Ministry of Economic Affairs and Communications ECONOMIC SURVEY OF ESTONIA 2009

Transcription

1 Ministry of Economic Affairs and Communications Ministry of Finance ECONOMIC SURVEY OF ESTONIA 29 Tallinn 21

2

3 Contents Macroeconomic situation... 4 Labour market... 8 Foreign trade... 1 Manufacturing Food and beverages Textile Wearing apparel Gunnar Kraft: Estonian wearing apparel will see a reduction in output figures and number of enterprises in Wood processing Tiit Kolk: Estonia is rich in forests only on paper... 3 Production of pulp, paper and paper products Manufacture of chemicals and chemical products Manufacture of rubber and plastic products Metal and metal products Fjodor Berman: We aim to be stronger than ever after the crisis... 4 Manufacture of electrical appliances and optical instruments Manufacture of machinery and equipment Manufacture of transport equipment Furniture Construction... 5 Peeter Vilipuu: The market is still tight Domestic trade Kati Kusmin: It turned out to be important to create value for the customer Tourism Transport Annexes Abbreviations in text: y-o-y year over year r.s. right scale As a result of the introduction of the new NACE classification of economic activities, changes have taken place in time series, due to which some of the data are not any more comparable in time.

4 4 Economic survey of Estonia Contribution to economic growth Net exports Investments and inventories Consumption Economic growth Domestic demand and imports real growth Domestic demand Economic growth in Estonia and Eurozone Estonia, Eurostat Exports real growth Eurozone Imports Goods and services exports growth Weighted GDP growth of trade partners (r.s.), Eurostat Macroeconomic situation Estonia s negative economic growth fell to 15.6 in the first half of 29, caused by the abrupt downfall of domestic and external demand. Due to deceleration in domestic demand shrinkage, the downward trend slowed considerably in Q4 (to 9.4). The overall decrease in GDP growth rate for 29 was Domestic demand s downward shift accelerated to 24 and its share in GDP at current prices dropped by 11 percentage points compared to 28 (to 95). Domestic demand fell mostly due to the rapid decrease in private consumption expenditure, investments and inventories. Weak domestic demand resulted in a considerable decline in goods and services imports (26.8). Goods and services exports decreased the least (11.2), as a result of which the share of net exports in economic growth turned out to be positive, reaching 12.9 percentage points. Private consumption plummeted by 19 in 29, after having already fallen by 5 in 28. The downward trend in salary income reached its peak in Q4 (ca 2). The sharp decline in salary income was compensated for by the slightly increased pensions and rapidly accelerating unemployment benefits. Thus, the usable income of the population dropped less than consumption expenditure (the latter fell by 2). People now save more due to the tough situation in the labour market, thus their bank savings have started to grow and the loan stock has decreased. Consumers confidence indicator reached its lowest point in spring 29 and then started to rise in spite of the increasing unemployment rate. This upward trend came to a halt in autumn 29. The inhabitants confidence concerning consumption can now be restored only if they receive clear and positive signals from the labour market. Consumption of durable goods fell by 41 in 29, mostly due to the more modest behaviour in purchasing vehicles (-55) and home appliances (-26). Decline in consumption of semi-durable goods was stable throughout the year (31). Consumption of wearing apparel and footwear dropped the most. In 29, 5 billion Estonian kroons were spent on wearing apparel and footwear, while in the peak year of 27 the amount was twice as high. In 27, at the end of the economic boom, people spent one third (37) of all their expenses made on goods on durable and semi-durable goods. The rest was spent on non-durable goods of which necessary expenses on food, water and electricity formed a significant part. The share of durable and semidurable goods in the consumer basket fell to one fifth in 29. Ministry of Economic Affairs and Communications Ministry of Finance 21

5 Economic survey of Estonia 29 5 The decline in the consumption of non-durable goods actually manifested itself only at the beginning of 29, dropping to 14 by Q4 (yearly decline was - 12). This decrease is mostly attributable to food products and alcohol. Consumption of dairy products and meat fell the most, while bread products was the only product category showing a growth trend (5). In 29, people spent almost by one tenth less money on food products than in 28. However, due to lower prices, the actual decrease in consumption amounted to only 6. The downward trend in services consumption slowed slightly in the second half of 29, the yearly decline being 16. Consumption of catering services dropped by 3 and consumption of services related to beauty and wellness by almost 5. It is forecast that the income of the population will continue to decrease in 21 and the consumption basket will become more expensive due to external factors. As a result, a further decline in private consumption is expected in 21. The reduction in investments witnessed already in 28 accelerated in 29 and reached -35. Housing investments by households started to drop already in the second half of 27, while investments of enterprises showed their lowest in 29 (-4). Public sector investments decreased as well (-19), regardless of the fact that financing from external sources, including the Structural Funds, had doubled. Share of investments in the GDP fell to 22 in 29. In 29, the largest decline in investments concerned means of transportation and machinery and equipment, respectively -59 and -41. Housing investments dropped by 29, by the same amount as in 28. It is expected that investments will continue to decrease in 21. However, the trend should reverse in the second half-year. Government sector investments will go up and the gap between price decline in the housing market and the salary level should also favour new investments. As regards enterprises the decline may still continue but final clarity concerning the introduction of the euro in summer might bring about a positive shift. The investment capacity of the private sector will depend to a great extent on the loan policy of banks. At the end of 28, similar to other EU countries, the global economic crisis resulted in a considerable downturn in Estonian exports. Exports plummeted even more at the beginning of 29 and the volume remained low throughout the year. This regression decelerated at the end of the year, mainly due to the weak comparison base. Some sectors even showed a slight upward trend as a result of better market conditions, e.g. wood and wood products, soft furniture and electronic products. The yearly decline at constant prices in goods and services exports amounted to 11.2 in 29. At current prices, due to the rapid decrease in export prices, exports slumped much more. Volumes dropped in almost each sector and only the exports of mineral fuels, being of transit character, increased. Exports of metal and metal products, means of transportation and machinery and equipment diminished the most. Due to the recession in domestic demand, imports of goods and services showed a pronounced downfall in 29, reaching Capital goods imports experienced the strongest decline while imports of consumer goods diminished less. The deepening economic crisis and the weak confidence level forced enterprises and consumers to mainly reduce their expenses on capital goods, which is a category demanding higher expenses. of GDP Savings Other fields Financial intermediation Real estate etc. Transport etc. Construction Retail and wholesale Man. Ministry of Economic Affairs and Communications Ministry of Finance Foreign savings Private savings Contribution to value added growth of GDP Public savings Domestic savings Transfers Revenues Services Current account Source: Bank of Estonia, Statistical Office of Estonia Current account structure Goods

6 6 Economic survey of Estonia CPI in Estonia and Eurozone Estonian CPI Estonian core inflation Eurozone CPI (MUICP), Eurostat th Employment and unemployment Change in number of employed Unemployment rate (right scale) Labour productivity Wages real growth Labour productivity GDP real growth After strong corrections in domestic demand and due to the global crisis, the current account came into balance at the beginning of 29 and then showed a surplus. The yearly current account surplus amounted to 4.6 of the GDP. All accounts show an improvement in their external balance: foreign trade and revenues account deficit has diminished and services and transfers account surplus has grown. Domestic savings grew to 24 of the GDP in 29. Savings of the private sector increased significantly for the second year in the row while those of the public sector grew just slightly. This is due to the improved budget position in 29 compared to the previous year. Private sector s savings grew mainly due to the diminished consumption and investment activity which was the result of uncertain future prospects. Saving was further promoted by the financial sector s caution in loan-giving and the invariably high savings interests. Of all economic sectors, the enterprise sector had the strongest influence on the GDP downturn in 29 its value added fell by The decline was provoked by the weak domestic and external markets, resulting in output cuts and a further acceleration of the negative profitability rate. Value added fell in most sectors but was the most prominent in manufacturing, commerce, construction and transport, storage and communication. In 29, the value added of manufacturing dropped by 26 due to the weak domestic and export demand and the resulting low output volumes. Decline in the value added of the production of metal products, building materials, electrical and optical instruments, means of transportation and wood processing had a significant impact. The rapid decline in added value (-2) in the commercial sector was caused by a sharp downfall in the population s purchase power which in its turn brought about a swift cutback in retail and wholesale sales revenues and margins. The downturn in the construction sector s value added was especially prominent (-3), mainly due to the diminished construction and especially housing construction volumes in the domestic construction market, accompanied by a decrease in construction prices resulting from tight competition. The cutback in transport and storage value added (-16) was mainly caused by the weak demand for transport services, resulting in a fast decrease in sales revenues and productivity. The impact of the financial sector whose value added dropped swiftly to -27, was also considerable. This was mostly the result of the restrained lending and leasing activities and the resultant cutbacks in revenues. As a result of the global trend of lower prices for commodities (food and oil) and domestic factors, such as weak demand and smaller income, consumer prices showed a shrinkage of.1 in 29. The change in the price level acquired a negative value in spring, while the lowest point (-2) was reached in Q4. A further decrease in consumer prices was prevented by several tax measures that came in force on 1 July 29, e.g. higher VAT and excise tax rates. The increased VAT rate necessitated a correction in the prices of many goods and services; however, due to the weak economic situation it was not possible for the enterprises to transfer the whole VAT rate increase into the prices, thus the consumers only had to cover about a half. The core inflation rate which showed the effect of domestic demand-side factors on prices, gradually decelerated in 29 and became negative only in the last months of the year. Weak domestic demand and reduced salaries were the main factors for the decrease in core inflation. However, in the adjustment phase of the economy, enterprises have reduced their salary costs primarily by cutting back the number of employees and workload, and the decline in average salary has been moderate. Among services the prices of housing services have dropped the most, attributable to the striking downfall in rental prices. As a result of a price decline in accommodation prices the prices for leisure services have fallen as well. Ministry of Economic Affairs and Communications Ministry of Finance 21

7 Economic survey of Estonia 29 7 The number of the employed fell by 9.2 in 29. Compared to 28, the number of employed persons fell by 61,. Employment dropped the most in three sectors: construction, manufacturing and commerce. Employment grew in education, health care and social welfare, financial and insurance sector and mining. Unemployment rate increased to 13.8 in 29. The number of unemployed persons grew by 56, and reached 95,1 persons. During the period of Estonia s reindependence, such high unemployement rate was seen only once in 2. The beginning of 29 saw a growth in the number of long-term unemployed. The number of inactive persons remained on the level of 28. The salary rise trend started to decelerate in Q1 of 28. In Q1 of 29 the average gross wage fell by 1.5, the first decrease since The yearly nominal wage dropped by 4.6 and real wage by In 29, average wage dropped the most in construction, mining and public administration and state defence. Average wage grew only in the real estate and electricity sectors. In relation to the economic decline, labour productivity also showed a downward trend of 5.3 (GDP at constant prices per employed person). Government sector budget deficit amounted to 3.69 billion kroons in 29 (1.7 of GDP). Compared to 28, the budget position of the government sector improved by 3.6 billion kroons (1.1 of GDP). In the government sector all levels had a deficit at the end of 29: central government (.6 of GDP), social insurance funds (.7 of GDP) and local governments (.4 of GDP). The diminished government sector s deficit was the result of lower expenditure compared to 28. The amount of tax revenue collected in 29 totalled 63.8 billion kroons; tax burden amounted to 36.4 of GDP. Indirect taxes had the highest share (15.4 of GDP), followed by social insurance payments (13.4 of GDP) and direct taxes (7.6 of GDP). The government sector s debt burden was 7.2 of the GDP at the end of 29 - still the lowest in the EU. The debt of local governments constituted about 56 of the total debt of 15.5 billion kroons; its share has dropped by almost 13 percentage points since 28. The debt burden of the central government mainly increased due to the loans taken by the State Treasury. 1 Wage adjusted by inflation. Ministry of Economic Affairs and Communications Ministry of Finance 21

8 8 Economic survey of Estonia 29 th Number of employed th Unemployed and discouraged Discouraged persons Unemployed Unemployment rate (right scale) th II III IV 27 II III IV28 II III IV29 II III IV Less than 6 months 6 11 months 12 months or more 24 months or more Unemployed by unemployment duration Unemployment rate North-Estonia Central Estonia NE-Estonia West-Estonia South-Estonia A swift change in employment took place in Q1 of 29 the number of employed fell by 6.8. The yearly decrease in the number of employed amounted to 9.2 (about 61, persons). Three sectors contributed the most to the declining employment rate construction (23 persons), manufacturing (21, persons) and commerce (9, persons). The employment rate dropped primarily due to the diminished demand in Ministry of Economic Affairs and Communications Ministry of Finance 21 Labour market the market which resulted in smaller output volumes and the need to cut costs. These developments were the most prominent in construction and. The number of employed grew only in education, health care and social welfare, financial and insurance activities and mining. Companies have used various options to reduce their costs in the difficult economic situation, in order to be able to meet the demand when the situation improves. For this, the number of employees has been reduced and the number of people working part-time has increased compared to 28. In 29, part-time labour grew by 33, while full-time labour diminished by 13. The rapid unemployment rate growth which had started in the second half-year of 28, continued to climb fast in 29. Unemployment rate rose to 15.5 in Q4 of 29 (16,7 persons). Average unemployment rate for 29 amounted to During Estonia s re-independence, unemployment was that high (13.6) only in 2; however, the number of employed was then lower, totalling 57, (596, in 29). Compared to 28, the number of unemployed persons grew by 56,6 and reached 95,1. The unemployment rate of non-estonians grew from 8.2 in 28 to 19. in 29 and that of Estonians from 4.2 to 11.. As before, unemployment rate was the highest in NE-Estonia, rising from 1. to Unemployment rate was the lowest in West- Estonia The number of long-term unemployed started to increase at the beginning of 29. In Q4 there were 33,4 persons who had been looking for a job for more than a year. This is almost one third of all the unemployed persons and by 19,5 persons more than in 28. The number of inactive persons started to grow in Q4 of 29, increasing by 14,9 persons compared to the same quarter in 28. Yearly inactivity remained on the 28 level. Inactivity increased on account of persons on maternity or parental leave (by 8,) and discouraged persons 2 (by 6,5). As only a slight economic recovery is expected in 21, the number of employed will decline even more, by 19,9 persons or 3.3. In 21, a further decline in employment will take place due to the lower output volumes resulting from less demand, and cost-cutting by enterprises, mainly in sectors focused on domestic demand. 2 A discouraged person is a person who is not working but would like to work and, if there was a job, would commence immediatately, but because of having lost the hope to find a job, is not actively searching it.

