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International Internet Magazine. Baltic States news & analytics Monday, 10.08.2020, 19:14

Swedbank economist: Outlook for external demand improving

BC, Tallinn, 10.07.2020.Print version
Swedbank chief economist Tonu Mertsina said that according to Statistics Estonia, the decline in exports deepened, but pointed out that the outlook for foreign demand is nevertheless improving.

According to Statistics Estonia, Estonia's exports of goods decreased by 25% and imports by 24% in May 2020 compared with the same month a year ago.

"Unfortunately, the statistics of a month and a half ago are already too distant history in the context of the current crisis and do not show the current state of the economy correctly. According to preliminary estimates, improvement of production activity in several areas of activity can already be seen in June," Mertsina said.

The exports of goods of Estonian origin decreased by 27% on year in May and in the first five months of this year, the decline is already 13%. "External demand began to weaken even before the coronavirus crisis. Exports of goods have been declining already since June last year, there was extraordinary growth only in December," the economist said.

"Imports of goods, however, fell by 24% on year in May, with 40% of the decline in imports coming from a decline in imports of inputs used in production," Mertsina said, adding that, in addition to weakened demand, the decline in exports and imports has been boosted by falling prices -- in May, export prices fell by 8% y-o-y and import prices by 9%.

Mertsina said that although exports of most commodity groups declined, they were the largest in exports of oil products, mobile communication equipment, prefabricated wooden buildings and wood products.

"The share of these four commodity groups in the decrease in exports in May was as high as 62%, including the share of oil products in the extent of 37%. Exports to the countries of the European Union, which account for 70% of our exports, fell by 27% -- including Finland by 28%, Sweden by 24% and Germany by 11% --, the United States by 34% and Russia by 3%," the economist said.

According to Swedbank's chief economist, the share of exports of the manufacturing industry, our largest commodity-exporting industry, in the revenue has decreased in the crisis months of this year --  while it was an average of 67% in 2019 and 68% in the first quarter of this year, it fell to 64% in April.

"In May, the share of manufacturing export revenue increased to 66%. At the same time, it should be taken into account that the value chain related to exports in Estonia is significantly greater than the share of the export revenue of the manufacturing industry or the share of goods in GDP with 48% indicates," Mertsina said, adding that, according to a study commissioned by the Foresight Center, 29% of Estonian companies export directly, but 80% are up to two transaction partners away from exporting.

"Thus, foreign demand affects most of the Estonian business sector," he said.

According to Mertsina, purchasing managers indexes, which characterize economic activity, have improved rapidly in the euro area since the low point in April and it reached the level of the beginning of this year in the manufacturing industry in June.

"Purchasing managers indexes have also improved in the United States and China. This indirectly indicates that the decline in external demand has bottomed out and is gradually improving. Although the outlook for industrial production volumes in Estonia improved sharply in June, the outlook for exports remained at the very low level reached already in April," the economist said.

He added that companies' assessment of export orders improved marginally and is still far from the pre-crisis period, not to mention the last peak in 2017.

"Employment in the Estonian manufacturing industry has gradually started to improve. Although it is still declining on an annual basis, then in June, it was already slightly up on a weekly basis," Mertsina said.

He pointed out that at the same time, it should be taken into account that approximately 28% of those employed in the manufacturing industry received wage compensation from the Unemployment Insurance Fund as of the beginning of July.

"Its end could deal another blow to employment in this industry if demand and prices do not improve fast enough," Swedbank's chief economist said.

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