markets of chemical s exports changed to some extent instead of the Netherlands more products were sold to Sweden, the UK and Belgium or through these countries to other markets. Exports of other chemical products grew vigorously to Latvia (ammonia), USA (urea) and Sweden (paints and varnishes, urea). The number of employees in this did not change in 28. Statistical data indicate some movements inside the sector employment in shale oil companies has increased and in other chemical branches decreased. This, however, may not reflect actual changes but can be the result of a more exact specification of field of activity. As the employment rate did not change, labour costs grew only on account of wage increases. After the rapid wage increase in 27 the growth rate of wages has decelerated. The average wage increase in chemical was less than 1 in 28. Labour costs constitute only one tenth of production costs in chemical, while other inputs, the majority of which are imported, have a much higher share. Production costs grew by one fifth in 28, half of which is attributable to the increase in production volumes. Due to the even more rapid increase in sales revenues the total profit of the grew by more than half in 28. Profit and sales revenue ratio was the highest in recent years. The good financial results were also reflected in productivity figures. The amount of investments in chemical was the same as in 27 when they rose to their record high. Most of the investments were made in construction and reconstruction of buildings and facilities, followed by machinery and equipment. VKG Oil AS started to build a new oil shale processing plant in 27, intended to be commissioned in the middle of 29. The total cost of the project is over 1 billion kroons. Besides the oil shale branch, heavy investments have been made also in other chemical branches. The difficult situation of the global economy resulted in a substantial decrease in the number of orders and forced chemical to reduce its use of production capacities at the beginning of 29. The already worsening production figures fell even more. Although the companies questioned by the Estonian Institute for Market Research hope that the situation will improve in the middle of 29, the 28 production level will probably not be attained. The increased production capacity of oil shale may give a positive effect in the second half-year but its actual impact will depend on the market situation. Even if the developments are positive, it will probably not be able to make up for the decline in other branches. Mineral fuels and oils 24 Paints, varnishes, mastics 24 Main export commodity groups Fertilisers 1 Other 2 Goods of Estonian origin Anorganic chemicals; compounds of rare earth metals 11 Organic chemicals 6 2 Number of employed and wages Number of employed 27 28* Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value added, labour costs and productivity * 28* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments by enterprises * Investments in fixed assets 28* Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

32 32 Economic Survey of Estonia 28 Manufacture of rubber and plastic products After rapid growth, manufacture of rubber and plastic has shown more modest developments in recent years. Establishment of new companies and creation of new jobs has slowed down due to the stabilisation of production and sales volumes. The largest enterprises in rubber and plastic are AS Plasto, AS Glaskek Group (plastic windows), AS Estiko- Plastar (film and plastic bags), Pipelife Eesti AS (plastic pipes), AS Polyform (videotape cases, packages for food ), Promens AS, Bladhs Eesti AS (plastic products for automobile ), Greiner Packaging AS (plastic packages), OÜ Merinvest (rubber o-rings, membranes) and AS Balteco (baths). The largest enterprises are located in Tallinn and Harju county (half of the workforce), Tartu and Ida-Viru counties (about one-tenth of the workforce), and Hiiu and Saare counties also employ quite a lot of labour. It is forecast rubber and plastic will experience some backlashes due to the current economic situation. Long-term prospects, however, are rather positive. The sector s development is supported by the expanded product mix and wider use of packages in food. At the same time, mass production is already being transferred from Estonia to other countries and thus, companies that are flexible and focused on smaller batches have better prospects. In contrast to previous years, employment growth prospects are slight Sector's share in Estonian economy 2,6 3,2 Share in Share in value added man. exports 2,4 Share of exports in sales 4, Share in man. employment 89, Ratio to average wage 1 mln EEK Sales and exports * 28* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Sweden Finland Germany Latvia Norway Lithuania Russia Netherlands Denmark UK Exports by main target countries Production and sales volumes in rubber and plastic dropped all through 28, bringing down the financial indicators. Exporting companies had a somewhat better position but exports also started to fall in the second half-year. The decline in production volumes that had started in the second part of 27 continued its downward trend in 28. Output dropped by 14 for the whole year and the downturn deepened each quarter. Total figures underwent a change due to the liquidation of the largest producer in the sector, Nolato Tallinn Polymer, in the second half of 27. This company had previously accounted for almost one tenth of the sector s sales revenue and employees. But it was not the only reason. Lowering demand affected a large part of the sector s companies and most of the problems were related to the diminishing demand in the domestic market. Domestic sales started to fall in the second half of 27. In 28 sales in the domestic market were by about one fifth lower than a year before. The downward trend in construction activity affected rubber and plastic as well production of plastic doors and windows fell. Exports still showed growth during the first half-year but turned downwards in the second half-year. As regards the whole year, however, exports maintained the level of 27. The main commodity group to show a decline in exports was plastic office and school supplies and plastic films. On the other hand, exports of plastic packages, plastic pipes and containers and rubber seals exhibited strong growth. Compared to 27, exports declined to the Netherlands (office and school supplies), and to some extent to Sweden and Latvia. Sales in other target markets increased, most of all in the UK (plastic packages), Finland, Germany and Denmark. Producer prices of the rubber and plastic grew by 4. in 28. Export prices increased by Ministry of Economic Affairs and Communications Ministry of Finance 29

33 Economic Survey of Estonia about the same while imported rubber and plastic products showed a somewhat slighter increase. Difficulties in sales brought about cuts in workforce. In 28, the number of people employed by rubber and plastic fell by. Wage rise also came to a sudden halt and, at the end of 28, wages were even lower than in 27. As a result of measures taken, labour costs in this sector did practically not grow in 28 and total costs decreased (also due to a smaller output volume). Cost saving could not make up for the decline in revenues and the total profit of the fell by about half. The profit of rubber and plastic was almost 7 of sales revenue. Negative developments also reflected in productivity figures. Value added and sales revenues per employee, labour costs and total costs fell. Companies investments in fixed assets were by about one third smaller than in 27. Investments in the main field machinery and equipment dropped by the same amount. Investments in construction, renovation and purchase of buildings and facilities were cut by one fifth. Output volumes of rubber and plastics will continue to diminish in the first half of 29. All the companies responding to a survey made by the Estonian Institute for Market Research confirmed at the beginning of 29 that output was decreasing, the number of orders was record low, and stocks of finished products were piling. Under these conditions, enterprises plan to cut the number of employees even more. Although forecasts indicate that the situation will stabilise, it does not yet mean growth. Other 11 Plastic pipes and hoses 8 Vulcanised rubber products (seals, washers, etc.) 7 Main export commodity groups Plastic sheets and film 9 Goods of Estonian origin Number of employed and wages Office and school supplies, accessories 37 Boxes,, packages, bottles, etc * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