9 Economic survey of Estonia 29 9 As it is expected that economic growth will accelerate in 211, the present part-time workforce will probably work full-time and enterprises will need to recruit more people due to the growing output volumes. Employment growth will be modest in 211, amounting only to.5; however, as domestic demand increases and exports are restored, the number of employees will start to grow faster. In long term the labour market will be affected by the decreasing number of persons in working age, resulting from the sharply declining birth rate since the beginning of the 199s. In the near future, however, due to the high unemployment rate, it should not yet have an effect on the supply of labour. It is estimated that due to the low demand for labour, unemployment rate will increase to 15.5 in 21. It will drop to 13.9 in 211. Unemployment rate will probably partially be alleviated by the fact that longterm unemployed will give up job seeking and will become discouraged. As a result, the number of inactive persons will rise in Unemployment rate will drop to 7 by 214. Wage growth started to decelerate in Q1 of 28. In Q1 of 29 average gross wage dropped by 1.5, the first decline since Yearly nominal wage dropped by 4.6 and real wage by Average monthly gross wage, calculated on the basis of quarterly data, amounted to 12,223 kroons in 29. Wage reductions were triggered by low demand and rapid unemployment growth resulting from the economic recession. Adjustment of wage levels has been favoured by the flexibility of the Estonian labour market, enabling employers to swiftly react under the conditions of low demand. Labour productivity real growth turned negative in Q1 of 28, the reasons being slower economic growth and simultaneous employment growth. Labour productivity real growth assumed a positive value again in Q1 of 29 and reached 1.8. Yearly labour productivity real growth was, however, negative, dropping by 5.3. In 29, average wage was reduced the most in construction, mining and public administration and state defence. The higher than average wage cuts in construction were the result of smaller construction volumes and the need to cut costs, all because of low domestic demand. Wage reduction in public administration and state defence took place due to the extensive cutting of operating costs. Average wage grew only in real estate and electricity sectors. In 21, when economic growth is expected again, the downfall of average wage will decelerate to 2.8. In 21, wage levels will be affected both by smaller workload and reduction of performance pay, and changes in employment. However, increasing output volumes in exporting sectors may stop the downward trend of wages or may even bring about their increase in the second half of 21. Prof., research, technology act. Administration, support s. Accommodation and catering Wages by fields of activity Finance and insurance Information and comm. Energy Public administration Mining Health care Water supply Transport and storage AVERAGE Construction Commerce Manufacturing Education Real estate Agriculture Art, leisure Other kr Labour productivity Wages real growth Labour productivity GDP real growth It is expected that wages will grow by 2.5 in 211. By the end of 214 nominal growth of wages will amount to 4.2, corresponding to the general economic trends. Wages real growth will start to accelerate again in 211 and will reach 1.5 in 214. Labour productivity real growth will again become positive in the second half of 21 and will amount to 4.4. It will be the result of positive economic growth and the simultaneous and continuing decline in employment rate. A somewhat more modest labour productivity real growth will be seen in the next years. 3 Wage adjusted by inflation. Ministry of Economic Affairs and Communications Ministry of Finance 21

10 1 Economic survey of Estonia 29 Exports and imports growth Exports nominal growth Imports nominal growth. bn EEK Trade dynamics Exports Imports Balance Trade deficit plummeted in 29 and export and import volumes remained low all through the year. The faster decline of domestic market compared to external demand brought about positive changes in the trade balance. Trade deficit diminished by almost three times in 29. Global economy was still in a deep crisis during the first half of 29 but the second half-year demonstrated more economic activity than expected. The revival started first in Asian developing countries and in the United States. In the latter, quarterly comparison showed that economy was growing as soon as in Q3. Yearly growth arrived on the plus side in Q4. The economy of the European Union also showed signs of improvement in the second halfyear. The economic sentiment indicators of our main trade partners Finland and Sweden rose from month to month. This, however, did not increase demand for Estonian products in foreign markets and yearly export volumes were by about one quarter lower than in 28. Domestic market weakened at an accelerated pace and imports fell by one third in 29. Lowering of the wages and the ever growing unemployment rate had a major effect on private consumption. People started to save more and paid more attention to reducing their debt burden. The investment activity of enterprises fell considerably due to the worsening economic situation, as a result of which imports of capital goods diminished. Due to the weak external market there was less demand for importation of Foreign trade inputs which are needed to manufacture export goods. In 29 foreign trade turnover amounted to billion kroons, which was by 29 lower than in 28. Exports totalled 11.3 billion kroons and imports billion kroons. Share of exports in the total turnover rose to 47, exceeding the corresponding figure of 28 again by 3 percentage points (it was 3 also in 28 compared to 27). Foreign trade deficit was slightly higher in the second half-year of 29 than in the first half-year, the reason being that export demand in foreign markets grew in Q4. This resulted in higher import volumes of semifabricated products and materials used to manufacture export goods. Yearly foreign trade deficit was 12.5 billion kroons, which is by three times less than in 28. The previous time that our foreign trade deficit was that low was in The negative balance diminished the most as regards means of transport (from -8.3 billion kroons to -.4 billion kroons) while that of machinery and equipment fell from 8.1 billion to 2.2 billion kroons. The balance for metal and metal products turned positive (to.6 billion kroons). Metal has not shown a positive balance for the last 15 years. The highest surplus (5.8 billion kroons) was again shown by wood and wood products; however, it diminished by more than a billion kroons. Other industrial goods (furniture, log houses) and animal products had a trade surplus of 5.5 and 1. billion kroons, respectively, as in 28. It is predicted that trade balance deficit will stay low in 21. This was proved by the foreign trade results of the first two months in 21. In February the balance slightly crossed to the plus side for the first time. Nevertheless, this may be considered as a onetime phenomenon and is the result of extensive exports of mineral fuels that had been previously imported. If there is an upturn in domestic demand and export demand accelerates, foreign trade deficit may increase again. The answers of experts of the Estonian Institute of Economic Research given in March as regards changes in the trade balance in six months varied considerably. 42 of the experts estimated that trade balance will not change, one third expected an improvement concerning the deficit and one quarter were pessimistic, expecting the deficit to grow. Exports In each of the first three quarters of 29 exports dropped by one quarter. This downfall decelerated to 16 in Q4, mainly due to the weak comparison base. Nevertheless, as a result of the improved market situation, the export volumes were growing in some Ministry of Economic Affairs and Communications Ministry of Finance 21

11 Economic survey of Estonia sectors compared to the previous year. Yearly exports dropped by 24 in 29. Exports fell in most commodity groups, except for mineral fuels that showed a 6 growth. This growth was supported by exports of oil products, mostly to the USA, Nigeria and Canada. Selling electricity to foreign markets also increased. In monetary terms, Latvia s import of Estonia s electricity exceeded the import of 28 three times. Yet, exports of electricity to Finland fell by a half. Exports of machinery and equipment was by almost one third lower than in 28, as a result of which their share in total exports dropped to Such low level was last seen in Exports of electrical and electronic equipment showed a major fallback, mainly as regards to mobile communication equipment, cable sets for vehicles, electric wires used in telecommunications and alternating current generators, all of which had considerably accelerated exports in previous years. Exports dropped the most for metals and metal products, by almost a half. The global economic recession had a significant impact primarily on companies producing metals; however, companies producing metal products also suffered from the lower foreign demand. At the beginning of 29 an enterprise in Muuga engaging in steel zincing halted its production, as a result of which yearly exports of sheet metal dropped fivefold. Exports of waste and residues of ferrous metals diminished by more than 2.5 times. Exports of metal structures fell by one tenth. The downward trend of wood and wood products exports decelerated in the first three quarters of 29 and showed a slight increase in Q4. The reason was the low comparison base of 28 as wood exports fell already in Q4 of 28. Yearly descent in wood and wood products exports amounted to 22. The weakness of the construction sector forced the export volumes of sawn timber and construction details down by 1-15, while their share in exports amounted to almost a half. Exports of round timber fell the most (-52) - this can be explained by the recession of paper in the main target markets. In the category of other industrial groups, furniture, contributing the most to export volumes, experienced a decline of 15. Demand for furniture in foreign markets is closely related to the developments in the construction sector. Yet, exports of pillows and blankets stayed practically on the level of 28. The economic crisis had a negative impact also on the exports of log houses which dropped by almost 3. Exports to Norway, the former largest target market, fell by a half; yet, log house manufacturers managed to increase their exports to Germany by more than a quarter and to France by more than one third. Machinery and equipment Mineral products Metal and products Wood and products Furniture, log houses, etc. Means of transportation Finland Sweden Latvia Russia Germany Lithuania Exports by commodity groups The share of the European Union in total Estonian exports did not change in 29 and amounted to 7. The figure has been the same for the last three years. As most of the Estonian exports are directed to the EU s internal market, export volumes are decreasing as fast as total exports. Export volumes have significantly fallen in respect of most Member States, with some positive exceptions. Exports to France increased by 3 and to Belgium by 2. Exports to Slovenia, Cyprus and Malta increased as well. The global economic crisis affected our exports also to other commonwealths. In 29, exports to the CIS dropped the most (-33). This was mainly caused by developments in the market of the highest share (8) the Russian market. Exports to this target market fell by one third in 29. The fastest downfall, however, took place in our exports to the Ukraine (share 1). Exports to the EFTA countries 4 dropped by a quarter. While exports to Norway and Iceland fell significantly, exports to Switzerland even increased. 4 European Free Trade Area: Norway, Switzerland, Iceland, Liechtenstein. Ministry of Economic Affairs and Communications Ministry of Finance Exports target countries

12 12 Economic survey of Estonia 29 Exports to the NAFTA countries 5 diminished by 15. The exports downturn to the United States by one third was balanced by the threefold increase in exports to Canada, backed by processed fuels. In 29, as earlier, Finland and Sweden were two of the most important export markets for Estonia. Latvia restored its third place and Russia fell to the fourth because exports to Russia declined faster than exports to Latvia. Lithuania and Germany reversed places again. Germany s import demand for Estonian goods has been stable since billion kroons worth of goods, although there have been some ups and downs during the years. Thus, the comparison base for Germany is much lower than that for Lithuania to which exports grew very fast in the years Exports to Finland dropped by 23 compared to 28. As the decrease was slightly slower than that of total exports, Finland s share in total exports rose to 19. As regards commodity groups, exports of both machinery and equipment and metal and metal products fell by one third. Exports of most goods had a decline. In the equipment category static converters and their parts, parts of electric motors and generators, power distribution equipment and insulated power cables were exported the most. In the metal products category metal structures had the highest export figures. Although exports of most commodity groups to Finland showed a downturn, exports of chemical products, prepared foodstuffs and beverages increased considerably (by 4, 3 and 21, respectively). In 29 the economic downturn in Sweden showed a significantly slower pace than in Finland but demand for Estonian goods dropped much faster. The cheapening of the Swedish krona made Estonian goods relatively expensive compared to Swedish products. Exports to Sweden diminished by almost one third in 29. Similar to total exports, exports of machinery and equipment and wood and wood products dropped by one third. These two commodity groups made up more than a half of our exports to Sweden. Exports of other important commodity groups also showed a major downfall. Only exports of prepared foodstuffs and beverages, paper products and building materials, all of which have a minor share in total exports, showed an increase. After the rapid decline in the first half-year of 29, the downturn of our exports to Latvia decelerated significantly in the second half-year and yearly decline amounted to 27. Exports of means of transport and chemical products both fell by a half, while exports of machinery and equipment dropped by one third. Exports of mineral products had an increase by a half, backed by higher exports of electricity to Latvia. 5 North-Americal Free Trade Area: United States of America, Canada, Mexico. Exports to Russia dropped by one third each quarter. The fastest decline took place in exports of means of transportation it fell three times during the year. Exports of prepared foodstuffs and beverages decreased by 4 and that of machinery and equipment by one third, while exports of chemical products declined by one tenth. Only the exports of animal products and measuring instruments demonstrated surprisingly vigorous growth (more than 5). Among animal products, exports of live pigs, fish and dairy products also had an upturn. It is expected that exports growth will be restored in 21. In the first half-year the extremely low comparison base will support the growth. Also, expectations as regards the external environment and the economic activity of our main trade partners are improving. As it will take more time to restore domestic demand, many enterprises have shifted their focus to export products. They also search actively for possibilities to enter new markets. Many Nordic companies have again started to expand their production units in Estonia or even transfer all their production to Estonia. This will support exports even more. In March 21, 75 of the experts of the Estonian Institute of Economic Research predicted export volumes to grow in the next six months, while only 25 expected the volumes to stay on the current level. Imports In 29, due to the fast decline in domestic demand, imports fell considerably more than exports. In the first three quarters the yearly decline amounted to more than one third, and in the last quarter diminished to one quarter. As in the case of exports, the comparison base of the previous year was much lower in Q4 than in other quarters. The yearly decline in imports amounted to 33. All commodity groups showed a decline in imports in 29. Imports of means of transportation plummeted the most (by 2.7 times) as the demand for new vehicles was still low both in the domestic market and our main target markets. In 29 machinery and equipment had to give up their first position in the Estonian total imports to mineral products for the first time because the yearly downturn rate (-17) of fuels was considerably lower than that of machinery and equipment (-4). As a result, the share of mineral products increased by 4 percentage points and reached 2. The decline in oil products imports was mostly the result of weak domestic demand, considering that the volume of fuels imported and then exported showed an increase. Imports of machinery and equipment have been diminishing for the last three years. The economic cool-off that started in 28 initially affected the imports of capital goods due to less investment activity. In 29 the downfall rate was further Ministry of Economic Affairs and Communications Ministry of Finance 21

