ESTONIA CONSOLIDATED ANNUAL REPORT OF THE STATE FOR 2019 1. Management report The management report comprises the general economic indicators of the state (section 1.1) and the financial indicators of public sector and general government (section 1.2). Information on the general government staff indicators, the achieve- ment of the goals set in the government sector action plans and the state’s internal control systems is available in the Esto- nian version of the report. 1.1 General economic indicators of the state Over the past few years, the Estonian economy has % Annual domestic demand growth been in a good state in terms of employment, revenue 60 and export capacity. Economic growth has been a pos- 40 itive surprise, averaging 5% over the past three years. Regardless of the rapid growth, the Estonian economy 20 should not experience any material internal imbal- ances. 0 In 2019, actual economic growth slowed to 4.3%, and -20 7.7% at current prices. Business confidence indicators -40 weakened mid last year in both Estonia and partnering 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 countries. Behind this trend was the slowing interna- Annual private consumption growth tional trade and the deepening uncertainty in eco- nomic policy, which inevitably trickled through to our Source: Statistics Estonia Annual investment growth economy. As a result of a decrease in foreign demand, export growth experienced a downturn in the final % Annual GDP growth quarter. The main domestic demand components expe- 15 rienced slower growth in the second half of the year. In the fourth quarter, economic growth due to net taxes 10 on products was a strong 3.9%, whereas the value- added at whole economy level only increased by 2.6%. 5 Throughout the year, the growth of value-added was driven by industries targeted primarily at internal con- 0 sumption, in particular, information and communica- -5 tion, trade and professional and technology activity, contributing a total of 2.6 points. The manufacturing -10 industry also had a strong impact, even though its value-added growth dropped in the last quarter to- -15 gether with a decrease in exports. Economic growth was also supported by the rapid growth in the agricul- -20 tural sector. The greatest negative impact was experi- 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 enced by the energy sector due to the decrease in the competitiveness of oil shale power. Annual GDP growth in EU Annual GDP growth in Estonia Domestic demand in 2019 increased at the fastest Source: Statistics Estonia rate over the past seven years, by 5.4%, and the share of domestic demand increased to 96.8% of GDP. The rate of investment growth over the past years has Growth in Private consumption has been rapid over been volatile. After marginal growth in 2018, last year, the past eight years, amounting to nearly 4% annually. investment growth increased to 10.3%. The increase At the same time, the purchasing power of employment in investment activity was led by companies and income has increased even faster, over 6%. In addition households where growth exceeded 17%. Government to the fast improvement of standard of living, the eco- sector investments witnessed a slight drop primarily nomic conditions have been favourable towards the in- due to the decreased expenditure on defence-related crease in savings. In 2019, consumer confidence re- non-current assets. Capital injections into buildings mained relatively strong and the rapid wage growth at- and civil engineering works of the greatest relative im- tributed to a labour shortage continued. Regardless, portance have remained stable over the past two years. private consumption in 2019 slowed to 3.2%. The year witnessed a slowdown in the consumption of durables Despite the cooling external environment and prevail- and services in particular. Purchases of furnishings, lei- ing uncertainty over the future, the growth of invest- sure goods and vehicles increased dramatically. Apart ments by companies last year was broad-based, show- from services, an increase in the consumption of ac- ing a powerful increase in investment into transport commodation and communication services can be and property in particular. At the same time, the order highlighted. According to the latest data from 2018, Es- portfolio began to deteriorate while existing produc- tonian households saved 12% of their disposable in- tion capacities were adequate. Against this backdrop, come, which corresponds to the average of the Euro- the increase in company investments may have been zone and is significantly more than expected from our temporary. Household investments were kept high by level of wealth. At the same time, the high savings rate a strong sense of confidence and the labour market, indicates a good level of preparedness for a potential which favoured the purchase of new property. The pro- future economic crisis. portion of investments in the GDP in 2019 was the highest over the past six years (26%) but it is probably 2 not going to rise to pre-crisis levels (35%). The compa- last year, while the prices of recreational, housing and nies’ additional needs for capital-intensive buildings health care services showed faster growth. The cooling are lower. of the global economy and trade tensions resulted in In the context of material deceleration of global trade lower oil prices in the second half of the year, causing a and the low level of PMI indexes in the industrial sector slight decline in fuel prices in the domestic market as over the past few years, the export developments of Es- well. To boot, the price of electricity stabilised after the tonia and our significant trade partners remained ra- peak high level a year earlier which was caused by un- ther strong. Regardless of the slowdown in the growth favourable weather conditions. of external demand (2.2%), the export growth of Es- Food prices rose by 3% in 2019, which is comparable tonian goods and services picked up speed in 2019 to the long-term average increase in food prices. The (5.2%). Consequently, despite the cost pressure caused increase in local food prices were mainly attributed to by wage growth, the market share of exports continued higher prices of horticultural and bread products, and to grow in external markets. Goods and services both in the autumn, the rise in meat prices began to acceler- contributed to export growth. Growth in the services ate due to increased import to China. As traders sold sector was primarily supported by the rapid growth of stocks accumulated at a higher rate of excise duty, the the export turnover of information and communication 25% reduction in excise duty on spirits, beer and cider and business services. The success of the IT field on ex- on 1 July gradually affected the prices. As a result, spir- ternal markets has allowed the sector’s exports to dou- its became cheaper by almost 12% and beer by 8%. ble over the past four years. % error Consumer Price Index (CPI) in Estonia and For goods of an Estonian origin, growth was fuelled by 12 eurozone an increase in the export capacity of foodstuffs, me- 9 chanical machinery, and optical devices. The contrac- tion in demand on external markets brought the export 6 growth of traditional lines of business such as wooden 3 structures to a halt, and the demand for wooden prod- ucts decreased in the second half of the year. The fast 0 rise in the price of the carbon dioxide quota made it -3 economically impractical to produce electricity and so 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 its export was virtually non-existent last year. Of the CPI in Estonia CPI in euro zone main markets, export to the USA, Denmark, and Spain increased the most. In the US direction, exports in- Source: Statistics Estonia, Eurostat creased in various fields of activity, whereas in the case of Denmark and Spain, various fuels were the main thousand Employment and unemployment % drivers. 80 22 The import of goods and services increased by 3.9% 50 18 due to the higher number of foreign trips taken by res- 20 14 idents, the growth of outsourced construction services and the accelerated import of consumer goods and -10 10 means of transport. -40 6 Over the past few years, the current account surplus as a ratio of the GDP has amounted to nearly 2%. De- -70 2 spite the intensified investment activity, the surplus in- 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 creased to 2.8% of the GDP in 2019. The growth of ex- Change in the number of people employed ported goods accelerated, compensating for a higher Unemployment rate (scale on right) Source: Statistics Estonia domestic demand and a decrease in the trade deficit. Due to strong import of services, service surplus con- According to the labour survey, the number of em- tinued slight reduction. ployed persons increased by 1% year-on-year, and By virtue of more volatile developments in the global unemployment fell to 4.4%. The labour market situa- economy, the contribution by external factors de- tion was excellent, but at the end of the year, the creased last year and inflation decelerated to 2.3% in growth of the number of employed persons decreased, Estonia and 1.2% in the Eurozone. Price growth in ser- and registered unemployment increased slightly as the vices accelerated during the year, while the increase in economic situation cooled. Although unemployment energy prices slowed down and alcohol prices, affected was at an all-time low, it was significantly affected by by excise duty cuts, fell in the second half of the year.