34 34 Economic Survey of Estonia 28 Metal and metal products Metal has developed extremely fast during our re-independence period. Output of the has grown by 2 per year on average in the last ten years, mainly thanks to exports but also the increased domestic demand (in machinery and equipment and construction sectors). Expanded sales figures and production facilities have brought about more need for labour. The employs more than 13, people (by the labour force survey encompassing people doing metal work in other sectors and people working abroad, the number is 16,), being thus one of the largest sectors. Metal is concentrated in Tallinn and its vicinity (more than half of the workforce) and Ida-Viru county (almost one fifth of the workforce). The largest enterprises are AS Kohimo, AS Viljandi Metall, Hiab Balti AS, OÜ BLRT Marketex, AS Remeksi Keskus (metal structures), Ruukki Products AS, AS Saku Metall (building structures), AS Energoremont (manufacture of products needed by power plants and servicing power plants), AS Hanza Tarkon, AS Favor, OÜ BLRT Masinaehitus (metalworking), Metaprint AS (metal packages), ArcelorMittal Tallinn OÜ (galvanised steel), and AS Demidov Industries (aluminium alloys). The sector has positive outlooks for the next years but the economic crisis that started in 28 will also affect this. According to long-term forecasts domestic demand and exports will grow. Due to labour productivity growth employment will not grow as much as sales but it is estimated that the sector will create additionally ca 2, jobs by Sector's share in Estonian economy 4 2 2,1 12, Share in Share in value added man. exports 62,2 Share of exports in sales mln EEK Sales and exports 11,3 Share in man. employment 17, Ratio to average wage (r.s.) * 28* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Finland Turkey Sweden Norway Poland Germany Latvia Russia Denmark Exports by main target countries Metal branches showed rapid growth in 28 compared to other industries and the year 27. Exports increased almost until the end of the year and the number of employees grew. Metal s output increased by almost 9 in 28. Similar to other industries there was a sharp downturn at the end of the year. Exports exceeded the level of the previous year until December. Backlashes in the domestic market manifested themselves somewhat earlier (for example in lower demand for building structures). Sales in the domestic market grew by in 28 compared to 27, exports increased by almost one quarter. Sales figures reflect the actual changes in production quite adequately because producer prices grew at a much more modest pace than in previous years (3.7). Exports grew mainly due to the higher export volume of zinc-coated sheet steel, metal scrap and metal structures. Export revenues increased partly due to the price rise of products, resulting from the more expensive metal prices in the global market. As regards the main export partners Denmark and Germany showed a decline, while exports to other markets increased. Exports to Finland (metal structures), Turkey (metal scrap) and Russia (zinccoated steel) increased by more than one third. Metal s workforce grew by about two per cent. The does not employ new workforce due to the decreased demand. Wages have also been adjusted under the changed circumstances. Wage increase has stopped as a result of the general situation but the total wage increase in 28 was still 1. Labour costs rose much faster than total costs. Profits fell by a quarter compared to 27 while profitability was not much lower than the long-term average. Value added growth was smaller than the increase in costs but sales revenues and value added per employee were higher than a year ago. Metal enterprises invested much less in buildings and facilities than in 27. Most Ministry of Economic Affairs and Communications Ministry of Finance 29

35 Economic Survey of Estonia 28 3 investments were made in machinery and equipment where the decrease was more modest. Total investments fell by one fifth. Insufficient demand is the main problem. The survey made by the Estonian Institute for Market Research showed that the had large unused capacities at the beginning of 29 and the number of orders was much smaller than usual. Only every fifth respondent hoped that the situation would improve soon. Almost half of the companies intended to cut their workforce. The pressure to lower prices is very strong due to the difficult economic situation. Iron and steel 4 Main export commodity groups Other 9 Goods of Estonian origin Iron and steel products 34 Alu-minium and products 7 Copper and products Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

36 36 Economic Survey of Estonia 28 Manufacture of machinery and equipment The output of the machine engineering sector has rapidly grown but, due to the increased production efficiency there has been no need for additional labour. However, in recent years the downward trend has reversed and employment in this sector has started to grow. Machine engineering has developed mainly thanks to foreign markets; most of the production is exported. The largest companies are AS Hekotek (wood processing equipment), AS Fors MW (timber trailers, log lifts), and AS Finmec (parts of machinery). However, smaller enterprises are dominating in the sector. The largest enterprises are concentrated in Tallinn and Harju county but machine engineering is represented in almost every region in Estonia. Long-term forecasts show growth in exports and sales in the domestic market. Output volume growth will primarily be supported by productivity growth and, thus, the number of people employed by the sector will not grow much. The need to quickly raise productivity is related to the lagging compared to the productivity level of the sector in developed countries and the increased production costs Sector's share in Estonian economy 2,8 4,9 Share in Share in value added man. exports 72,1 Share of exports in sales mln EEK Sales and exports 3, Share in man. employment 11, Ratio to average wage (r.s.) * 28* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Finland Sweden Russia Italy Germany Norway USA Exports by main target countries Machine engineering continued to grow rapidly in the first three quarters of 28. The end of the year showed a sharp decline in demand. However, annual results were better than a year ago. In 28, production of machinery and equipment increased by 7. Growth in the first nine months was twofold but, as in most industries, output volumes started to diminish at the end of the year due to the decreased demand in the domestic and foreign markets. Sales increased by one tenth thanks to an increase in producer prices (by 4.). Most of the production is exported; exports were the main driver for the relatively good developments in the. Sales in the domestic market were also higher than in 27 but growth figures were much lower than by exports. The main export articles of machine engineering are lifting and loading equipment and their parts. In general, sales in the primary export markets increased, except in Germany and USA where the volumes decreased. Exports to Italy showed strong growth (parts of lifts and lifting equipment). The number of people employed by machine engineering remained at the 27 level. New people were recruited at the beginning of 28 and lack of labour was a serious problem for the. The situation was completely different by the middle of the year. Wage increase came to a standstill but the overall increase per year was still one tenth. Labour costs rose by 1 while total costs increased by only half of that amount. It corresponds to the revenue side and thus, profit figures were somewhat higher than in 27. Productivity indicators improved slightly or did not change. The abrupt changes taking place at the end of the year affected all economic figures. Machine engineering companies invested three times less in 28 than in 27. Investment activity decreased in all fields. Most investments were made in machinery and equipment and buildings and facilities. Ministry of Economic Affairs and Communications Ministry of Finance 29

37 Economic Survey of Estonia Companies were pessimistic about the market situation and short-term prospects at the beginning of 29. The survey of the Estonian Institute for Market Research showed that the number of orders had considerably dropped. Enterprises also forecast that production volumes would continue to decrease in the coming months. Most companies said that a decrease in workforce was likely. Tendencies in the global market show that investments will decline in 29, thus the demand for investment products, i.e. machinery and equipment, will also fall. It will have a strong effect on Estonian manufacturers and subcontractors. 16 Number of employed and wages * Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) - -1 Ministry of Economic Affairs and Communications Ministry of Finance 29