13 Economic survey of Estonia accelerated by the strongly declining imports of semifabricated products needed to manufacture export goods, the reason being the recession in foreign markets. Imports of chemical products fell by one fifth in 29 and the volumes reached the level of 26. Imports of organic chemicals, fertilisers and paints dropped the most. Demand for household chemicals and pharmaceuticals stayed almost on the 28 level. Imports of metal and metal products dropped by a half in 29. In 28, imports of these products fell mostly because of the weakness of the domestic market, but in 29 it was the low external demand for metal products that pushed the downfall further. This, in its turn, caused a direct decline in the imports of raw materials for metal products. In 29 the European Union gave 8 of total Estonian imports, same as in 28. Due to its large share, imports from the EU internal market dropped at the same rate as total imports. Imports from the CIS countries plummeted even more (-4). Imports from the NAFTA countries decreased by a quarter. Only imports from the EFTA countries stayed at the level of 28. It was backed by strong imports growth from Norway and Iceland. Similar to exports, Finland was the most important import partner for Estonia in 29. Lithuania leaped from the fifth position to the second. Latvia also improved its position by one step and ranked third. Germany and Sweden, both of which had been among the first three in previous years, now took the fourth and sixth position, while Russia ranked fifth. Imports from Germany and Sweden fell by almost a half and imports from Russia declined by a quarter. Compared to 28, imports from Finland diminished by 31. Vehicles were the commodity group showing the fastest decline (2.5 times). Imports of metal and metal products dropped by a half and that of machinery and equipment fell by almost 4. Mineral fuels were the only commodity group demonstrating growth in imports from Finland (by two times). Since imports fell much faster than exports in 29, our trade deficit with Finland increased eightfold (to 2.3 billion kroons). Lithuania s ranking improved not because imports from that country increased but because its downfall rate was slower than that for other countries (-18). Oil products imports from Lithuania fell at the same rate (55) as total imports. However, the imports of two other important commodity groups chemical products and prepared foodstuffs and beverages grew by about one tenth. Imports from Latvia dropped by 23. Imports of the three most important commodity groups (mineral fuels, machinery and equipment and textile products) fell as much. Only imports of vegetable products and furniture, which are commodity groups of minor importance, showed some increase. It is predicted that imports will also start to increase in 21. Although domestic demand is still low, growth will be facilitated by imports of semifabricated goods and materials needed to manufacture export goods. However, imports growth will not reach exports growth. In March 21 experts of the Estonian Institute of Economic Research were also more pessimistic in their imports expectations for the next six months. A little more than a half of them predicted that imports will grow, while 42 of the experts thought that the volumes would not change and 5 were of the opinion that imports would decline. Mineral products Machinery and equipment Chemical products Metal and products Prepared foodstuffs and beverages Means of transportation Imports by commodity groups Finland Lithuania Latvia Germany Russia Imports by countries of origin Sweden Ministry of Economic Affairs and Communications Ministry of Finance 21

14 14 Economic survey of Estonia 29 Manufacturing Manufacturing output was constantly increasing in 2-28 and doubled during that period. The number of employees in the sector remained the same. The global economic crisis in 29 had a profound effect on the industrial sector and thus, the number of employees sharply dropped. The two larger sectors in Estonia are food and wood. In the last ten years manufacture of electrical and communications equipment, metal and chemical have developed faster than other branches. A considerable part of the production is exported; in 29, more than 6 of the output was sold in foreign markets. The main target markets are Finland and Sweden, countries that have invested considerably in the Estonian manufacturing. Continuous modernisation of technology in manufacturing has made it possible to significantly raise productivity, as a result of which output has grown without an increase in 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 structure have to be initiated. The number of employed will probably decline in the future but in some sectors more jobs are expected. In 29 more than 5,5 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 29, the largest manufacturing enterprises were PKC Eesti AS (wiring harnesses), AS Rakvere Lihakombinaat (meat processing) and ABB AS (electrical appliances). Other companies employing a rather high number of labour were the shipbuilding and metal processing group AS BLRT Grupp, Kreenholmi Valduse AS (textiles) and safety belts manufacturer AS Norma value added Sector's share in Estonian economy 6.8 Exports share in sales mill. EEK employment 91.4 Ratio to average wage Sales and exports * 29* Sales Change in sales (r.s.) Textile 4 Rubber and plastic 4 Other branches 17 Share of sub-branches in sales Wood 13 Chemical 9 Exports Change in exports (r.s.) Food 22 Building materials 4 Metal 1 Apparatuses 13 Furniture 4 In 29, due to the decreasing demand in domestic and external demand, manufacturing s output remained considerably below the level of 28. The layoff wave that had started at the end of 28 continued, coupled by cuts in working hours, wages and investments. However, Q2 showed some signs of improvement but only a small part of the output volumes that had been lost during the crisis was regained. In Q1 of 29, the constant decline in manufacturing output deepened. After that came a more stable period and each subsequent quarter saw an augmentation of output volumes by a few percent. The yearly output volume was 28 lower than in 28, dropping to the level of 23. Estonia was hit the hardest among the EU Member States. It is partly due to the fact that the output volumes of Finland and Sweden, Estonia s primary trade partners, to which Estonia is closely linked through subcontracting networks, suffered from a heavy decline in output. Compared to the low start at the beginning of 29, output volumes had grown by almost one tenth by Q4 which was still one third short of the peak output. Sales decreased equally in domestic and foreign markets but exports recovered to a certain extent in the second half-year. In Q4, exports share in sales amounted to almost 63, the highest for all times for manufacturing. Growth trend for exports share was characteristic of almost all sectors. Output volumes dropped by tens of percent in most branches. Demand fell less in food, manufacture of electronic and optical instruments and production of pharmaceuticals, and their output dropped less than 1. Output volumes diminished Ministry of Economic Affairs and Communications Ministry of Finance 21

15 Economic survey of Estonia almost by a half in chemical, manufacture of building materials and machine engineering. This can be explained by the fact that food production is mostly focused on the domestic market, building materials has equal shares of exports and domestic sales, and the other abovementioned branches export most of their production. Thus, the latter were more affected by foreign demand. In most branches, sales in the domestic market fell more than exports. Lower demand pushed down prices of several production inputs and forced to save costs, resulting in diminishing producer prices. It also meant that sales revenues fell more than output volumes in most industries. Prices decreased the most in several subbranches of food (e.g. dairy ) where prices had risen the most in 28. Prices dropped by almost one tenth in metal and by some percent in other industries. Producer prices increased only in some sectors (e.g. chemical, manufacture of electrical appliances). A new pressure for a price increase was felt during the last months of the year, triggered to a certain extent by restoration of demand and by the fact that the price of several imported raw materials had grown (oil, wood, metals). The sharp decline in demand in manufacturing forced enterprises to make major cuts in workforce. Every sixth job disappeared during the year. In addition, companies introduced part-time work, as a result of which the number of working hours dropped by almost one fifth. The number of employees decreased the most in building materials, wearing apparel and textile, wood, production of means of transport, rubber and plastic. The number of jobs fell in these branches by one fifth or more, exceeding 1 in most branches. In some branches, however, more people were recruited in spite of the economic crisis, for example manufacture of electric appliances showed a ten percent growth in employment. The downward trend of job losses stopped at the end of the year and the number of working hours increased in several industries. This, accompanied by increasing output volumes, gives us hope that the industrial sector has more or less completed its adjustments and the number of jobs will no longer decrease. Wages also stabilised in the second half of 29: wage level in the industrial sector in Q4 was only by 1 lower than at the same time in 28. Yearly wage of manufacturing fell by 4. th Number of employed * 29* 14, 12, 1, 8, 6, 4, 2, 1 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.) * bn EEK Average gross monthly wage Average wage (kroons) Change in wage (r.s.) * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) -1 Value added, labour costs and productivity bn EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

16 16 Economic survey of Estonia 29 Cost-saving measures resulted in a considerable reduction of costs but did not wholly compensate for the declined sales. In 29, profits of industrial enterprises were by 6 lower than a year before. Yet, most sub-sectors were able to obtain a yearly profit, only manufacture of building materials had a major downfall. Similar to the lowest point of production activity, the economic and productivity indicators of enterprises showed their lowest in Q1, after which the situation improved. The total profit of industrial enterprises in Q4 of 29 even exceeded that of Q4 of 28, probably due to the low comparison base caused by the economic recession. Labour productivity also increased during the year but did not reach the pre-crisis level. Yearly sales revenues per number of employed, working hours, labour and total costs, were by some percentage points lower than in 28. Productivity indicators based on value added fell by Low demand and borrowing difficulties caused cutbacks in investments for the second year in a row. The investments of manufacturing enterprises in material fixed assets dropped by 3 compared to 28. Investments fell in almost all industries and investment fields. More than half of the investments were made in machinery and equipment and one third in buildings and facilities. The investment activity had a slight increase in the second half-year investments made in material fixed assets constituted 6-7 of sales, almost reaching the usual level. A survey conducted by the Estonian Institute of Economic Research revealed that, parallel to an increase in several economic indicators, entrepreneurs showed more confidence in the second half-year of 29. At the beginning of 21 the confidence level was even higher. Still, the number of orders was smaller than usual and expectations did not grow any more during the rest of the year. In the first months of 21, however, expectations as regards exports had risen. About 6 of the production capacity was in use (8 in previous peak periods). The main obstacle for enterprises in increasing their output was low demand. The number of enterprises tackling with financial problems also increased, although the situation was somewhat better in the second half-year. Globally a moderate growth in demand is expected for 21. This corresponds with the opinion of Estonian entrepreneurs that their output volumes will start to grow. Yet, they did not yet see a need for additional workforce. However, the share of companies planning to recruit more people is gradually increasing. The evident pressure on prices, characteristic of 29, has subsided. All these factors and the improved competitiveness, as estimated by entrepreneurs, give hope for better developments in 21, especially in exports. Even so, although output volumes will most probably grow in many sectors, the number of new jobs will be modest. Ministry of Economic Affairs and Communications Ministry of Finance 21

17 Economic survey of Estonia Ministry of Economic Affairs and Communications Ministry of Finance 21

18 18 Economic survey of Estonia 29 Food and beverages Food is the biggest in Estonia by production volume; food production is the principal activity for almost 4 companies. By now more than a quarter of its output is exported, but domestic market is still the primary market. The employs 14,6 people. The number of employed has dropped in recent years mainly due to higher production efficiency. 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 food enterprise, followed by meat processing companies Atria Group (AS Wõro Kommerts, AS Vastse-Kuuste Lihatööstus) and AS Tallegg, which are somewhat smaller. AS Leibur, Fazer Eesti AS 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 Valio Eesti AS and dairy cooperative E-Piim. AS Paljassaare Kalatööstus operating in Harju country is the largest fish processing company. Competition in the Estonian food market has grown from year to year. Several companies have been acquired by foreign capital and neighbouring countries have increased their share in the Estonian market. Economic recession has forced the to streamline its activities and search more opportunities in external markets. For the next years stabilisation in workforce numbers and increase in exports are predicted. Sector's share in Estonian economy Food and beverages suffered a 1 significant decline in 29, just like other sectors. 8 Sales dropped by more than one tenth during the year. Both the domestic market and exports were 6 weak value added 8.7 man. exports 29.6 Share of exports in sales mill. EEK 18, 16, 14, 12, 1, 8, 6, 4, 2, 11.4 man. employment 9, Ratio to average wage * 29* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Beverages 17 Sales and exports Share of sub-branches in sales Other 15 Pastry and pasta 9 Fruits and vegetables processing and storage 3 Prepared feed 2 Meat 2 Fish 8 Dairy Food was somewhat less affected by the crisis than other manufacturing branches. Although the focuses mostly on the domestic market, its products are primary consumer goods and the descent was not profound. The decreasing producer prices also helped to block a decline in output volumes. Lowering prices of several inputs had a positive effect on the sector. The average milk purchase price was by 29 lower in 29 compared to 28. Labour and energy costs were cut as well. The first half-year was the most difficult as it was the deepest phase of the recession. The second half-year saw adjustments and sales figures improved. Food exports slightly more than a quarter of its output. Beverages (3) and dairy products (26) are the biggest export articles. In 29 exports to most target countries took a downturn. Exports to Russia and Latvia even dropped by more than a quarter. Exports to Sweden, on the other hand, increased by almost one third and reached.2 billion kroons. 29 was a relatively difficult year for dairy, the largest food branch. Output volumes at constant prices showed some increase but sales revenues dropped by more than one fifth. However, companies managed to compensate for the decline in sales by a decline in raw materials prices. Russia became the number one export market for dairy products. Finland, ranking first before, gave up its position dairy s exports to this country fell by almost 13. The most important export articles are cheese and curd, giving almost two fifths of the exports. Meat was the most successful in coping with the economic crisis in this sector. Meat Ministry of Economic Affairs and Communications Ministry of Finance 21

19 Economic survey of Estonia enterprises were able to increase their sales revenues by a couple of percentage points regardless of economic difficulties. Output volumes, however, dropped by more than one tenth. Domestic sales had the largest negative impact, while exports diminished at a slower pace. Since, contrary to other food branches, raw material prices dropped only superficially, producer prices were only slightly forced down. The purchase price of pork, one of the main raw materials, dropped by 3.7 during the year. The largest export markets for meat were Latvia, Lithuania and Russia. Beverages s sales fell by slightly less than one tenth in 29. At that, it is one of the few sectors where domestic market is stronger. Exports dropped by almost one fifth. Beverages is generally innovative. By a survey made in 28, 76 of the enterprises in this sector had launched a substantially improved product or service in the last three years. Innovation will be even more important in the future due to the tightening competition. Russia was still the most important export partner, taking almost two thirds of the exports of beverage, followed by Latvia and Lithuania. However, exports dropped in respect of all these target markets. Exports to the Nordic countries showed better results and even increased as regards Finland. Bakeries and pasta producers experienced a more than ten percent decline in sales in 29. Sales revenues dropped faster than total costs and net profit of enterprises fell by more than one fifth. Exports share is only 5, making the highly dependent on developments in the domestic market. Sales of fishing fell by one tenth in 29. Exports, forming three fourths of the sector s sales, diminished as much. Although sales revenues decreased, the was able to cut its costs faster. Labour productivity per employed grew by almost one fifth. The also succeeded in increasing its profit by more than a half. Instead of the Ukraine, Russia became the primary target market, taking almost a quarter of the sector s production. Germany Ukraine Lithuania Finland Latvia Russia Exports target countries Primary exports commodity groups Other 2 Fish products 15 Beverages Goods of Estonian origin 3 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Dairy products 26 Meat products 9 Number of employed and wages * 29* 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 12 Pastry and pasta 24 Other foodstuffs 16 Meat 2 Prepared feed 1 Fish 12 Dairy 15 Ministry of Economic Affairs and Communications Ministry of Finance 21

20 2 Economic survey of Estonia 29 mill. EEK Value added, labour costs and productivity 4, 3,5 3, 2,5 2, 1,5 1, * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mill. EEK 1,6 1,4 1,2 1, Investments of enteprises * 29* Investments in fixed assets Change in investments (r.s.) Employment rate in food and beverages continued its slow descent. The decline in sales volumes and investments targeted on increasing efficiency brought about a 1 decrease in the number of employed. Average wage stayed on the level of the previous year. Food and beverages sector is still the largest investor in manufacturing, making almost 19 of the total investments. However, total investment volume dropped by more than one third in 29. Almost 63 of all investments were made in machinery and equipment. The companies interviewed by the Estonian Institute of Economic Research had much more positive expectations at the beginning of 21 than a year before. Also, use of production capacity had grown by some percentage points. It is expected that export markets will demonstrate considerable growth. More than half of the respondent companied expected their export orders to grow in the coming months. Ministry of Economic Affairs and Communications Ministry of Finance 21

21 Economic survey of Estonia Ministry of Economic Affairs and Communications Ministry of Finance 21

22 22 Economic survey of Estonia 29 Textile Estonian textile is an mainly focused on export markets, comprising almost 2 enterprises. In recent years the sales of the have started to diminish, reaching the level of eight years ago. The number of employees has dropped by more than twice during this period. There are large textile companies in several regions in Estonia. AS Wendre, manufacturer of finished textile products, is located in Pärnu country. The larger home textile producers are AS Toom Tekstiil and Hilding Anders Baltic AS. Technical textile producer AS Mistra-Autex is located in Harju county. Qualitex AS is the largest company producing finished garments. Kreenholmi Valduse Aktsiaselts is also one of the largest textile manufacturers in Estonia. The sector has undergone heavy adjustments with the new situation, leaving only the strongest companies in the market able to invest in product development and compete in external markets. Next years should bring stabilisation to this sector and expansion to new markets. 1 Sector's share in Estonian economy 1 Textile s output volumes fell by more than 13 in 29. The number of employed also 8 86, dropped rapidly and exports showed a downturn value added man. exports Share of exports in sales Czech Republic Norway Russia Germany Sweden Finland 4.7 man. employment Exports target countries mill. EEK 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Ratio to average wage Sales and exports * 29* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Textile started adjustments somewhat earlier than other industries, thus the most extensive layoffs were made already in 28. Although 29 has also been difficult, there are a number of companies who have successfully coped with the situation. Exports has had a high share in textile s sales, growing even more in 29 and reaching 86. Thus, recovery of foreign markets is important for this sector. Raising the sector s competitiveness is also an important task. It is positive that the number of technologically innovative companies in textile exceeds the Estonian average. Innovation will ensure success to the in the future. More than half of the sector s exports are received by Finland and Sweden. Finland s share increased in 29 to more than 3. Total exports, however, showed a downward trend; exports to Sweden diminished by even more than a quarter. The share of blankets and pillows in total exports is still increasing and is now more than 6. Almost one fifth of the blankets and pillows are exported to Sweden. However, the share of Finland and France in the exports of this commodity group has slightly dropped. The number of employed continued to fall rapidly in 29, the yearly decline being one fifth. This, however, is somewhat less than a year before. Costcutting was rather successful, as a result of which productivity figures per employed even showed an improvement. All in all, the decline in output caused a decline in profit and value added. Textile was one of the few branches in 29 to have an increase in average wage which grew by a couple of percentage points. In spite of this, average wage in this sector amounted to only a little more than two thirds of the Estonian average. Investments remained on the level of 28 and amounted to 1 million kroons. Investments in machinery and equipment dropped by almost two thirds but investments in purchasing of buildings and facilities increased considerably. Ministry of Economic Affairs and Communications Ministry of Finance 21

23 Economic survey of Estonia Textile enterprises had rather positive expectations for the coming months at the beginning of Q2 of 21. None of the companies intended to cut workforce. The utilisation rate of production capacities was also the highest during the last months of 29, reaching 69. However, low demand was considered to be the main growth impeding factor. Other finished textile products 13 Primary export commodity groups Cotton textile 3 Carpets and other textile floor covers 6 Other textile products 18 Blankets and pillows 6 Goods of Estonian origin Number of employed and wages 12, 25 1, , 1 5 6, 4, , * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK Value added, labour costs and productivity 1,6 1,4 1,2 1, * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mill. EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) -6 Ministry of Economic Affairs and Communications Ministry of Finance 21

24 24 Economic survey of Estonia 29 Wearing apparel Wearing apparel has suffered from several backlashes in recent years. Output volumes continue to fall and the number of employed has decreased. It was difficult before but the economic crisis has had an even stronger impact. Weak export markets are a big problem since more than two thirds of the s output is exported. The largest wearing apparel producers are AS Baltika and AS Silvano Fashion Group in Tallinn and AS Sangar and AS Ilves-Extra in Tartu. Wearing apparel is one of the most vulnerable sectors at the time of the economic crisis. Since the does not make primary consumer goods, people find it easier to save on these products. Moreover, the constantly growing production costs, triggered by increasing wages, make it difficult for Estonian companies to remain competitive. As a result, a transfer from subcontracting to own brand names has taken place. These are certainly right developments in long-term but the results may come only in years. It is estimated that the will become more stable in the next years, but output volumes are expected to grow only after the end of the crisis when brand development will bear fruit. Sector's share in Estonian economy 29 was a difficult year for wearing apparel 1 1 sales and output dropped considerably. The number of employed and investments also decreased value added man. exports Share of exports in sales mill. EEK man. employment Ratio to average wage * 29* Investments in fixed assets Change in investments (r.s.) mill. EEK 2,5 2, 1,5 1, 5 Investments of enterprises Sales and exports * 29* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Wearing apparel s output volumes fell by one third at constant prices in 29. Sales at current prices fell by some percentage points less. The situation was the most difficult in the domestic market but exports also dropped by more than a quarter. The overall crisis has had a significant effect on wearing apparel. Sales revenues have dropped not only in the regular clothes sector but also in the sector of working clothes and other specialised products. The share of cheap subcontracting is also diminishing because labour cost cuts have not enabled companies to compete with Asian countries. Wearing apparel exports more than two thirds of its output. Exports to each of the main target countries dropped by almost the same amount. In 29 Finland and Sweden were the largest export markets, receiving 4 and 27 of the production, respectively. The Russian export market did not perform well and exports to this market fell by more than a third. Among the largest commodity groups the exports of women s clothes (suits, dresses, jackets, etc.) dropped by more than one fifth. On the other hand, exports of women s outdoor clothes (coats, anoraks, etc.) increased by a few percentage points. Exports of T-shirts fell twice during the year. 28 was rather stable for this sector in terms of employment but 29 saw a decline in workforce by a quarter. It brought about very serious changes in the sector. However, it was not sufficient for cost cutting and productivity indicators also sank. The share of total profits in sales revenues even decreased by one tenth. Wages dropped regardless of labour cuts average gross wage fell by more than 8 compared to the previous year. Investment activity has become extremely low in this sector. In 29 only a little over 3 million kroons were invested in material fixed assets. This places the sector among one of the last in manufacturing Ministry of Economic Affairs and Communications Ministry of Finance 21

25 Economic survey of Estonia In the coming years the low investment activity may start to inhibit the sector s development. In the first half of 21, the wearing apparel companies interviewed by the Estonian Institute of Economic Research were more optimistic as regards near future than a year before. None of the respondent enterprises planned to reduce the number of employed in the coming months. It is also positive that the utilisation rate of production capacities in this branch is significantly higher than the average in manufacturing, reaching 88. Lithuania Germany Latvia Norway Sweden Finland Export target countries Women's wearing apparel 38 Goods of Estonian origin 14, 12, 1, 8, 6, 4, 2, Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK 1,4 1,2 1, Main export commodity groups T-shirts and undershirts Men's 4 working clothes Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Other 23 Men's wearing apparel 3 Ministry of Economic Affairs and Communications Ministry of Finance 21

26 26 Economic survey of Estonia 29 Gunnar Kraft: Estonian wearing apparel will see a reduction in output figures and number of enterprises in 21 Gunnar Kraft, Chairman of the Board of AS Sangar, is of the opinion that although the market of high quality products is again taking an upturn in large and traditional economies, it cannot be expected that demand in the Estonian wearing apparel market will show an increase before the end of 21. workforce. However, the market lacks specialists and skilled workers of sufficiently high qualification. What was the year 29 like for Sangar? Which objectives were met and which not and why? It may be said that 29 was a year of major readjustments for Sangar. In addition to reacting to the recession in the market and reorganisation of our customer base we reviewed the Sangar brand architecture, bringing our new high quality Sangar EXECUTIVE collection to the market, renewed our corporate image (which was awarded the highest prize at Kuldmuna competition), and also expanded our new concept outlet chain in Tartu and Pärnu. Some other positive developments included the growing sales of Sangar brand in Estonia and increase in the number of clients ordering uniforms. However, the higher than expected reduction in sales in export markets (both for subcontracting and our own brands) and a decline in public procurement orders were negative developments. Was 29 a year for continuation of the crisis or emerging from the crisis? We dedicated the first half-year of 29 to active cost-cutting and reorganisation of the company, which eventually enabled us to finish the year on the plus side. Yet it is clear that demand will not be restored by the end of this year. However, the experience of our long-term subcontracting partners shows that demand for high-quality products is again increasing in large traditional economies. What were the main developments influencing wearing apparel in 29? The main influencing factors for our were certainly the economic downturn and decline in demand. The crisis forces Estonian wearing apparel companies to look more actively for niches that would give them a competitive edge in comparison with countries where production costs are lower. What has been the effect of labour market changes on Sangar? Compared to the economic growth years, changes in the labour market have raised the motivation of Photo: private collection What challenges will the wearing apparel face in 21 and 211? The sales and number of employed will drop in 21. Only these companies which have a niche in target markets can be successful. Sangar s advantages, in our opinion, are world class shirts, as well as agile and flexible production and logistics which take into account the needs of our current and future clients. What are Sangar s objectives and plans for this year? In the domestic market it is our plan to continue the initiative launched in 29 promoting Sangar as a quality shirt brand and an outlet chain. We intend to open at least two new shops in Tallinn. Increasing exports is also one of the main objectives. We hope that tailor-made shirts service will become our main export article. We also hope that there will be more public procurement contracts for uniform shirts. Subcontracting volumes will most probably decrease. Ministry of Economic Affairs and Communications Ministry of Finance 21

27 Economic survey of Estonia Ministry of Economic Affairs and Communications Ministry of Finance 21

28 28 Economic survey of Estonia 29 Ministry of Economic Affairs and Communications Ministry of Finance 21 Wood processing 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 over 16, people. The s output volumes, after having grown rapidly for some years, have taken a downturn and dropped to the level of 21 in 29. The number of employed in the sector has dropped as well, falling to the lowest in ten years. The product mix of wood is comprehensive, ranging from sawn timber production and processing to manufacture of log houses, windows and doors. Sawn timber manufacturer Stora Enso AS and hard- and chipboard manufacturer AS Technomar & Adrem employ the highest number of people. AS Viljandi Aken ja Uks (wooden doors, windows, casements and frames) is also one of the largest wood companies. UPM Kymmene Otepää is one of the largest plywood manufacturers. Estonian wood is closely related to the Scandinavian wood sector through ownership relations. Estonia has been a good opportunity for Finnish and Swedish groups to expand their operation to more cost effective regions. Wood started to suffer under the crisis earlier than other sectors because of the fact that construction sector is one of its main customers. By now, extensive adjustments have been made and the sector s future prospects are much better. Sector's share in Estonian economy Wood saw a further decline in 1 1 production volumes and workforce in Exports were still stronger than the domestic market but both suffered a heavy downfall value added 14.7 man. exports Share of exports in sales mill. EEK 1,6 1,4 1,2 1, mill. EEK 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, 12.9 man. employment Ratio to average wage Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Sales and exports * 29* Sales Exports Change in sales (r.s.) Change in exports (r.s.) 4 2 In 29, sales of wood at current prices fell by a little more than a quarter compared to the previous year. Domestic sales decreased by one third. The somewhat better standing in exports is important for the sector as more than two thirds of the output is sold abroad. The first part of the year was especially difficult while some recovery could be noticed in the second half. Producer prices also continued to fall in 29, mostly in the first half-year. In the second half-year the price increase of raw materials started to have an effect, as a result of which yearly decline was only a couple of percentage points. Labour costs decline by more than one fifth backed a cut in producer prices. In 21, changes in the prices of energy and raw materials will start to affect the prices more than labour costs. Contrary to previous years the sector did not have acute problems with raw materials in 29. However, reserves had become thin by autumn and the growing demand pushed raw material prices upwards. It was also positive that Russia postponed the planned increase in wood tariffs. It is still possible that the tariffs will be raised but it has been evident even under the current lower tariffs that Russia has not made major investments in its own wood and a lot of raw materials are simply wasted. Estonia is less dependent on Russia s wood than Finland but the sector would benefit from alternative supply channels to ensure stability. Scarcity of local raw materials is one of the problems that wood faces. Private forest owners have had no motivation for felling. They do not like the complicated administrative procedures and the revenue is small. This is why many forests are overgrown and the profit to be earned from them will diminish from year to year. The passiveness of private forest owners is not only Estonia s problem. The same problem is widespread in several countries of

29 Economic survey of Estonia the EU. On the average 6 of available wood is used in the European Union. As the demand increases, the figure is predicted to grow to It is estimated that growing bioenergy use and more demand for green products will be the main engines. The Estonian forestry development programme until 22 which is to be developed by 21 includes possible solutions to this problem. Difficulties in wood are characteristic also of our neighbouring countries. Volumes have plummeted in almost everywhere in Europe. It is estimated that the 27 level for demand will not be reached before 211. However, by the end of 29 reserves had become very low in a number of countries and, thus, preconditions for an improvement in the next years are good. Estonian wood exports two thirds of its output. This figure has grown in recent years. The external market is geographically very wide, comprising 88 countries. The main target countries are still Finland and Sweden, receiving more than 3 of our exports. The main export articles are construction details (windows, doors, glued timber) and log houses. Most larger commodity groups showed a decline in 29. Log houses exports dropped by almost one third, due to the weakness of the Norwegian market. Exports of veneer, however, increased by more than one tenth and exports of particleboard by more than one fifth. According to the data of enterprise statistics the number of employed in wood dropped by more than 3, in 29. This has brought about a swift decline in labour costs, as a result of which productivity indicators have improved. Labour cuts also enabled the sector to keep the wage decline above the Estonian average and retain the sector s competitiveness. Considerably fewer investments were made in fixed assets in 29, with their amount dropping twofold. In comparison with the peak years of the amount of investments dropped even by almost four times. Almost half of the investments were made in machinery and equipment. Investments in computers and computer systems decreased the least (by 5). The expectations of the enterprises interviewed by the Estonian Institute of Economic Research were much more optimistic at the beginning of 21 than before. Production capacities were used up to 8 and none of the companies planned any labour cuts. Two thirds of the respondents expected output volumes to grow in the next months. Construction details (incl. windows, doors, glued timber) 27 2, 15, 1, 5, UK Norway Germany Denmark Sweden Finland Export target countries Main export commodity groups Sawn timber 23 Goods of Estonian origin Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Firewood (incl. chips) 13 Round timber 9 Profiled timber 7 Other 21 mill. EEK Value added, labour costs and productivity 5, 4, 3, 2, 1, * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