38 38 Economic Survey of Estonia 28 Manufacture of electrical appliances and optical instruments Manufacture of electrical appliances and optical instruments has been one of the fastest developing industries in Estonia. In the last six years sales have grown by six times. Employment has doubled during the same period. The sector has strong orientation on export markets; most of the larger enterprises are based on foreign capital. About 38 companies engage in the manufacture of electrical appliances and optical instruments Geographical concentration in Tallinn and in its nearest vicinity is characteristic of the manufacture of electrical appliances and optical instruments but it also has a strong influence on regional development. Electronics has been one of the most important job creators in Saare county, Pärnu, Sindi, Elva and Koeru. Manufacture of electrical appliances and optical instruments is divided into four sub-branches. AS Ordi and AS ML Arvutid, engaging in assembly and sale of computers, are the largest enterprises in the office equipment and computer branch. Contrary to the s main trend, production of office equipment and computers focuses mainly on the domestic market. In manufacture of electrical appliances and apparatuses, ABB AS has the highest turnover, its principal activity being manufacture of power distribution equipment and generators. Other larger enterprises are AS Konesko which is dealing with manufacture of electric motors and parts, and AS Draka Keila Cables, a related company to AS Harju Elekter group, that produces various types of cables. The larger enterprises producing television and communication equipment are AS Elcoteq Tallinn (communication network equipment), Enics Eesti AS (electronic components for industrial and medical equipment) and Stoneridge Electronics AS that makes electrical systems for motor vehicles. In the branch of medical equipment, optical instruments and precision instruments, OÜ JOT Eesti is the largest enterprise producing miscellaneous automatic equipment. The has developed well until now but the economic downtrend starting in 28 had its effect on it. Therefore, forecasts for the near future are more pessimistic. In the first three quarters of 28 there was still Sector's share in Estonian economy strong production and sales growth in the 1 manufacture of electrical appliances and optical 8 instruments but the deepening economic 6 4 8,9 88,3 recession at the end of the year had a significant 19,3 2 11,9 2, impact on the sector. Employment remained almost on the level of the previous year but Share in Share in Share of Share in Ratio to productivity improved. added value man. exports in man. average wage sales exports mln EEK Sales and exports employment * 28* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Sales growth by sub-branches * 28* Office equipment and computers Electrical equipment and apparatuses Radio, TV and communication equipment Medical equipment, optical instruments and precision instruments Sales growth was still quite strong in the manufacture of electrical appliances and optical instruments in 28 (14), by 1 percentage points lower than in 27. Sales still grew vigorously in Q3 (24) while in the next months the effects of the economic downturn and financial crisis reached this sector as well. In earlier years the rapid sales growth had mainly been supported by exports but in the last two years domestic sales also showed strong improvement. Output volumes at constant prices only increased by.2 compared to the previous year because production figures fell in Q4. Producer prices grew by. on the average, the growth being faster by a couple of percentage points compared to 27. The sales of this grew by 18 in 28 but the growth rate was significantly lower than in 27. Sales in the domestic market (growth 29) grew faster than exports (growth 17), thanks to several large orders. In the end, the share of exports in sales dropped by one percentage point to 83. The development of manufacture of radio, television and communication equipment has shown a significant slowdown in recent years. In 27, sales of this branch still had relatively strong growth (13) but in 28 there was no growth at all. The cooling of the global economy reached this branch sooner Ministry of Economic Affairs and Communications Ministry of Finance 29

39 Economic Survey of Estonia because of its dependence on foreign markets (96 of its production is exported). In the first half of 28 development of manufacture of medical equipment, optical and precision instruments was one of the fastest in all manufacturing. In the second half-year, however, the rapid decline in foreign demand started to affect this branch as well (exports constitute 88 of the sales). Still, sales of the branch grew by 9.2 and exports by 1.6 in 28. Manufacturers of computers and office equipment experienced falling sales already in the last quarter of 27 when economy s cool-off accelerated in Estonia. Computers are mainly sold in the domestic market and the continuously falling domestic demand in 28 reduced the output and sales figures of this branch even more. Sales dropped by one third in 28. The biggest export market for the was still Sweden, taking 4 of all its exports. The main articles sold in the Swedish market were parts of communication equipment, wiring harnesses for cars and other insulated electric cables. Finland s share in exports fell by another percentage points to 27 due to a major decrease in the exports of communication equipment. Sales of various electrical equipment showed strong growth. Denmark rose to be the third target market due to large exports of AC generators for wind generators. A sharp growth in exports of the same products to Spain brought Spain among the six largest target markets. Exports to Germany increased as well, thanks to generators and power distribution equipment, transformers and medical equipment. Exports to the Netherlands were dominated by wiring harnesses for cars and other insulated electrical cables. The number of employees in the of electrical appliances and optical instruments was almost the same as in 27. However, there were bigger changes in the branches. In the branch of electrical appliances and apparatuses that had developed faster, the number of employees grew by about one tenth, while in the branch of radio and communication equipment workforce was cut by the same amount. Share of sub-branches in sales Electrical equipment and apparatuses 6 Office appliances and computers 2 Finland 27 Sweden 4 Exports by countries Radio, TV and communication equipment 3 Precision instruments 12 Denmark 7 Germany Other 16 Number of employed and wages Spain * Number of employed Avarage wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (p.s.) Netherlands mln EEK Investments of enterprises * Investments in fixed assets Investments growth (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

40 4 Economic Survey of Estonia 28 After rapid wage increases in 26 no fast wage growth has taken place any more but the growth still amounted to 12 in 28. In the manufacture of electrical appliances and apparatuses and medical and precision instruments the average wage is almost as high as the Estonian average but in the branch of radio and communication equipment the wages are by about one quarter lower. Wages have increased as a result of improved productivity figures. Labour productivity based on value added showed again growth, after a decline for a couple of years. The value added created by companies grew by almost one fifth in 28. The rapid cool-off of the economy in 28 had a negative effect on the investment decisions of the sector. In the sector of electrical appliances and optical instruments investments fell by almost half. The share of investments of enterprises manufacturing electrical appliances and apparatuses was more than half while companies manufacturing radio and communication equipment made almost one third of the investments. Both branches showed a decline in investments comparable to the decline in total investments of the sector. Investments in buildings, facilities and equipment fell considerably, only vehicles were bought for the same amount as last year. It is expected that output volumes will continue to decrease in this in the first half of 29. Demand will diminish in both domestic and foreign markets. However, expectations of the companies of the two biggest branches of the, questioned by the Estonian Institute for Market Research in April, were contradictory. The confidence indicator of companies manufacturing electrical appliances and apparatuses was more negative than ever before, being also one of the lowest among all industries. Most companies wanted to lower their sales prices and cut the number of employees to stay in competition. Expectations for the coming three months of companies manufacturing radio, television and communication equipment were much more positive in April than at the beginning of of the enterprises hoped to increase their output and half of the companies forecast an increase in export orders. Sales prices will remain the same but one fifth of the companies plan to cut their workforce. Confidence indicator of the radio and communication equipment branch was still negative in April but much higher than in January. Ministry of Economic Affairs and Communications Ministry of Finance 29

41 Economic Survey of Estonia Bo Henriksson: Exporters, look east! Bo Hendriksson, chairman of the Management Board of AS ABB, thinks that manufacturing companies should increase their exports in order to overcome the economic crisis and look east: the Asian and Russian markets. As people are the most valuable asset of our company, we want to maintain our quality staff also during the difficult times. What was the year 28 like for AS ABB? Which objectives were reached and which not? 28 was a successful year for ABB. The sales of last year amounted to 2.6 billion kroons which was by 2 more than in 27. It was the largest sales revenue during the time ABB has been in the Estonian market. The amount of orders grew by 28 and amounted to 2.6 billion kroons. We continued to expand in 28. Another extension of the industrial electronics plant in Jüri was completed and we started to expand the machine engineering plant and build a new storage facility. Important investments were made to purchase production equipment for the plant. We also started to provide a maintenance service for turbo compressors. Enterprise Estonia awarded ABB for its excellent results the Entrepreneurship Award 28 and Foreign Investor Award 28. The latter award was given to ABB for the second year in a row. If and how did the economic crisis affect ABB in 28 and how will it affect ABB this year? Indications of the global economic and financial crisis were felt in the economic results of our company in the last quarter of is and will be a difficult year. Our position in the market, however, is sufficiently strong to overcome the difficult times and to emerge from the recession with a strong competitive position. What are ABB s objectives for 29? Depending on the field of activity, we consider it important either to maintain or to enlarge our market share. For this, security of supply has to be improved even more and service needs to become more flexible. Security of supply and the increasing quality or our products and services has been one of the most important indicators for a larger number of orders we have made no compromise here until now and will not make any in the future. It is important to expand the product mix and to offer new solutions for the clients. To ensure all this, we will continue to pay a lot of attention to increasing the efficiency of production processes but also to better application of know-how and expanding the share of product development. Photo: ABB What are the challenges for the Estonian industrial sector in 29? In my opinion coping with the decreasing demand in the domestic market, and therefore, more reorientation to exports and making efforts to find foreign markets are the biggest challenges. What are your recommendations to other manufacturing enterprises to overcome the economic crisis? Increasing exports is one of the few options to overcome the economic downfall. Taking into account the situation today, I consider that looking east is one of these options, although an unsure option. I am speaking about Asian markets and Russia. It would be worth to make efforts to warm up relationships with Russia in fact, no serious efforts in this respect have been made in recent years. Ministry of Economic Affairs and Communications Ministry of Finance 29

42 42 Economic Survey of Estonia 28 Manufacture of transport equipment The manufacture of transport equipment depends mainly on foreign demand since exports constitutes ¾ of the sales of the sector. The increased exports and domestic market sales have expanded the output and promoted the recruitment of new employees. Although the productivity of this sector is rather high it is still about 3-4 times lower than in Finland. The largest enterprises are AS Norma (safety belts), Loksa Laevatehase AS (structures for ship building); affiliates of Balti Laevaremonditehas (ship repair) OÜ Tallinna Laevatehas, OÜ BLRT Rekato, OÜ BLRT Laevaehitus, OÜ Tehnomet and AS Baltic Premator; AS Bestnet and AS Respo Haagised (trailers), OÜ Tarmetec (car accessories), AS Ühinenud Depood (repair of railway rolling stock), Universal Industries OÜ (exhaust systems). The largest companies are concentrated in Tallinn and Harju County ( 2 / 3 of the sector s workforce), but are also located in Tartu, Ida-Viru and Saare counties. Long-term forecasts show that sales will be promoted by exports but domestic sales will also grow. The growing output figures are backed by productivity growth because lack of qualified labour and growing labour costs force companies to focus on more expensive products. The situation in the labour market is complicated by working abroad; also, the competes with other sectors. In short-term, though, labour demand will drop hand in hand with the economic depression Sector's share in Estonian economy,8 6,1 Share in Share in value added man. exports 7,2 Share of exports in sales mln EEK Sales and exports 4,7 Share in man. employment 1, Ratio to average wage (r.s.) * 28* Sales Exports Change in sales (r.s.) Sweden Russia Finland Norway Belgium Latvia Ukraine Germany Exports by main target countries Change in exports (r.s.) The manufacture of transport equipment showed increased exports in 28 but it could not balance the domestic downfall. Manufacture of motor vehicles and their parts grew while the output of other means of transport dropped. In 28 the output volumes of this sector fell by a couple of percent. Manufacture of motor vehicles and trailers grew by but the output volumes of other means of transport fell (-6). Demand dropped drastically in Q4 also in this branch and production had to be cut to a considerable extent. Both branches showed a slight exports growth in 28 while domestic sales decreased. Problems in the domestic market were already felt in the second half of 27 but exports started to suffer seriously only in the last months of 28 due to developments in the world market. Compared to 27 exports of floating structures grew the most while that of yachts fell considerably. Among the sector s primary export partners, exports declined to Sweden (due to decreased sales of safety belts) and Finland (yachts). Exports to other target markets increased. Sales to Belgium (safety belts) and Norway (floating structures) increased by several times. Employment in this sector grew by 8 in 28. As the number of companies (mainly engaged in manufacture of other means of transport) covered by statistics increased by 8, it may be assumed that some of this rapid growth may be attributed to the better coverage of enterprises in statistics. Wages of this sector grew at the same pace as the Estonian average but, similar to other sectors of manufacturing, strict wage growth cuts were made to react to the worsening market situation Manufacture of transport equipment is manufacture of motor vehicles, trailers and semitrailers and other means of transportation, such as ships and railway rolling stock Ministry of Economic Affairs and Communications Ministry of Finance 29

43 Economic Survey of Estonia Wage growth and increased workforce numbers pushed labour costs up by a quarter. Other costs were practically the same as in 27 and thus, revenue increase exceeded expenditure growth. Total profit of the enterprises grew by more than one fifth and productivity figures improved as well. Manufacturers of motor vehicles and trailers and other means of transport invested in fixed assets only half of that of 27. Investments dropped in almost all fields. The largest investments were made in machinery and equipment and buildings and facilities. The first months of 29 were very poor for the sector. Production volumes dropped by more than half compared to the period a year ago. Car problems affect also Estonian companies; the number of orders has dropped also for manufacturers of other means of transport. Although demand may slightly grow in the second half-year, the year as a whole will be difficult for this. Motor vehicles parts and accessories 2 Main export commodity groups Rail Other containers Goods of Estonian origin 7 6 Source: Statistical Office of Estonia Number of employed and wages Trailers and semi-trailers 23 Floating structures 6 Yachts and boats * 28* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mln EEK Value addes, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

44 44 Economic Survey of Estonia 28 Furniture In Estonia over 4 enterprises engage in furniture manufacture. In 28, output figures at constant prices fell to the level of 23. More than 7 of the output is exported. The record high of furniture in Estonia was in when real estate prices grew extensively. After that, the share of exports has grown continuously. Due to the smallness of the domestic market more and more companies have been forced to enter foreign markets in recent years. The workforce of the sector has continued to diminish and fallen under 8, people. In previous years workforce was reduced due to technological development but in 28 it happened due to lower demand. If the market situation does not improve, a further decline in employment is expected. The largest companies in the furniture sector by their number of employees are located in Harju county and in SE- Estonia. In 28, AS Standard (office furniture) and Flexa Eesti AS (manufacture of parts of furniture), AS Thulema and Valga GOMAB Mööbel AS (solid wood furniture) were the s largest companies Sector's share in Estonian economy,8 4,9 Share in Share in value added man. exports 71,6 Share of exports in sales UK Germany Norway Denmark Sweden Finland 6, Share in man. employment Exports bu main target countries 78,4 Ratio to average wage 1, 1, 2, 3, 4,, mln EEK Sales and exports * Sales Exports Change in sales (r.s.) Change in exports (r.s.) In 28, furniture was one of the sectors suffering the most under the economic crash. Sales dropped by more than one tenth, exports remained at the level of 27. Employment also fell considerably. The sales of furniture fell by 1. compared to the previous year and production volumes at constant prices dropped by Domestic sales decreased by one quarter. The main reason was the reduced housing construction and lower purchase power resulting from the economic recession. The year was successful for these companies which had long-term contracts or received larger orders from the government. Exports have played an important role in the development of furniture. After the domestic market dropped in 28, exports assumed an even bigger role. However, more rapid expansion in foreign markets is inhibited by competition from countries which can produce labour-intensive products with lower labour costs. Furniture exports may also be hindered by the rapidly fallen prices of transport which, due to the closeness of the main target markets, have been one of Estonia s competitive edges. Therefore, speed and flexibility offered by our geographical position and economic structure should be used for further development. Exports of furniture made in Estonia was more than 7 of all sales in 28; 3 / 4 of the exports went to the Nordic countries. Thanks to the large share of rich and stable export markets, furniture exports have been able to stay at the level of the previous year. Seats are still the most important export article their exports grew by. Average gross wage in furniture (together with production not classified elsewhere) grew by 12.1; this is one of the slowest growths in recent years. Workforce figures fell under 8, people. In spite of reduced labour costs all productivity figures showed a decline because companies were not able to cut costs at the same pace with sales. Investments in furniture fell by more than 7 in 28. The plummeting demand did not favour investments and companies were searching for opportunities to save costs. More than half of the investments were made in machinery and equipment. Ministry of Economic Affairs and Communications Ministry of Finance 29