30 3 Economic survey of Estonia 29 Tiit Kolk, Chairman of the Board of AS Repo Vabrikud, says that wood products manufacturers have a constant problem of scarcity of raw materials although there are enough forests in Estonia, they are badly managed and the wood in South- Estonia has to use wood imported from Latvia. Tiit Kolk: Estonia is rich in forests only on paper passive forest use., as well as the higher price of raw materials compared to the neighbouring countries. What was the year 29 like for AS Repo Vabrikud? Which objectives were met, which not and why? 29 was a very difficult year for us. In addition to the general decline in demand, local currencies were devalued in many of our target markets at the beginning of the year. Devaluation blocked our boards exports to Poland, Russia and Central-Asian countries. In the middle of the year a dangerous competitor for raw materials emerged overnight Eesti Energia AS started to burn technological wood in its Narva power stations, pushing the price of wood up by tens of percent and making this raw material even scarcer in NE-Estonia. Under those conditions it was our aim to adjust as quickly as possible and to survive. For this it was necessary for us, inter alia, to refinance our credit, invest 19 million kroons in technology and heating, reduce costs and improve the quality of our boards. We were able to meet all these objectives. We did not meet the initial output and sales volume targets. This was due to lack of wood as raw material and its high price. It was also the main reason for our losses during the financial year. What were the most important developments in your in 29? Those sawn timber producers who had survived the wage crisis and liquidations in 27-28, obtained the raw materials market share of the companies who had left and somewhat increased their production. However, in the second half-year of 29 raw materials became scarce again and output growth decelerated. Manufacturers of log houses and windows and doors had a weak year throughout. Demand for paper wood increased in the second half-year, enabling the to restore paper wood exports to Finland and Sweden which had slowed down in the first half-year. The State Forest Management Centre enjoyed its exclusive and extensive contract with Eesti Energia AS and the positive economic effect resulting from its dominant market position. The development of Estonian wood is most of all inhibited by lack of raw material caused by Photo: private collection How have changes in the labour market affected your enterprise? Our enterprise was forced to take urgent measures under the crisis to cut labour costs and reduce the working time. Our employees understood as regards these steps and there were no protests. What will be the challenges for wood processing enterprises in 21 and 211? Raw materials availability and prices will still be the main challenge. In Estonia there a very many forests which are not managed at all, thus Estonia is a country rich in forests only on paper. The wood in Central- and South-Estonia uses wood imported from Latvia. Wood in North- Estonia has been forced to considerably reduce its output due to the discontinuation of round timber imports from Russia in 27 the result of formal obstacles created by our eastern neighbour. Achieving a stable felling volume, raw materials flow and raw materials price is the greatest challenge. After Ministry of Economic Affairs and Communications Ministry of Finance 21

31 Economic survey of Estonia stability in this field is achieved, it will not be difficult to restore the output and sales figures. We hope that the Ministry of the Environment will be able to eliminate the obstacles to the Estonian forest management in its new forestry development programme. What are the objectives and plans of AS Repo Vabrikud for this year? We aim to increase the share of products, furniture details and laminated board of higher price and value in our portfolio. We also plan to increase the share of our long-term Scandinavian quality customers to half the volume of our portfolio. Ministry of Economic Affairs and Communications Ministry of Finance 21

32 32 Economic survey of Estonia 29 Production of pulp, paper and paper products Paper is an with long traditions but lately with decreasing importance in Estonia. Currently there are about 6 paper, pulp or paper products enterprises in Estonia, with a workforce of slightly under 1,5 people. The output volumes that had been rapidly growing since the beginning of this century have now dropped back to the 23 level. Almost 8 of the s output is exported and only a small part is sold in the domestic market. Two companies form the backbone of this AS Estonian Cell, with a turnover of almost one billion kroons, is the largest pulp producer, and "HORIZON" Tselluloosi ja Paberi Aktsiaselts (turnover.5 billion kroons) is the largest paper and cardboard producer. It is expected that the market situation will improve after the rather difficult year of 29. Both companies have managed to raise prices, and as export markets are expected to revive, the companies have better prospects for the coming periods. Sector's share in Estonian economy The output volumes of paper showed a 1 15 rapid downturn in 29. Sales and exports both dropped by almost one third value added man. exports Share of exports in sales 1.5 man. employment Ratio to average wage (r.s.) mill. EEK Sales and exports 3,5 5 3, 4 2, , 1 1,5-1 1, * 29* Sales Exports Change in sales (r.s.) Change in exports (r.s.) India Finland Italy Germany France China Export target countries was a difficult year for paper. Export markets were low especially in the first half-year, forcing several enterprises to halt production. In the second half-year a slight upward trend in demand could be noticed. The lowest prices for pulp were seen in the middle of 29. This sector has had problems all over the world. Demand for paper fell drastically at the time of the crisis and is now only slightly recovering. In some fields of use the pre-crisis level will probably never be achieved again (paper volumes used in printed media). Re-use of paper, on the other hand, is increasing all the time, and raw material prices in this field have already exceeded the pre-crisis level. 8 of paper output is exported. There are no dominant target markets and this helps to avoid excess dependency on the economic development of certain regions. China is the largest export market but still takes only one tenth of the s total exports. In 29 paper pulp exports to Germany fell the most and Germany s ranking fell from the first to the third among our export partners. Paper pulp gives half of the s exports. Uncoated cardboard and paper produced by "HORIZON" Tselluloosi ja Paberi Aktsiaselts make up 3 of the sector s exports. Exports of these two large commodity groups dropped by more than one fifth in 29. Employment rate continued to decrease in paper in 29. The number of employed fell by 14, mainly during the first half-year. However, the was not able to sufficiently reduce its costs in order to retain productivity, and total productivity fell by more than a half in 29. Estonian Cell s extensive losses also had its impact here. Wages dropped by a couple of percent, staying lower than the Estonian average. Investments in fixed assets more than doubled in this, again amounting to more than 1 million kroons. 94 of the investments were made in machinery and equipment, the most rapidly growing investment field. This growth was most probably backed by some single large investment. Ministry of Economic Affairs and Communications Ministry of Finance 21

33 Economic survey of Estonia The sector s prospects for the next year have considerably improved. The has found new markets in Asia, enabling it to compensate for the lower export volumes in Europe. mill. EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Main export commodity groups Other 11 Uncoated paper and paperboard 31 Recycled paper and cardboard waste 4 Boxes, bags and other packages 5 Goods of Estonian origin 15, 12, 9, 6, 3, Wood pulp 49 Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

34 34 Economic survey of Estonia 29 Manufacture of chemicals and chemical products The Estonian chemical is tightly linked to oil shale but other chemical branches are also being developed. Output volumes grew until 29 but it did not bring about more employment in the sector. Thus, the increased sales and output volumes have been backed by higher productivity. Although productivity has shown rapid growth, it is still significantly below the level of productivity in developed countries. In 28, value added per employee in this sector in Estonia and Finland were 7, kroons and 2 million kroons, respectively. In Estonia there are about one hundred chemical enterprises. 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, Kiviõli Keemiatööstuse OÜ, Eesti Energia Õlitööstus AS (shale oils), ES Sadolin AS, AS Tikkurila and AS Eskaro (paints and varnishes), AS Silmet (rare metals), OÜ Krimelte and Henkel Makroflex AS (assembly foams), Genovique Specialties AS (benzoic acid, sodium benzoate), AS Nitrofert (mineral fertilisers, ammonia and carbamide), Orica Eesti OÜ (explosives) and AS Nycomed Sefa (pharmaceuticals). The sector s growing productivity may decrease its need for labour. The need to raise efficiency derives from the more expensive production inputs. In the chemical increased costs related to environmental protection also play an important role. On the other hand, the fluctuating oil prices have boosted interest in alternative fuels, including shale oil, which may result in more employment in the sector. 1 8 Sector's share in economy Declining demand in the domestic and external markets brought about a decrease in chemical s 6 output and workforce. In some 6 9 enterprises production was suspended. Prospects 4 6 for 21 are, however, more positive, especially in 1.3 oil value added man. exports Share of exports in sales 4. man. employment Ratio to average wage (r.s.) mill. EEK Sales and exports 12, 4 1, 3 2 8, 1 6, 4, , * 29* Russia Latvia Sweden Ukraine Denmark Netherlands Nigeria Finland Belgium Lithuania Germany Belarus USA Sales Change in sales (r.s.) Exports by main target countries Exports Change in exports (r.s.) In 29 the output of chemical fell by more than one third. Output of chemicals and chemical products dropped the most output volumes dropped by almost two times compared to 28. Nitrofert, manufacturer of fertilizers, had a profound impact on the results of the after it had to suspend production in February due to low global prices. The output of some other important chemical products also fell considerably. Output of heating oil fell by one fifth. However, production figures were starting to grow again at the end of the year. As global oil prices increased, heating oil prices started to increase as well. The production volumes of a smaller sub-branch of chemical pharmaceuticals were rather stable considering the overall developments; its output fell only by 7. Sales indicators mostly reflected changes in output. Producer prices rose by 6.5 on the average, thus sales revenues decreased somewhat less than production volumes. On the other hand, export and import prices showed a declining trend. Exports of shale oil in terms of volume grew by a half in 29 but its price was lower due to lower oil prices and, thus, exports in financial terms increased by one tenth. Instead of the domestic market more output was directed to export markets. Among other 6 This sector embraces, besides production of chemicals and chemical products (NACE 2), the production of coke and refined petroleum products (NACE 19) and manufacture of basic pharmaceutical products and pharmaceutical preparations (NACE 21). Ministry of Economic Affairs and Communications Ministry of Finance 21

35 Economic survey of Estonia important chemical products the exports of mastics showed a slight increase while the exports of other products generally decreased. Export figures of chemical products were the most affected by ammonia and urea, exports of which stopped in March due to the suspension of production in Nitrofert. In 29, exports increased to Russia, the Netherlands, Denmark (due to shale oil) and Nigeria (mixtures of aromatic hydrocarbons, related to the processing of imported fuels in Estonia), and slightly to Finland. All other export markets showed a decline. Exports to the UK, Latvia, Sweden, Germany and Belgium took a strong downturn, primarily due to the suspension in sale of ammonia and urea. The number of employed fell by 8 in 29. Chemicals and chemical products and pharmaceuticals both cut more than 1 of their workforce in 29. Employment rate stayed on the level of 28 in oil. The share of partial time employment increased. Sales revenues declined faster than costs in all subbranches, as a result of which the total profit of the sector fell almost fourfold compared to the previous year. Manufacture of chemicals and chemical products was hit the hardest. Oil also reported losses, arising from low prices at the beginning of 29. The financial situation improved in the second half-year, productivity increased but not to the usual level. Yearly labour and total costs productivity indicators fell by tens of percent. Only pharmaceuticals had somewhat better results. Investments of chemical dropped by a quarter in 29, mainly on account of chemical and chemical products companies. More than 8 of the s investments were made by oil companies whose investments stayed on the 28 level (VKG and Eesti Energia Õlitööstuse investments in a new oil refinery). In pharmaceuticals investments were the highest in recent years (due to acquisition of large plots of land). 6 of the chemical s investments were made in machinery, equipment and inventory. Companies evaluated the economic situation in rather pessimistic terms all through the year. According to the survey made by the Estonian Institute of Economic Research most companies had fewer orders than usual. Demand problems were coupled by financial problems. This was pointed out by one fifth of the respondents in the middle of the year. The situation improved in the second half-year and expectations were considerably more optimistic in the first months of 21: output volumes were expected to grow, the number of orders had increased, nearly one company in ten intended to recruit more people. It is expected that in 21 output will grow mainly in oil, as the new oil refinery of VKG should be fully operational in the middle of the year. By the beginning of 21 results had improved also in some other fields (e.g. chemical products for construction); however, this may be attributed to the low comparison base of 29. Mineral fuel and oils 38 Fertilisers 4 Main export commodity groups Paints, varnishes, mastics 3 Goods of Estonian origin 18, 15, 12, 9, 6, 3, Other 17 Anorganic chemicals; compounds of rare earth metals 4 Organic chemicals 7 Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK 3, 2,5 2, 1,5 1, 5 mill. EEK 1,2 1, Value added, labour costs and productivity * 28* 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Investments of enterprises * 28* 29* Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

36 36 Economic survey of Estonia 29 Manufacture of rubber and plastic products Manufacture of rubber and plastic products showed rapid growth in the first years of the 21 st century. However, in the past couple of years the economic crisis brought about a reduction in output and workforce. The Estonian rubber and plastic products comprises almost 2 SMEs. The largest companies are Pipeline Eesti AS (plastic pipes), AS Estiko-Plastar (film and plastic bags), AS Plasto (plastic windows), 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) and Tartu and Ida- Viru counties (about one tenth of the workforce). Hiiu and Saare counties also employ quite a lot of labour. It is forecast that demand will be restored in rubber and plastic. Long-term prospects are also 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 more modest. Sector's share in Estonian economy Demand for rubber and plastic products fell both in the domestic and foreign markets in 29. The situation improved slightly at the end of the year. Companies were forced to cut labour due to lack of orders value added man. exports Share of exports in sales 3.7 man. employment Ratio to average wage mill. EEK Sales and exports 6, 6 5, 5 4 4, 3 2 3, 1 2, -1 1, * 14, 12, 1, 8, 6, 4, 2, Sales Change in sales (r.s.) 2 Exports Change in exports (r.s.) Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) In Q1 of 29, the output volume of rubber and plastic was only half of the volume of 28. From then on the situation began to improve. Yearly output fell by 3. Producer prices went down by 4 due to the pressure on prices. Domestic sales fell by more than a third, exports decreased to a lesser extent. By Q4 of 29 exports volumes had risen to the level of Q4 of 28 but we should bear in mind that the comparison base of 28 was low. Yearly exports of all commodity groups showed a decrease, in many cases by tens of percent. Exports dropped in respect of most target countries and slightly increased only to Denmark. The sharp decline in demand necessitated severe cuts in the sector s workforce. By the end of 29 one fifth of the jobs in this had disappeared. The increasing demand in Q4 brought about a slight increase in employment and in the number of working hours per employee. The downward trend in wages also came to a halt at the end of 29. However, labour costs per employee were by 8 lower in 29 compared to 28. The was lagging in its cost-cutting compared to changes in sales revenues but was nevertheless able to overcome its losses in Q4. Yearly decrease in profits was again about a half, for the second year in a row. The reaction of enterprises to the new circumstances helped to improve productivity but the yearly productivity of labour costs and total costs was still by some percent lower than in 28. The main productivity indicators based on the number of employees and working hours went down by more than one tenth. Investments of rubber and plastic dropped by 16 in 29. Investments decreased in all fields except purchase of buildings and facilities and computer systems. Half of the investments were made in machinery and equipment. Ministry of Economic Affairs and Communications Ministry of Finance 21