45 Economic Survey of Estonia 28 4 It is expected that investments will remain low in the near future as the production capacity created is substantially higher than companies are able to use. The survey made by the Estonian Institute for Market Research at the beginning of 29 showed that furniture manufacturers and enterprises not classified elsewhere were pessimistic about short-term growth in output volumes and export orders. Almost two thirds of the respondents considered it necessary to cut the workforce and regarded production capacities to be more than sufficient. Wooden bedroom furniture 7 Dining and living room furniture 1 Main export commodity groups Other furniture 2 Goods of Estonian origin Seats 46 Furniture parts 17 mln EEK Value added, labour costs and productivity * Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) With production not specified elsewhere mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) 1 1 Number of employed and wages * Number of employed Average wage* (kroons) Change in number of employed (r.s.) Change in wage* (r.s.) With production not specified elsewhere (NACE 36) Ministry of Economic Affairs and Communications Ministry of Finance 29

46 46 Economic Survey of Estonia 28 Priit Tamm, sales director of AS Standard, says that the company will focus even more on expanding its exports in 29, while the current economic crisis has shown that it is not enough to sell only in the neighbouring markets. Priit Tamm: Our aim is to increase exports by 2 better sharing of market risk have better chances to survive the crisis for example the Netherlands is a positive surprise for many. What was the year 28 like for AS Standard? Which objectives were reached and which not? We met our sales objectives last year. But the most important aspect for our company was exports growth by 42 - export turnover grew to 14 million kroons. In 28 we also completed the development of a new office furniture collection, primarily for the Finnish and Scandinavian markets, and managed to restore exports to Russia. In the second half of 28 problems in the Latvian and Estonian markets started to appear. AS Standard operates in the Latvian market through an affiliate. Latvia had a negative effect on our consolidated financial results because clients started to suffer from payment difficulties. Domestic sales were smaller than in 27 but we managed to compensate it by exports growth. What were the most important developments for furniture in 28? The total volume of furniture fell by 9. compared to 27. It was mainly due to a decrease in consumption in Estonia. The sector s total turnover reached billion kroons of which exports constituted 7 7. The housing sector s downfall and difficulties in getting a housing loan were the main factors affecting the domestic market in 28. As a result, several enterprises focused mainly on kitchen furniture market had to close. Producer prices also started to fall in the second half-year companies orientated on the domestic market had to reduce their prices most of all. Also, the number of companies participating in public procurements grew. Photo: Standard Did you have to make any changes in your company as a result of the economic crisis and if yes, which changes did you make? AS Standard cut its workforce by 1 at the beginning of the year and negotiations to reduce wages have also been completed. In addition we have used partial working time during those months where the number of orders has been small. What are AS Standard s goals for 29? We focus mainly on exports and we need to find more opportunities to sell in different markets. The current crisis has shown that nearby markets do not suffice. We will also focus on the company s efficiency and flexibility. Under the conditions of weak demand many different niches have to be serviced. As regards measurable objectives, we intend to expand our exports by 2. The Baltic market is, unfortunately, unpredictable. What are the challenges for furniture in 29? I really hope that the Estonian market reached its lowest point of the economic crash in the first quarter of 29. By the data of the Statistical Office the market in Estonia fell by in this period and in some sectors even 6. Most furniture manufacturers have set themselves a goal to survive in 29 our problem is now worsened by the fact that our main export countries Finland and Sweden are also suffering from a 3 downfall. Companies with a wider product mix and Ministry of Economic Affairs and Communications Ministry of Finance 29

47 Economic Survey of Estonia Ministry of Economic Affairs and Communications Ministry of Finance 29

48 48 Economic Survey of Estonia 28 Construction The Estonian construction sector focuses to a great extent on the domestic market and, therefore, its development is mostly influenced by the overall economic development of Estonia. The construction market is quite sensitive to changes in economic environment. In good times, construction volumes grow fast, and in bad times, they may even diminish. The 1999 recession had a substantial effect on the construction market (mainly due to a decline in the construction of office buildings). Similar developments are expected in the near future, especially as regards housing and business real estate where the economic cool-off is especially noticeable. Some expansion in construction volumes is expected for facilities, partly as a result of EU support. The larger general construction companies are Skanska EMV AS, AS Merko Ehitus, AS YIT Ehitus, AS Nordecon International and Koger & Parterid. In road building, Teede REV-2, AS Nordecon Infra and AS Talter are the main contributors. Forecasts show that some recovery is expected in the construction sector after the recession but it will not bring about employment growth (rather, labour productivity will grow). It is predicted that employment numbers will drop to the level of the years preceding the construction boom Sector's share in Estonian economy 8,4 12,2 Share in GDP Share in employment ,2 Ratio to average wage (r.s.) Construction sector's developments * Construction price index (left scale) Buildings construction volume index (r.s.) Facilities construction volume index (r.s.) th Number of employed * Number of employed by labour force survey Number of employed by enterprise statistics Change in number of employed (r.s.) Change in number of employed in enterprises (r.s.) In the construction market the period may be considered to be a period of continuous growth. The year 28, though, was a year of sudden stabilisation of the construction sector and some downward trends for some indicators resulting from the general economic decline. Construction volumes generally showed an overall decline but building of facilities went upwards. The growth rate of construction prices dropped almost fourfold, creating a favourable basis for the construction of large infrastructure projects. The confidence of construction enterprises went down and smaller companies disappeared from the market, the reasons being a diminishing number of orders and construction volumes, a standstill as regards purchase of new buildings in the real estate market (mainly housing), changes in the loan conditions offered by the financial sector and decreasing investments. More and more unemployed construction workers appeared in the labour market. Wages still grew to some extent but the growth was much lower than in previous years. As regards housing, a significant decrease in the number of housing space allowed to be given into use took place in 28. In 28, Estonian construction companies built for 4.2 billion kroons in Estonia and outside. This figure was by 6.8 lower than in 27. Construction did not become more active although the construction price index growth rate decelerated. Using their own capacities (without subcontracting), construction companies built for only 3.2 billion kroons which, at constant prices, was by 12. lower compared to the previous year. In 28 the value of the buildings erected in Estonia was 11 billion kroons and that of facilities 4.9 billion kroons. Compared to 27, the figures had dropped by 17 for buildings and grown by 1.7 for facilities. Due to the economic recession in the neighbouring countries, the primary foreign market for Estonia s construction services, construction activities outside Estonia dropped by 1.7 in 28. Construction volumes abroad still constituted 4 of the overall volume of construction Ministry of Economic Affairs and Communications Ministry of Finance 29

49 Economic Survey of Estonia works. The total amount of Estonian construction works abroad was 2.2 billion kroons. As the need for investments into construction capacities reduced, the possibilities and needs of construction companies to build for their own purposes also decreased. The total amount invested in building for construction companies own purposes was 143 million kroons, being by 64 less than in 27. Construction companies investments in fixed assets dropped as well (in 27, these investments grew by 14.3 but in 28 fell by 26.4). The largest investments were made, as before, in machinery, equipment and purchase of means of transport. Construction price index grew by 3.4 in 28, by 3.7 times lower than in 27. The drastic deceleration of the construction price index growth was the result of a slower price increase for construction price components but the primary reason was that labour costs grew more slowly (wage costs growth dropped by.3 times). Labour costs grew by 4.1 in 28, building material prices by 3 and construction machinery prices by.. Building materials price growth slowed down for all groups of materials but mainly as regards wood products, cables and building panels. A price rise similar to 27 took place in respect of finishing materials and pipes. As a result of the stabilising selling prices for materials and the diminished construction volumes, 28 turned out to be worse than the previous year for the producers of building materials. Output at constant prices fell by 28.1 and sales at current prices by Exports share in sales grew to As domestic demand for building materials had significantly dropped, other opportunities were searched to continue the business. According to the survey made by the Estonian Institute for Market Research, the confidence of building material producers about the future was lower than the average but they still had the hope that the current situation as regards orders, output volumes and workforce numbers would not change. For construction machinery, hourly price rate growth at the speed of 27 continued for excavators (12) and small machinery (2) while the hourly price rate for other construction machinery dropped considerably. The construction sector employed 79,9 people in 28, as a result of which it was placed third by the number of employees after manufacturing and retail and wholesale sector. The cooling of the construction market brought about a decrease in construction workforce (-1.2), resulting in the stabilisation of construction employment. Although the wage level of the construction sector was still higher than the Estonian average (by 9 percentage points), the growth rate of gross wage slowed down threefold. The 28 gross wage of the construction sector was comparable to that in property, rental and business activity and transport, storage and communications sector. 1 1 Wages * Average wage (kroons) mln EEK Construction works with own forces 3 Change in wage (r.s.) * Construction works abroad Construction works in Estonia Construction works abroad, Construction works in Estonia, mln EEK Investments of enterprises * Investments in fixed assets Change in investments (r.s.) 1,8 1,6 1,4 1,2 1,,8,6,4,2, Labour costs productivity * Labour costs productivity based on value added Change in productivity (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 29

50 Economic Survey of Estonia 28 1 Housing loan interests and residential space given into use * Area of residential space given into use Loan interests given to private persons Source: Bank of Estonia, Statistical Office of Estonia th m Under the conditions of the construction market cool-off only 8,41 new permits for construction of buildings were issued and 6,29 new buildings were given into use in 28. The number of construction permits issued was by 18.4 lower than in 27 and the number of permits to use dropped by This shows that the construction market had a major downfall. The number of permits for construction of housing space was still the highest among all permits. Regardless of the changed economic conditions and the situation of the financial markets,3 new residential premises were given into use in 28, totalling 48,4 m 2. Compared to 27 which was the year of the highest growth in residential space given into use, the number of residential space given into use in 28 fell by 2. Like in 27, apartment houses of 3 storeys with apartments accommodating 2 3 rooms were the most numerous. The average area of individual residential space given into use increased to 86. m 2, being higher than the Estonian average until now. Use permits for residential space were mostly issued to businesses and private persons. Local governments took 22 new municipal residential premises in use in 28.,46 construction permits were issued for building new residential space with the total area of 67, m 2. The figure is by 38.8 lower than that of 27. The number of permits issued to construct nonresidential space increased by 2.4 in 28, totalling 3,76. The area of buildings planned to be constructed under these permits will amount to 13, m 2, similar to 27. Permits were mostly given for the construction of new accommodation and industrial buildings. The total number of nonresidential buildings given into use in 28 amounted to 99 with the total area of 1, m 2 and total space of 614, m 3. The number of new nonresidential buildings dropped by 9. in 28. The highest number of buildings allowed to be given into use were in the categories of new commercial and catering buildings and industrial buildings. As regards regions, new non-residential buildings were the most numerous in Ida-Viru, Harju and Tartu counties. In 28, the construction volumes of facilities increased, as well as the number of permits for building, expanding and renovating facilities. By the data of the Estonian Register of Buildings 314 new permits for construction were issued in 28, by 6 more than in 27. Most permits were given to build national roads, streets, local roads and water pipes. 19 new facilities were given into use in 28, mostly communications and power lines and national roads, streets and local roads. As shown by a survey of the Estonian Institute for Market Research, the confidence level and expectations of construction companies were low at the end of 28. Most companies considered insufficient demand and the resulting decrease in orders to be the major factor hindering construction activities. The continuing downward trend of construction prices was also seen as a problem. Ministry of Economic Affairs and Communications Ministry of Finance 29

51 Economic Survey of Estonia 28 1 Kaido Fridolin: We hope to maintain the level of 28 Kaido Fridolin, chairman of the management board of AS Oma Ehitaja, hopes to maintain the turnover and profit level of 28 and believes that this aim can be achieved in spite of the recession in the construction market. What was the year 28 like for Oma Ehitaja? Which goals did you reach and which not? For 28, Oma Ehitaja set the goal of continuing at the stable level of previous years. We focused on the principal activity of the company: high quality design and construction of buildings. We did not predict any turnover and profit growth for 28. It was our goal to maintain the efficient operation and profit level of the company, which was achieved. We did not come short of any of our important goals. I believe that the results of Oma Ehitaja correspond to changes in the general economic environment. However, we were lucky to sign contracts for the construction of several important sites the new library of Tallinn University of Technology, a new building for Põhja police department in Tallinn, reconstruction of Vabaduse square in Tallinn, a sports building in Pärnu. What are the challenges for the construction and property sector in 29? The challenges for enterprises in the construction and property sector are similar to those for companies in other sectors. On an even wider scale, the Republic of Estonia has similar challenges. The main challenge is to find solutions how to survive under the economic recession and crisis without major backlashes. It should certainly be taken into account that the construction sector reacts to all changes in the economic environment (ups and downs) with a lag of one or two years. On this basis it may be predicted that the most difficult times are still ahead. Which changes were you forced to make in Oma Ehitaja because of the economic crisis? Similar to other companies we have paid serious attention to cost developments and to reducing them; fixed costs have been reduced the most. We follow the principle that the cost base of a company must correspond to its revenue base. Efficiency is also an important keyword. What were the most important developments of the construction and property development sector in 28? The construction market that first indicated a downward trend in the second half of 27 clearly continued to decline in 28. In 28, Estonian construction companies built with their own capacities for 3 billion kroons in Estonia and abroad, at current prices by about 12 less than in 27. Construction of buildings, which is also the principal activity of Oma Ehitaja, decreased by about 17, construction of facilities stayed at the level of 27. The property sector did not develop at all. No new projects were initiated, all developers tried to sell their completed projects or projects undergoing completion. Photo: Scanpix Last year, you mentioned in an interview to the Äripäev newspaper that your aim for 29 was to maintain the turnover and profit of 28. Is this plan sustainable? This plan is sustainable. Our goal is to overcome the difficult times without major backlashes. Ministry of Economic Affairs and Communications Ministry of Finance 29