37 Economic survey of Estonia By the survey of the Estonian Institute of Economic Research, companies were more optimistic in the second half of 29 due to the increased output volumes. However, the number of orders was still lower than usual. Although several companies planned to increase their workforce at the beginning of 21, there were still many that intended to make more labour cuts. The utilisation rate of production capacity was still lower than 5 at the end of 29. Thus, companies did not predict any considerable improvement of the situation in the near future. However, some increase in output volumes compared to the previous year was hoped for. Sweden Finland Germany Norway Latvia Lithuania Russia Denmark Netherlands Exports by main target countries mill. EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Boxes, bottles, etc. 33 Main export commodity groups Plastic sheets and film 11 Vulcanised rubber products (seals, etc.) 7 Office and school supplies, accessories 31 Goods of Estonian origin Other 12 Plastic pipes and hoses 7 mill. EEK 1,6 1,4 1,2 1, Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

38 38 Economic survey of Estonia 29 Metal and metal products Metal has developed extremely fast during our re-independence period. Output of the grew threefold in It was mostly thanks to exports, backed by the increased domestic demand (in machinery and equipment and construction sectors). Expanded sales figures and production facilities brought about more need for labour. The employed almost 12, people in 29, being thus one of the largest sectors. However, the global economic crisis has brought about a significant backlash in this respect. The comprises almost one thousand enterprises. 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 Group, Cargotec Estonia AS, OÜ BLRT Marketex, AS Remeksi Keskus (metal structures), ArcelorMittal Tallinn OÜ (galvanised steel), Ruukki Products AS, AS Saku Metall (building structures), Eesti Energia Tehnoloogiatööstus AS (manufacture of products needed by power plants and servicing power plants), AS Hanza Tarkon, AS Favor, OÜ BLRT Masinaehitus, Metalliset Eesti AS (metal working), Metaprint AS (metal packages), and AS Demidov Industries (aluminium alloys). The sector expects to see increased export demand in long-term. Due to labour productivity growth employment will not grow as much as sales. Sector's share in Estonian economy The economic crisis had a strong effect on metal 1 15, bringing about reduced output volumes and cuts in workforce. However, enterprises 6 9 expect that they will see a moderate recovery of 4 6 demand in value added 1.1 man. exports Share of exports in sales mill. EEK 18, 16, 14, 12, 1, 8, 6, 4, 2, 11.8 man. employment Ratio to average wage (r.s.) Sales and exports * Sales Change in sales (r.s.) Finland Germany Sweden Denmark Norway Latvia Russia Turkey Poland Exports by main target countries 3 Exports Change in exports (r.s.) The output of metal plummeted by 4 in 29 compared to the previous year. Sales revenues decreased even more as a result of lowered prices. The cheapening metal prices in the global market and low demand caused a 1 decrease in producer prices. Exports and domestic sales dropped by the same amount. In the second half of 29 the situation started to improve in metal production but not in metal products output was low all through the year. Exports of sheet steel, the best export article in 28, dropped the most. ArcelorMittal s zincing plant suspended operation at the end of April, resulting in a six fold reduction of sheet steel exports in 29. Exports of metal scrap also decreased by several times. Exports of metal structures were more or less at the level of 28. Exports increased in only some less significant commodity groups. For most of the most important trade partner, such as Finland, Sweden, Norway, Latvia and Russia, exports dropped as much as output by 4. Exports of scrap metal to Turkey decreased the most by several times. Exports to Germany increased (metal structures), while exports to Denmark did not change compared to 28. The number of employed in this sector dropped by 16, most of all in metal production. Labour costs per employee were on the average by 7 lower than in 28. Costs decreased as much as revenues, as a result of which total costs productivity almost stayed at the level of the previous year. However, the sector could not immediately react to the reduced revenues and showed losses in Q1. The yearly profit was by almost four times smaller than in 28. Labour and labour cost productivity were by 2-3 lower than in 28. Ministry of Economic Affairs and Communications Ministry of Finance 21

39 Economic survey of Estonia Metal enterprises investments dropped by about one tenth compared to 28. The investments of metal producers grew but they only account for a small part of the whole sector. Compared to other industries the investments of metal have been rather high in the low demand period. Investments in machinery and equipment made up a half of the investments. The survey made by the Estonian Institute of Economic Research at the beginning of 21 showed that metal s prospects have improved. The number of companies expecting growth in output had increased, stabilisation in workforce figures was expected and there was less pressure on prices. The growing demand in the global market is pushing up raw material prices and thus, a price increase for Estonian products may also be presumed. But the respondents did not mention that they expected more orders. Thus there will be no rapid growth in output volumes. However, ArcelorMittal s plant was put in operation again in February and will have a significant effect on the indicators of the whole sector. Iron and steel products 51 Main export commodity groups Iron and steel 22 Goods of Estonian origin 18, 15, 12, 9, 6, 3, Other 13 Aluminium and aluminium products 9 Copper and copper products 5 Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mill. EEK 1, Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

40 4 Economic survey of Estonia 29 Fjodor Berman: We aim to be stronger than ever after the crisis Fjodor Berman, Chairman of Board of BLRT Group is glad that the group earned a profit in 29 regardless of the falling sales. The company has extensive plans for the coming years and aims to be stronger than ever after the crisis. as gaining the contracts shows that our quality is trusted and we are held in high esteem. What was the year 29 like for BLRT? Which objectives did you meet and which not and why? Our initial plan was to keep the sales figures of 29 at the level of 28. However, the trends prevalent at the beginning of the year forced us to review the budgets of our affiliates to balance costs with the dropping output volumes. The price decline for ship repair and metal sales was higher than expected, while metal structures output and ship building grew by more than 4. Many enterprises had their 29 results on the level of 28, some showed even better figures but some were worse. In total, yearly sales dropped by almost 18. In spite of that we managed to have a profit by the end of the year. Was 29 for you a year of continuation of the crisis or of emerging from the crisis? 29 was most certainly not a year of emerging from the crisis. It was rather a year when the crisis began. 28, on the other hand, was the most successful year in BLRT s history. Even 21 will not be the beginning of a new rise, although markets begin to recover and BRLT s results will be better than last year. Photo: private collection How have changes in the labour market affected your company? BLRT has not been forced to make extensive workforce cuts in relation to the economic crisis. We have even created new jobs in some areas. Labour market changes are positive for us. For years, our greatest problem has been lack of qualified labour both workers and engineers. The situation became especially difficult during the years of economic boom when wage growth was far ahead of productivity growth. Today s trends bring back many talented Estonian experts from the Scandinavian countries. We have employed some highly qualified and experienced staff whose contribution to our energy and infrastructure projects is of world-level quality. What were the main developments for BLRT in 29? Off-shore energy sector (offshore wind energy parks, offshore oil platforms, etc. editor) became our main strategic focus. This sector has continued to grow globally in spite of the general recession. The same is true for Estonia. This production branch showed growth last year and continues to grow this year. The construction of the most expensive wind energy service vessel WindLift 1 was completed. With the help of this vessel wind energy parks are erected in the coastal seas of Germany. In addition to special vessels we also build structures for offshore wind turbines and oil and gas platforms. Quality requirements are extremely strict because structures have to stand in extreme open sea conditions for years. Our other important branch of activities is participation in attractive infrastructure projects in Scandinavia. A metro tunnel in Stockholm and a bridge structure in Denmark can be mentioned here. We are proud of winning these public procurements What challenges will you face in 21 and 211? We expect a downturn in sales in 21 by a couple of percent but hope to earn a more than twofold profit. To achieve this, we have continued to invest in technology and process efficiency increase regardless of the economic crisis. We have signed a couple of building contracts for ro-ro ferries, comprising the construction of more than five ferries for companies in Scandinavia. We also have contracts for extensive ship reconstruction or conversion for Dutch, Russian and Norwegian ship-owners. We will further develop the fields related to energy and infrastructure. The economic recession has shown us the weakest links of the group, thus we also plan some restructuring. We intend to be stronger than before when emerging from the crisis. Ministry of Economic Affairs and Communications Ministry of Finance 21

41 Economic survey of Estonia Ministry of Economic Affairs and Communications Ministry of Finance 21

42 42 Economic survey of Estonia 29 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 five years sales revenues have grown by almost a half. Employment has grown by one fifth during the same period. The sector has strong orientation on export markets; most of the larger enterprises are based on foreign capital. About 2 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 two sub-branches. Ericsson Eesti AS (since the second half of 29, produces mobile communications equipment), Enics Eesti AS (electronic parts for industrial and medical equipment), Scanfil OÜ (electronics equipment) and AS Ordi, the largest computer manufacturer, are the larger enterprises in the computer, electronic and optical appliances 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 (electric motors and parts), AS Draka Keila Cables (aluminium cables), a related company to AS Harju Elekter group, and Ensto Ensek AS (power distribution and control equipment). The economic downturn continuing in 29 had a significant effect also on the manufacture of electrical appliances and optical instruments. By now, however, prospects for the future are more optimistic. Companies are expanding their production and recruit new people. Sector's share in Estonian economy In 29, the strong downward trend in output 1 1 and sales continued in manufacture of electrical 8 8 appliances and optical instruments, the main 6 reason being low external demand. Enterprises 81,7 89,4 6 had to restructure their production, resulting in the reduction of workforce value added man. exports mill. EEK 14, 12, 1, 8, 6, 4, 2, 12. Share of exports in man. sales employment Ratio to average wage * 29* Sales Exports Change in sales (r.s.) Change in exports (r.s.) Sales and exports Sales growth by sub-branches* Production of computers, electronic devices and optical instruments, *initial In 29, sales in manufacture of electrical appliances and optical instruments dropped by 17 compared to 28. Exports fell by a quarter due to the rapid deepening of the global economic crisis. Due to the high importance of exports for the sector, its sales depend primarily on the developments in foreign markets. The output volume of the sector at constant prices fell short of the 28 figure by one fifth. Yearly producer prices grew on the average by 4.5, their growth rate being by about one percentage point lower than a year before. In 29 the two branches (manufacture of computers, electronic and optical instruments, and manufacture of electrical appliances) each gave a half of the sector s sales. In 28 the latter branch s sales had been by three percentage points higher. In manufacture of computers, electronic and optical instruments sales dropped by 14 in 29. Exports decreased less (-9) while domestic sales fell by almost a half. However, 95 of the branch s output is sold in foreign markets. The strong downward trend in mobile equipment exports continued because Elcoteq Tallinn, experiencing financial difficulties, stopped mass production in Estonia and sold most of its production facilities to Ericsson in the middle of the year. Foreign demand showed signs of recovery at the end of the year and the branch s exports also started to grow. However, growth figures were much supported by the low comparison base of the previous year. Ministry of Economic Affairs and Communications Ministry of Finance 21

43 Economic survey of Estonia In manufacture of electrical appliances there was a much sharper decrease in sales (-29), the reason being the still prominent growth in 28. Exports dropped by more than one third, bringing share of exports in total sales down to 69 (84 in 28). All major electric appliances showed a decrease in exports: power distribution equipments, alternating current generators, insulated electric cables and frequency converters. Domestic sales of electric appliances, however, still showed a small growth, backed by continuing investments in the energy sector. In 29 the two main export markets for electric and electronic equipment were still Sweden and Finland, taking almost three quarters of the sector s exports. Exports to Sweden fell by about a third and to Finland by about a quarter in 29. Mobile communication equipment was the biggest export article for Sweden. Exports to Finland comprised mostly static converters, power distribution equipment and parts of electric motors and generators. Germany became the third target market; exports to this market even showed a slight increase. This was mainly due to the strong increase in sales of alternating current generators. Denmark fell to the fourth place exports to this country dropped by 4. Employment in the sector decreased by only one tenth in 29. Employment in manufacture of electrical appliances even grew by one tenth but the computer, electronic and optical instruments branch had to cut their workforce by one tenth. The highest number of jobs disappeared in Elcoteq Tallinn while other enterprises in the branch did not make such drastic changes in employment. Due to the structural changes that had taken place in the electric and electronic equipment sector, gross wages still showed a slight increase in 29. At the same time, productivity figures calculated on the basis of value added dropped considerably. Value added fell by one fifth during the year while labour costs stayed almost at the level of the previous year and total costs even increased to a certain extent. After a long interval, the sector s investments in fixed assets increased in 29 by a quarter. The last time the sector witnessed strong growth in investments was in 24, the year of Estonia s accession to the European Union. In the following years there was a gradual decrease in investments. Thus, the comparison base of the previous year is very low. Restructuring of production, however, brought about the need for new technology and equipment. More than half of the sector s total investments were made in equipment (growth 12) and more than a quarter in purchase of land (growth 1.8 times). Investments in computers grew the fastest but their total share was less than 1. Other investments showed a downward trend. Growth in investments was backed by manufacture of electronic equipment (growth 1.6 times) two thirds of investments were made in this branch. Investments in manufacture of electric appliances fell by about one tenth. mill. EEK Investments of entreprises * 29* Investments in fixed assets Change in investments (r.s.) Number of employed and wages 16, 14, 12, 1, 8, 6, 4, 2, * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK 4, 3, 2, 1, Finland 3 Sweden 43 Exports by countries Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) It is forecast that the sales figures of manufacture of electric and electronic equipment will grow in 21. This was confirmed by the sales and exports figures for Q1. A survey of the Estonian Institute of Economic Research made in March showed that more than half of the enterprises in the electric appliances branch forecast growth in sales for the next three months. The rest still expected declining sales volumes. In the electronic equipment branch every fourth company expected its output to grow and only about one tenth still reported a decline in volumes. A quarter of the enterprises intended to recruit more people. Ministry of Economic Affairs and Communications Ministry of Finance 21 Other 9 Germany 8 Denmark 6 China 2 USA

44 44 Economic survey of Estonia 29 Manufacture of machinery and equipment The output of machine engineering sector grew rapidly until the global economic crisis. The crisis, unfortunately, had a major effect on all manufacturers of investment goods, including manufacturers of machinery and equipment. The development of machine engineering is mostly affected by export markets since most of the output is exported. In Estonia there are almost 2 small and middle-sized machine engineering companies. The larger companies are AS Hekotek (wood processing equipment), AS Fors MW and OÜ Palmse Mehaanikakoda (timber trailers, log lifts), AS Finmec (parts of machinery) and Metos AS (commercial catering equipment). However, smaller enterprises are dominating in the sector. The larger 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 value added man. exports 74.3 Share of exports in sales mill. EEK Sector's share in Estonian economy 3.9 man. employment 11.2 Ratio to average wage (r.s.) Sales and exports * 29* Finland Germany Sweden Italy Russia Norway Sales Change in sales (r.s.) Exports by main target countries Exports Change in exports (r.s.) The economic crisis was accompanied by a sharp decline in orders for machine engineering, resulting in a significant decrease in the number of employed. Compared to other industries, companies of this sector were considerably more pessimistic about their current situation and prospects at the beginning of 21. Manufacture of machinery and equipment was one of the sectors most affected by the economic crisis at the beginning of 29. Output volumes fell by almost a half and the same decline was witnessed in domestic and foreign sales. Companies were forced to considerably restrict their investments due to the global crisis, which in its turn had an effect on machine engineering in all Europe. Output figures showed a slight increase by the end of 29 but still lagged prominently compared to the so-called regular figures. Producer prices stayed rather stable regardless of a sharp decline in demand. Prices only fell by 1 on the average compared to 28. However, the downward trend took a somewhat deeper turn in the second half-year. The main export articles of machine engineering are lifting and loading equipment and their parts. Exports of these products fell by a third in 29. Exports to Finland were affected the most but sales to other export countries also decreased. Only exports to Germany showed a different trend sales of lifting and handling equipment increased. For some other products, though, sales to this foreign market decreased as well. The employment rate in this sector continued to decline throughout the year, the reason being the difficult economic situation. The number of employed dropped by one fifth. Contrary to other industries wages continued to decrease at the end of the year and the yearly reduction in labour costs per employed was on the average 9. Revenues decreased more than cost-cutting in each quarter, as a result of which only Q4 resulted on the profit side. Labour productivity figures also stayed low, showing a decrease by about one quarter compared to 28. Ministry of Economic Affairs and Communications Ministry of Finance 21

45 Economic survey of Estonia Although 29 was a very difficult year for this sector, it still managed to increase its investments. It was mainly due to purchase of buildings and facilities, construction and reconstruction all this comprised one third of the investments. Many investments were made also in machinery and equipment. The companies were rather pessimistic about the economic situation and did not have much hope as regards future developments. The survey made by the Estonian Institute of Economic Research at the end of 29 and the beginning of 21 showed that although there were some expectations as regards improvement in output volumes and orders, the general situation was estimated to be significantly worse than usual. The share of companies waiting for stabilisation of prices and workforce had grown. Compared to other industries, these signs refer to a slower and later recovery. 16, 14, 12, 1, 8, 6, 4, 2, Number of employed and wages * 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK 1,8 1,6 1,4 1,2 1, Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mill. EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

46 46 Economic survey of Estonia 29 Manufacture of transport equipment Manufacture of transport equipment depends mainly on foreign demand since exports constitutes most of the sales of the sector. The increased exports and domestic market sales expanded output and promoted the recruitment of new employees until 29. Although the productivity of this sector is rather high it is still about three times lower than in Finland. There are over 1 manufacturers of transport equipment in Estonia. The largest enterprises are AS Norma (safety belts), PKC Eesti AS (cables for car ), Stoneridge Electronics AS (electronic equipment for car ), AS Respo Haagised and AS Bestnet (trailers), OÜ Tarmetec (car accessories), Universal Industries OÜ (exhaust systems), Baltic Woodboats AS (aluminium boats), AS Luksusjaht (plastic yachts and speedboats). Many shipbuilding and repair companies are also categorised under the activity of machinery and equipment repair, e.g. BLRT Grupp AS and its affiliates. The largest companies are concentrated in Tallinn and Harju County, but are also located in Tartu, Ida-Viru and Saare counties. Long-term forecasts show that sales will be promoted by exports while domestic sales will have a more modest role. 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; moreover, the competes for labour with other sectors. In short-term, though, due to the economic crisis, finding workforce will not be that difficult. Sector's share in Estonian economy Similar to many industries the economic crisis 1 1 brought about a decline in demand in manufacture of transport equipment Investments and workforce were reduced due to 4 4 the difficult situation. The situation improved to 2 a certain extent during the second half-year of value added man. exports Share of exports in sales man. employment Ratio to avarage wage mill. EEK Sales and exports * 29* Sweden Finland Norway Russia Belgium Latvia Sales Change in sales (r.s.) Export by main target countries Exports Change in exports (r.s.) Car output showed a significant decline as a result of the economic crisis, affecting also enterprises in Estonia. The situation improved in the second half-year but yearly production of motor vehicles and their parts and other means of transport fell by one third. Sales in the domestic market plummeted and exports also fell by tens of percent. The decreased sales of parts of motor vehicles (by 4) had the most serious effect on export volumes. Exports of trailers also fell significantly (by 3). Considering general market developments, exports of vessels and floating structures was somewhat more stable but did not completely escape a decrease in demand. Exports to Russia and Sweden dropped noticeably less need for vehicle safety equipment components due to the decreased manufacture of cars played an essential role here. However, exports to Belgium increased due to higher sales of safety belts. In manufacture of motor vehicles and other means of transport the number of employed fell by one fifth in 29. Many had to work part-time. Companies cut their costs but not as fast as their revenues diminished. Companies showed losses in Q1 but were 7 Manufacture of transport equipment is manufacture of motor vehicles, trailers and semitrailers (NACE 29) and other means of transportation, such as ships and boats and railway rolling stock (NACE 3). Due to changes in the statistical classification of economic activities, the larger shipbuilding and repair companies are shown under repair and installation of machinery and equipment (NACE 33). Ministry of Economic Affairs and Communications Ministry of Finance 21

47 Economic survey of Estonia then able to earn a profit and, thus, yearly results showed a slight profit. Labour and costs productivity figures were, however, worse than in 28. Investments in manufacture of means of transport fell almost twofold. Investments fell in manufacture of motor vehicles, trailers and other means of transport. Investment activity grew slightly towards the end of the year. Investments decreased in respect of all main investment fields. 6 of the investments were made in machinery and equipment. It is expected that output of manufacture of means of transport will grow in 21. Growth figures may be especially prominent during the first half-year due to the very low comparison base a year ago. Main export commodity groups Motor vehicle parts and accessories 41.1 Goods of Estonian origin Other 17.9 Trailers and semitrailers 21.8 Floating structures 7.4 Yachts and boats 8.1 Railway tanks , 12, 1, 8, 6, 4, 2, Number of employed and wages * 28* 29* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) mill. EEK 1,6 1,4 1,2 1, Value added, labour costs and productivity * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) mill. EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Ministry of Economic Affairs and Communications Ministry of Finance 21

48 48 Economic survey of Estonia 29 Ministry of Economic Affairs and Communications Ministry of Finance 21 Furniture In Estonia over 48 enterprises engage in furniture manufacture. In 29, output figures at constant prices fell to the lowest level of the last ten years. The recession in the domestic market has gradually made exports more important its share in total sales is now more than three thirds. The workforce of the sector has diminished in the last years and is now barely three thirds of the highest employment rate some years ago. There is no more room for such extensive labour cuts in the future and it is expected that the employment rate will stabilise. The larger companies in the furniture sector by their number of employees are located in Harju county and in SE- Estonia. In 29, AS Standard (office furniture), AS Bellus Furnitur (soft furniture), Flexa Eesti AS (manufacture of parts of furniture), and Valga GOMAB Mööbel AS (solid wood furniture) were the s largest companies. 1 Sector's share in Estonian economy 1 A downward trend in furniture became more prominent in 29. Companies focusing on foreign markets did not suffer as much as those selling in the domestic market. The number of 6 6 employed fell as well, accompanying the decline 4 4 in sales. 2.6 value added 5.4 man. exports Share of exports in sales UK Germany Norway Denmark Sweden Finland 6.7 man. employment Exports target countries Ratio to avarage wage mill. EEK Sales and exports 6, 1 5, 5 4, -5 3, -1 2, , * 29* Sales Change in sales (r.s.) 2 Exports Change in exports (r.s.) Sales of furniture fell by more than a quarter compared to 28. At constant prices the decline was by a couple of percentage points smaller. Domestic market was especially weak, plummeting by more than 4. Such extensive lack of domestic sales has forced companies to focus more on exports. The difficult economic situation has been an incentive for furniture companies to find cooperation opportunities. They participate actively in cluster programmes and try to enter foreign markets together. However, in order to increase output volumes more innovation is needed. The last innovation survey among enterprises showed that furniture ranked about the Estonian average as regards product innovation but was below the average in process innovation. When the advantage of cheap labour disappears, it would be necessary to streamline the processes even more in order to raise competitiveness. Foreign markets and their behaviour are extremely important for furniture. More than three quarters of the output is exported and the volume has grown over years. However, the number of target markets has almost stayed the same. Almost two thirds of the production is exported to Finland and Sweden, thus the is relatively vulnerable as regards developments in these countries. Seats are the main export articles, comprising more than two fifths of the sector s exports. Furniture s wage decline was by some percentage points higher than in other sectors. In addition, workforce continued to decline at the same rate, decreasing by almost 15. Reduction of labour costs, however, had a positive impact on productivity whose yearly indicators mostly showed an increase. Net profits of the sector also rose by some percentage points. Investments in fixed assets dropped fast in 29. Decreased availability of credit and lack of need for production capacity expansion have resulted in a tenfold decrease in investments compared to the boom in 27. More than 8 of the low amount of

49 Economic survey of Estonia investments made were made in machinery and equipment. A survey of the Estonian Institute of Economic Research showed that furniture manufacturers and enterprises manufacturing products not classified elsewhere were more positive about short-term output volumes and export orders growth at the beginning of 21 than a year before. None of the companies planned to cut workforce. Low demand was seen as the main obstacle to expansion of production. mill. EEK Value added, labour costs and productivity 2,5 1 2, 1,5 1, * 29* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Including production not classified elsewhere mill. EEK Investments of enterprises * 29* Investments in fixed assets Change in investments (r.s.) Main export commodity groups Wooden bedroom furniture 7 Other furniture 25 Seats 46 Dining and living room furniture 9 Goods of Estonian origin 14, 12, 1, 8, 6, 4, 2, Furniture parts 13 Number of employed and wages * 29* 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 21

50 5 Economic survey of Estonia 29 Ministry of Economic Affairs and Communications Ministry of Finance 21 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 the economic environment. In good times, construction volumes grow fast, and in bad times, they may considerably diminish. Similar to the 1999 recession which had a substantial effect on the construction market (mainly due to a decline in the construction of office buildings), the last couple of years have been very hard on the construction sector and its related fields (planning, architecture, design, real estate). Construction of facilities has also declined in volume and, as a result of the diminished revenue, local authorities are not any more able to implement investment projects to the extent of previous years. However, lower demand has made construction cheaper. More than 8, construction enterprises operated in Estonia in 28 and over 8 of them were small, employing fewer than ten people. The larger general construction companies are Skanska EMV AS, AS Merko Ehitus, AS YIT Ehitus, AS Nordecon International and AS Koger & Parterid. In road building, Teede REV-2, AS Nordecon Infra (belonging to AS Nordecon International group) and AS Talter are the main contributors. Forecasts show that slow 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 be significantly lower than those of the construction boom years value added Sector's share in Estonian economy employment 98.1 Ratio to average wage Construction sector developments * 29* Construction price index (left scale) Buildings construction volume index (r.s.) Facilities construction volume index (r.s.) 1, 8, 6, 4, 2, 1 Number of employed and wages * 29* Employed (labour force survey) Number of employed (enterprise statistics) Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) In 29, most economic indicators took a deep downturn in the construction sector. The growth period had been replaced by a recession, the reasons being global economic cool-off, financial sector crisis and a steep downward trend in demand in the domestic market. There was a decline in construction volumes, prices and the number of orders. Companies had to make significant cuts in investments, labour and wages. Housing construction market collapsed the most, followed by the non-residential market. Construction market for facilities was more stable without major ups and downs and more or less stayed on the 28 level. Related to the developments in the construction market, the confidence of construction companies was still low at the end of 29. In 29, construction sector s indicators had reached their lowest level compared to previous years. Nevertheless, Estonian construction companies were able to perform construction works for the total of 37.2 billion kroons. This figure can be compared with the figures of 25. Construction works volume dropped by one third compared to 28 and by 4 compared to 27. Using their own staff, construction companies built for only 23.5 billion kroons; for the rest subcontracting was used. In 29 the value of buildings erected in Estonia using companies own staff was 4.9 billion kroons, the figure being by 37 lower than in 28. Compared to 28 figures had dropped by one third for buildings and by 16 for facilities. Construction activities outside Estonia grew by 6 in 28, comprising 6 of total construction works. Preliminary statistical data show that, regardless of the significant decline in construction volumes, 6,73 companies continued to operate in the Estonian construction market in 29, providing employment to 58,3 people (according to the Labour Force Survey). The number of employed in this sector dropped by 28 compared to 28 and was slightly lower than the respective figure in 26. Cuts both in