52 2 Economic Survey of Estonia 28 Domestic trade The commercial sector comprises retail and wholesale businesses (also enterprises engaging in sale of motor vehicles and their parts and enterprises selling motor fuel). Commerce is an important, giving 14 of the total value added. More than 9, people, i.e. 14 of all the employed, work in the commercial sector. After the upsurge of recent years, triggered by the rapid economic growth, commerce suffered a strong backlash in 28. Annual growth figures of more than 1 were replaced by downward trends. In the last five years commercial space expanded rapidly, more and more outside the capital. New outlets were recently opened in Tartu (Tasku), Pärnu, Kuressaare (Auriga) and Rakvere (Põhjakeskus). The large retail enterprises in Estonia are ETK (comprising Maksimarket, Konsum, A&O), Maxima Eesti OÜ, Tallinna Kaubamaja AS (Selver), AS Prisma Peremarket, Rimi Eesti Food AS (Rimi, Säästumarket) and AS OG Elektra. The market share of the larger chains has grown from year to year. Chains have the advantage of less costly marketing and logistics which enables outlets to operate more efficiently. Next years will be difficult for the commercial sector. The dropping purchase power of the population will be a hurdle to sales growth and profit margins will drop considerably. Smaller and inefficient outlets will close and employment growth will slow down. Larger outlets will maintain their staff numbers due to their ability to negotiate more favourable prices with the producers Share of commercial sector in Estonian economy 13,7 14,2 Share in value Share in added employment 9, Ratio to average wage The slowing economic growth in 28 was also reflected in domestic trade figures. The decreasing purchase power of the population and growing unemployment at the end of the year brought about a decline in retail trade volumes. Retail sales dropped by 4 in 28. Sales revenues also fell by 4, mainly resulting from a 12 decrease in retail sales of car dealers. 28 witnessed the trend of previous years expansion of large retail chains, mostly outside the capital towards smaller towns. Five larger chains Selver, Maxima, ETK Group, Rimi (incl. Säästumarket) and Prisma attributed to most of the retail sales of unspecialised food outlets in 28. Their share will probably even grow in 29 because their size will help to keep the prices of purchased goods and logistics costs low. Regardless of the decreasing sales volumes, new retail space was given into use at the same pace as in 27. In 28 permits for use were given to 12 new commercial and catering buildings, only to 6 buildings less than a year ago. The added commercial space was considerably larger 24, m 2 were given into use; compared to 27, the figure was by one third higher. Commercial space was added most vigorously in Põlva, Järva and Valga counties. This rapid expansion took mostly place due to projects started earlier which were considered worth to be continued. Such rapid expansion of commercial space is not forecast for the coming years and the volumes may be much more modest. One of the retail businesses expanding the most in 28 was the Tallinna Kaubamaja Group which owns Selver, one of the largest retail chains in Estonia. The company completed its acquisition of footwear chains Suurtüki and ABC King last year. These chains operate in Estonia and Latvia. The group employs more than 3.9 thousand people. Selver chain opened 8 new outlets in 28 and expanded five of its outlets. Selver s net sales amounted to 1.6 of the sales of all unspecialised stores (mostly foodstuffs) in Estonia. The company intends to increase synergy among its units and to improve efficiency in 29. Similar to previous years Maxima chain was one of those expanding the most. Its turnover was 4.3 billion kroons in 28, by 43 more than in 27. Maxima opened 8 new stores in 28. The number of its outlets totalled 1 at the end of the year. However, the company decelerated its expansion plans and decided to pay more attention to efficiency. Expansion plans for 29 have also been cut. Rimi Eesti Food AS, a company operating Rimi super- and hypermarkets and the economy chain Säästumarket, is also one of the largest Estonian retail companies. Its sales revenues grew by 8 in 28. The group has 7 outlets all over Estonia. Commercial enterprises experienced a downward trend in 28. The first half-year was somewhat better but, as the economic crisis deepened, revenues started to fall. On the other hand, changes in the economic climate alleviated staff problems faced by retail companies in recent years. However, wages in this sector grew faster than sales, bringing about a decline in labour productivity. The total wage increase amounted to 13.6, being only by.2 percentage points lower than the Estonian average. It is expected that pressure on wages will continue to decrease but it may not result in higher profitability. It will be necessary to keep the new outlets of recent years in Ministry of Economic Affairs and Communications Ministry of Finance 29

53 Economic Survey of Estonia 28 3 operation, so it is likely that sales will drop more than labour costs. By the labour force survey the number of employed people in the trade sector grew by 6.1. Enterprise statistics, however, showed a 1.1 decline in the workforce. The number of employees increased the most in companies employing over 1 persons (by 12.6). Workforce also grew to some extent in companies with 2 4 people. The higher growth figure resulting from the labour force survey may be attributed to the fact that enterprise statistics does not include all companies and the labour force survey also reflects those people who have worked abroad for less than a year. As in other fields, investments also dropped significantly in commerce. Investments in fixed assets decreased by 16 in 28 and amounted to.9 billion kroons. The largest decline in investments took place in purchase of land (by 8). This downturn was, on the one hand, resulting from lack of confidence about the future, and on the other hand, the plummeting property prices during the year, as a result of which companies decided to wait for even better prices. Several outlet chains have mentioned in 29 that they would hold back expansion until the situation is more favourable. Thus, a further decline in investments is expected. The rapid sales growth of recent years was replaced by a decline in 28 (-4.1). It resulted in negative figures also for value added and productivity, calculated on the bases of sales revenues. By enterprise statistics, value added in the commercial sector fell by 9.4 (in 27 there was a growth of 18.1). However, in the first half-year the decline was only.9. In general, 28 was a diverse year for the commercial sector. On the one hand, companies still continued to expand rapidly at the beginning of the year, and on the other, sales started to fall quickly in the second half-year and profit margins dropped considerably. The survey made by the Estonian Institute for Market Research in April 29 showed that the lowest point on the barometer of the beginning of the year had been overcome and that the sector expected sales figures to remain on previous levels in the coming months. However, dropping prices and cuts in workforce were also forecasted for the near future. Retail trade In 26, retail trade was still flourishing and sales figures grew by each month compared to the previous year, but 27 showed a considerable deceleration of growth and in 28 sales figures were on the positive side compared to 27 only in two months (February and April). Total sales amounted to 68 billion kroons of which 6 billion were attributable to retail business and the rest to car trade. Sales dropped in most segments. Among the largest commodity groups retail sale of furnishings, home appliances and hardware suffered the most. tuhat Number of employed in commerce * Number of employed by labour force survey Number of employed by enterprise data Change in no. of employed by labour survey (r.s.) Change in no. of employed by enterprise data (r.s.) Wages in commerce * Average wage (kroons) Wage real growth (r.s.) mln EEK Investments of enterprises Investments in fixed assets 28* Change in investments (r.s.) Value added, labour costs and productivity mln EEK * Value added Labour costs Labour productivity growth (r.s.) Labour costs productivity growth (r.s.) Sales revenues of retail enterprises dropped by 4 to 112 billion kroons. Consumers preference was directed more and more to larger outlets and the sales revenues of outlets with over 1 employees Ministry of Economic Affairs and Communications Ministry of Finance 29

54 4 Economic Survey of Estonia 28 Retail sale by fields of activity,7 12,8 4,8,7 13,6 Retail sale at foodstores Sale of motor fuel,2 11,4 4,8 Retail sale of home furnishings and appliances, ironware, building materials Other retail sale Sale of motor vehicles and spare parts Retail sale in unspecialised industrial goods stores Retail sale of pharmacy and cosmetic products Retail sale of textiles, wearing apparel and footwear mld EEK Sales revenues at current prices * Retail trade Motor vehicles and fuel Wholesale Change in retail turnover (r.s) Ch. in turnover of motor veh. and fuel enterp. (r.s) Change in turnover of wholesale enterprises (r.s) mld EEK Sales * Retail trade with car trade** Wholesale Retail trade change at constant prices (r.s.) Wholesale change at current prices (r.s.) ** Sale of cars without lease increased by Sales revenues fell the most in businesses employing 1 19 people ( 6.3). The total number of companies engaging in retail sale in Q4 of 28 was 3,779 by 186 less than in 27. The number of companies increased the most in the size group of more than 1 employees (13,) and dropped significantly among enterprises employing 99 people. It is forecast that the number of enterprises will continue to fall in 29 since owners are forced to close down inefficient outlets. The profit of the retail sector dropped by 6 compared to 27. The share of total profit in sales revenues fell by 2.9 percentage points to 1.7. However, in unspecialised food stores this figure was only.4. Trade margins were the same as last year (29). Total profit plummeted in the second halfyear when unspecialised food stores had a loss amounting to 1 million kroons. By enterprise statistics the number of employees in retail trade grew by 4 in 28, in companies employing 9 people by 4.1 and in those employing over 1 people by 12.. In all other size groups there was a decrease in workforce, being the largest in companies with 99 employees (-1.8). These changes in workforce numbers were brought about by the expansion of larger retail chains which were able to continue investing during the economic crisis. Demand for commercial space started to drop fast in the second half of 28. Expansion plans were frozen and several shopping centres in less attractive locations were forced to lower their prices to stay in competition. Also, discussions were held to reduce the opening times of shopping centres to save costs. Investments that had rapidly grown for several years also suffered a backlash. The total amount of investments made by retail companies in fixed assets amounted to almost 2 billion kroons, by 31 less than the previous year. Almost half of the investments were made in machinery and equipment and a quarter in construction and reconstruction of buildings and facilities. Investments in land purchase dropped the most, the amounts spent were by 4 million kroons smaller than in 27. It is expected that investments will continue to fall in 29. Most of the investments still to be executed will be those covered by long-term plans for which preparations have been made. It is forecast that the investment activity will grow again after a certain period of sales increase. In 28, sales revenues dropped in most fields of activity. Enterprises selling means of transport suffered the most. Their sales fell by 12 in 28, corresponding to the downward car sales (registration of new cars fell by more than one third in 28). To retain sales volumes companies had to extend promotion campaigns that reduced their margins. Car sales were inhibited, in addition to lack of confidence about the future, also by the stricter conditions Ministry of Economic Affairs and Communications Ministry of Finance 29

55 Economic Survey of Estonia 28 imposed by lease companies, as a result of which the number of potential car buyers dropped considerably. Regardless of the decline in sales, investments of companies remained on the previous level. Falling car sales characterises the current commerce developments in most countries in the world. Wholesale The rapid growth of wholesale in 27 was followed by more peaceful times in 28. The total sales of wholesale and motor vehicles and motor fuel enterprises amounted to 168 billion kroons, which was 6 less than in 27. Of this, 28. billion were the sales of motor vehicles and fuel enterprises (a decline of 22). Wholesale of machinery and equipment plummeted the most in 28 (-13). Wholesale of fuel, metals, building materials, chemical products and waste, constituting 47 of all wholesale, also dropped (-4). Similar to other fields, wholesale companies also reduced their investments. Investments in fixed assets dropped by 1. More than half of the investments were made in purchase, construction and reconstruction of buildings. It is expected that investment activity will slow down even more in 29 until the economic climate improves. The number of the employed in wholesale fell by more than two thousand people in 28. Labour costs grew by 6 and total profit fell by 1. The rapid expenditure growth resulted in lower productivity figures. It is forecast for 29 that sales revenues will continue to fall. However, wage pressure will also be lower. It is likely that more smaller and ineffective companies will be closed. While in 28 companies were still considerably helped by the strong sales in the first half-year and the balance reserves gathered in previous years, it will be much more difficult for them to survive in Retail trade sales volume index * 28* Total retail trade Foodstuffs Industrial goods Motor vehicles, fuel Changes in retail sector by size of enterprise Employees Over 1 Number of enterprises Number of employed Sales revenue Wholesale by fields of activity Wholesale of fuel, metals, building materials, chemical products and waste Wholesale of food, bewerages and tobacco Wholesale of textiles, wearing apparel and footwear and house furnishings Wholesale of machinery and equipment Wholesale of motor vehicles and parts Other wholesale Ministry of Economic Affairs and Communications Ministry of Finance 29

56 6 Economic Survey of Estonia 28 Raul Puusepp: We are open to new business opportunities Raul Puusepp, chairman of the management board of Tallinna Kaubamaja, says that for some companies the economic crisis is a matter of survival and for others a matter of preserving their profitability. The Tallinna Kaubamaja Group is open to new business opportunities in order to expand. What was the year 28 like for Tallinna Kaubamaja? Which objectives were met and which not? 28 was a development year for Tallinna Kaubamaja Group our total investments of 1.2 billion kroons were higher than ever before. As a result the commercial space of the group expanded by 1 last year, exceeding 1, m 2 by the end of the year. We opened eight new Selver outlets in Estonia and Latvia and expanded five existing ones. We entered the specialised footwear segment by acquiring two well-known footwear chains in Estonia Suurtüki and ABC King. We also increased the market share of Kia in car trade, improved our department stores and prepared to open I.L.U. outlets. In this respect, 28 was a very successful year and everything was completed as planned. On the other hand, the biggest expansion of the group in history inevitably had an effect on our financial results, both the profit and sales figures. Launching new outlets brings about costs and the stores temporarily closed for reconstruction do not give revenues. In addition there were changes in the economic environment and consumption which affected all market participants. Generally and in long-term, 28 was a good year for us. We managed to react to the changing situation in a fast and flexible way, as well as to reduce our costs and improve efficiency, thus we were able to continue aggressive development. You mentioned last spring in an interview given to the Ministry of Economic Affairs and Communications that you would like to grow faster than the market in 28. Did you manage to do that? It is my pleasure to say that we really managed to do that. The group s turnover grew by 11 while total retail turnover in the market increased by only 3.7. Affiliates of the group were more successful than the market average in their respective segments. For example the turnover of the Selver chain increased by 1 in 28 this is almost half better than the respective figure for the super- and hypermarkets segment. And while the market fell by 6 in the department stores sector last year, our sales dropped only by.7. Photo: Tallinna Kaubamaja Which effect has the economic recession had on the operation and plans of Tallinna Kaubamaja? It is clear that the economic recession will have an effect on the retail market and traders. It will have an impact on everybody and will not make anybody happy. We have also been forced to make more efforts and slightly re-evaluate our plans we have decided to be more conservative. However, difficult times also have their positive aspects. The current economic crisis has in a way been favourable for the operation of the Kaubamaja Group it has given us an additional impetus to find opportunities to improve the group s efficiency, it has put a pressure on our cost base and made it necessary to intensify cooperation inside the group. The changing situation has offered us a new opportunity there are certainly companies in the market that will not emerge from the crisis as strong as before, which means that the current situation is better for larger and stronger companies of stable history. We will observe the developments concerning the redistribution of markets and will continue to build a strong foundation for the future. Which challenges will be faced by retail companies in 29? It will be a challenge to adjust to lower consumption and to operate under the conditions of rapidly increasing costs of last years. For some companies it will be a question of survival, for some preserving their profitability, for some a halt in their development potential. The focus will be on labour costs, costs related to purchasing goods, as well as logistics and rental and maintenance prices for commercial space. The market is full of unprecedented promotions, the aim of which is to sell the stocks of previous periods and to release funds - these sales often take place under the cost price. Most traders will not see big profits this year. Ministry of Economic Affairs and Communications Ministry of Finance 29