51 Economic survey of Estonia workforce and wages were made in 29. Average wage diminished by 13, reaching the wage level of the transport and storage sector. The total profit of construction companies fell by 91 compared to 28 and value added decreased by 45. Companies made cuts in all main cost articles, including investments, as a result of which investments in fixed assets fell by almost 41 by the end of 29. However, purchase and construction of buildings and facilities for companies own purpose continued, and investments made in purchase of land grew. Investments in machinery and equipment dropped the most. Construction prices started to decrease in the first half-year of 29 for the first time during the last ten years, dropping by 9 by the end of the year (compared to 28) and reaching the level of the 26 price index. The decline in construction prices was caused by all price components but reduced wages and labour cuts had the strongest influence, as a result of which yearly labour costs fell by 16. The price of building materials decreased by 6 and that of construction machinery services by 4. The Estonian construction sector, especially in terms of buildings and facilities to be built and given into use, was affected by changes in several conditions that had developed in the course of years. Due to the descent of Euribor housing loan interest rates have fallen from 6.8 to 4, but banks have made their conditions for issuing construction and housing loans considerably stricter. In addition, demand fell significantly, primarily due to the situation in the labour market and declining or totally disappearing households real income. Planning and construction of new facilities and taking into use of facilities under reconstruction was inhibited by the decreasing budgets of the public sector, first of all of local authorities. They were no more able to provide the same amount of own financing to projects financed by European Union funds as before. As a result, 4,812 construction permits were issued in 29, falling short by 3,729 permits compared to 28. The number of permits for use issued for residential buildings and for non-residential buildings fell by 43 and 2, respectively. 2,65 permits were issued for the construction of new residential buildings in 29, which is by 62 less than in 28 and by 635 permits more than in 21. Thus, in addition to the residential space already planned on the basis of construction permits issued earlier, only 271,5 m 2 of new residential space will be built in the near future. mill. EEK 5, 4, 3, 2, 1, mill. EEK 3, 2,5 2, 1,5 1, * 29* Construction works with own staff * 29* Construction works abroad Construction works in Estonia (current prices) Construction works in Estonia, Investments of enterprises Investments in fixed assets Change in investments (r.s.) Housing loan interests and residential space given into use * 29* Area of residential space given into use Loan interest to private persons Source: Bank of Estonia, Statistical Office of Estonia 6 th m Labour costs productivity * 29* Labour costs productivity based on value added Change in productivity (r.s.) Due to the diminishing number of construction permits since 27, the declining payment capacity of inhabitants and stabilisation of real estate prices only 3,1 new residential premises were given into use in 29, their total area amounting to 34, m 2. The average area of the residential premises given into use Ministry of Economic Affairs and Communications Ministry of Finance 21

52 52 Economic survey of Estonia 29 in 29 was higher than in 28 and exceeded 1 m 2, indicating improvement of living conditions in new residential buildings. Construction permits were primarily issued to private persons and companies for residential space in 6-8-storey apartment houses and private houses. Moreover, 136 new municipal rental housing units were given into use, which is by 85 units more than the total of 27 and 28 combined. The number of construction permits issued for nonresidential buildings started to fall in 29 (this figure had still grown in 28) and stayed on the level of The number of construction permits issued in 29 was 2,747, enabling to build 818, m 2 of non-residential space. However, the area and space of the non-residential buildings planned to be constructed in 29 were both smaller compared to 28, by 37 and 39, respectively. The largest number of construction permits was issued for the construction of accommodation and commercial buildings. Regionally, the largest number of permits was issued in Harju, Tartu, Pärnu and Ida- Viru counties. The total of 971 non-residential buildings were given into use in 29, their area totalling 91,4 m 2 and space 53, m 3. The number of non-residential buildings given into use fell by 24 buildings compared to 28. The largest part of non-residential buildings allowed to be given into use comprised of buildings of various purposes, i.e. other non-residential buildings, as well as commercial and catering buildings and industrial buildings. Among regions, newly completed nonresidential buildings were the most numerous in Harju and Ida-Viru counties. Similar to previous years the number of construction permits issued for facilities increased in 29. By the data of the Estonian Register of Buildings 384 new permits for construction were issued in 29, by 44 permits more than in 28. The largest number of permits for the approval of building plans of new infrastructure facilities were issued in Harju county (67), Tartu country (32) and Ida-Viru county (32). Most permits were given to build national roads, streets, local roads and water pipes. Permits were also issued to build 55 new railway facilities. 217 new facilities were given into use in 29, by 2 facilities less than in 28, and they included mostly water and sewage pipes and communication and power lines. According to the surveys made by the Estonian Institute of Economic Research, the confidence level and expectations of Estonian construction companies were low at the end of 29 but somewhat more optimistic than at the same time in 28. Most companies considered diminishing demand and the resulting decrease in orders and construction volumes to be the major factor hindering construction activities. More than half of the construction enterprises intended to cut their workforce. They also plan to lower the prices but not as much as in 29. Peeter Vilipuu, Chairman of the Supervisory Board of AS TREV-2 Grupp, says that the economic crisis affected in 29 both the socalled old road builders and the companies who were forced to shift from general construction to road building due to their difficult financial situation. The market continues to be tight in spring 21 because the general construction market is still in a standstill. Only the state as the main client for construction works would be able to lower the risks of construction companies. What was the year 29 like for TREV-2 Grupp? Which objectives did you meet and which not and why? 29 was a year when all construction companies had to make difficult decisions. This applies to our affiliates and the group as a whole. Adjusting the company s strategy, and the seminars and trainings conducted for that purpose enabled us to understand our problems and hopefully gave an impetus for internal development. Peeter Vilipuu: The market is still tight The turnover of the group amounted to almost 9 million kroons in 29. This is less than in the boom years but can be considered a good result in the light of today s reality. It is difficult to make a profit under the conditions of a declining market and competing for public procurement contracts where only one condition the lowest price determines the result of the selection procedure. We did not succeed in gaining much profit in 29. On the positive side meeting the expectations of our clients in all our construction projects may be noted. At the construction of the Koidula railway juncture we gave over new track beds with bridges and viaducts to Riigi Kinnisvara AS in a timely manner. Unfortunately, the same site also posed us the highest technical and financial risks. We hope not to find us in a similar situation this year. For your group, was 29 a year for continuation of the crisis or emerging from the crisis? 29 was a year when local authorities reduced their orders or stopped them completely. The forced shift Ministry of Economic Affairs and Communications Ministry of Finance 21

53 Economic survey of Estonia of general constructors to road building made competition even tighter. Thus, the crisis was tough for everybody. What were the main developments in road building in 29? Being true to the vision to shape construction visions the companies of AS TREV-2 Grupp have always tried to find innovative solutions. Taking into use new technologies in surfacing and earthworks was the most significant step last year. Introduction of the so-called slurry seal technology enables us to reduce the risk of appearance of loose crushed stone in our roads and streets in spring, or even the need to resurface a stretch. The Koidula site where we had to remove more than a million cubic meters of earth during a short time period, could not have been completed timely without the help of 3D automatic equipment. These devices provide essential help to our earthwork and asphalt works and geodetic tasks. How have changes in the labour market affected your company? It is now easier to recruit and to strengthen the existing team. Photo: private collection What are the goals and plans of TREV-2 Grupp for this year? Our vision is to build an environment which one would be proud to live in. We wish to continue in road and railway building, general construction and environmental construction. For us it is important that we can take pride in the buildings and facilities we have erected, also in many years. Thus, we are open to internal and external development. Time will show how much our economic environment will contribute to this goal. What challenges will road building companies face in 21 and 211? Do you expect any transfers, mergers or acquisitions? In addition to the weakness of the market there are technical and financial risks, all of which still have to be borne by entrepreneurs. Our company engages also in road maintenance and operates under long-term contracts. The contracts are related to the construction price index which unfortunately does not reflect the prices of road works and materials. Moreover, after decades, this winter surprised us with the so-called "snow risk". Our other risk is that road construction and repair sites depend on the global prices of materials (oil products and crushed stone). All of these risks may be reduced or eliminated if the state as the principal client for road maintenance would care more about its entrepreneurs. It is a tradition in the Nordic countries but not yet here. The market is still difficult as the general construction market is still in a standstill. The capacities of Estonian road builders and neighbours exceed the capacity of the market. Transfers, mergers and acquisitions of companies are normal processes which take place all the time in every corner of the world. Ministry of Economic Affairs and Communications Ministry of Finance 21

54 54 Economic survey of Estonia 29 Ministry of Economic Affairs and Communications Ministry of Finance 21 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 gives 14 of the total value added and more than 8, people work there. The economic crisis has affected this sector as well more than 1, jobs disappeared and sales figures have dropped to the level seen several years ago. Building of new commercial space has slowed down and chains are more careful about expansion. The larger 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 due to the general decrease in profit margins and cost-cutting. Thus, the number of small shops has dropped. Next years should be more stable for the commercial sector. When economic growth is restored, domestic consumption will also gradually grow. However, reaching the volumes of 27 will take some time. Expansion will be moderate and investments will be carefully considered. Sector's share in Estonian economy 29 saw a further decrease in sales compared to 28. Unemployment rate grew and the purchase 1 power of the inhabitants dropped. Retail sales fell by 16 in 29 and the sales revenues of companies dropped by almost one fifth ,7 14. value added employment th Number of employed Ratio to average wage * Number of employed by labour survey Number of employed by enterprise statistics 14, 12, 1, 8, 6, 4, 2, Wages * 29* Average wage (kroons) Wage real growth (r.s.) The Estonian retail trade is increasingly concentrated in the hands of a few larger chains. In 29 most of the retail sales of unspecialised food outlets was given by the five larger food outlet chains: Selver, Maxima, ETK group, Rimi (incl. Säästumarket) and Prisma. The market situation will most probably not change much in was generally a poor year for the commercial sector. A stable decline continued throughout the year it can be understood considering macroeconomic developments. Unemployment rate skyrocketed and wages were cut in many companies. The economic situation made people careful. They preferred to save money instead of spending it and larger purchases were postponed. The sums on the accounts of Estonian residents increased, pointing to the existence of reserves to increase consumption. The economic recession also had a substantial effect on the addition of new commercial space. In total, the number of commercial and catering buildings given into use in 29 dropped by 18. Useful floor space has diminished as well by more than two times. More than one third of the buildings and three fourths of the useful floor space were built in Harju county. Construction activity was much slower in other parts of Estonia. In addition to stopping expansion, outlet chains tried to find other possibilities to cope with the changed economic situation. Evening opening times were reduced and wages were cut. Also, products made under the chain s own trademark have gained popularity. Selver and Rimi are the flagships here. However, it will take time until the Estonian consumers get used to this concept. The number of employees in the sector decreased in 29, dropping by more than one tenth. The decreasing sales volumes forced traders to optimise the workforce. Labour cuts were the smallest in companies employing 1-9 people. In companies

55 Economic survey of Estonia employing 2-49 people workforce decreased by more than 17. Wages diminished as well. These factors jointly helped to cut labour costs by almost 15 but it was not enough to retain productivity, thus there was a decrease in labour cost productivity and total productivity. Economic difficulties have also prolonged the selling periods of stock. The average selling period of stock grew by 3.5 days in 29, reaching 49.5 days. In the period this indicator was constantly under 4 days. Retail trade 29 was a rather difficult year for retail trade enterprises. Sales volumes at constant prices fell by almost 16. Sales revenues dropped even faster. Total retail sales amounted to 57.9 billion kroons in 29. Of this, 54.9 billion kroons were attributable to retail trade companies and the rest to car sellers. Yearly sales figures dropped by more than 1 billion kroons. All commodity groups showed a decline. Sales of household items, home appliances, ironware and building materials diminished considerably, by almost a quarter. This group gives more than one tenth of total retail sales, having thus considerable influence on the total figures. More than half of the retail trade is comprised by sales of foodstuffs in specialised outlets or unspecialised outlets where foodstuffs are prevalent. Yearly sales volumes dropped by slightly more than 8 there. Cost-cutting was not as extensive as the decrease in sales revenues, thus productivity indicators started to move downwards. The decline in sales revenues was by a couple of percentage points greater than the reduction of total costs. Hourly productivity fell by almost a quarter. The number of hours worked diminished by one tenth. Investments in retail trade dropped at the same pace as in the rest of the commercial sector. Investments in machinery and equipment were the largest almost 5 of all investments. All investment fields suffered from a fast decline, only purchase of land stayed at the level of 28. It is expected that 21 will bring stabilisation and sales volumes will at least stay at the level of 29. The raising confidence level of the inhabitants and stabilisation of the labour market will give courage to the population to increase consumption. Value added, labour costs and productivity mill. EEK * 29* Value added Labour costs Labour productivity growth (r.s.) Labour costs productivity growth (r.s.) 3 mill. EEK Investments of enterprises 1, 3 8, 15 6, -15 4, -3 2, * 29* Investments in fixed assets Change in investments (r.s.) Other products 35.2 Retail sale by commodity groups Motor vehicles and parts, motor fuel 12 Wearing apparel, textiles, footwear 9.2 th EEK 18, 15, 12, 9, 6, 3, Foodstuffs 31.6 Alcoholic drinks, tobacco products Turnover at current prices * 29* Retail sale Vehicles sales Wholesale Change in sales of retail enterprises (r.s) Change in sales of motor vehicles and fuel enterprises (r.s.) Change in wholesale companies sales (r.s) Ministry of Economic Affairs and Communications Ministry of Finance 21

56 56 Economic survey of Estonia 29 Kati Kusmin: It turned out to be important to create value for the customer Kati Kusmin, Chairman of Board of the Central Society of Estonian Consumers Co-operatives (ETK) says that commercial companies had to seriously focus on creating value for the customers in 29. What was the year 29 like for ETK? Which objectives were met and which not and why? Similar to many other retail businesses, 29 was a year of adjusting to the changed economic environment also for ETK. Our main challenge was to retain efficiency when sales revenues went down. We almost reached this objective in the ETK group. The number of ETK group outlets decreased by ten in 29 and we had 367 outlets at the end of 29. We also continued to develop chains, thus eight Konsum outlets and six A ja O outlets were opened.. The selling space of Konsum outlets grew by 12 and that of A ja O chain by 1. ETK group was the leader in the Estonian market, its market share being Our net turnover amounted to 5.76 billion kroons in 29, by one sixth less than in 28 (it was 6.86 billion kroons in 28). Konsum gives the largest share of the turnover. We continued to develop our private label products under the Säästu trademark last year. We can already offer almost one hundred private label products. Was 29 a year for continuation of the crisis or emerging from the crisis for you? It was still a year when the crisis continued but our efforts were concentrated on coping with it and emerging from it successfully. Since ETK group s outlets are mainly located in county and rural municipality centres, we saw that the crisis arrived in rural areas somewhat later than in cities. Current developments show that rural areas will emerge from the crisis later. However, the positive effect of the economic crisis lies in the fact that it forced ETK and many other enterprises to pay much more attention to efficiency and to dedicate themselves to creating value for the customer. Photo: private collection What were the main developments affecting domestic trade in 29? 29 was characterised by a sharp increase in unemployment rate, decreasing income, weaker confidence of the consumers. Even if some people have reserves, they rather keep them in the bank and do not use for making purchases. Tightening competition in domestic trade and greater importance of the price element for the consumer are also essential factors. People bought less and cheaper. The first half-year of 29 saw extensive discount sales when outlets tried to sell their stocks which had piled due to the decrease in consumption. Investments to build new outlets practically came to a standstill and only pending projects were completed. Investments in renovation of outlets also decreased. I should also mention the increase in the VAT rate in the middle of the year. The time given to businesses to apply the new rate was unreasonably short, and, due to the tight competition situation, the increase in the rate was mostly covered by the companies themselves. Thus, the effect on the consumers was quite small. Ministry of Economic Affairs and Communications Ministry of Finance 21