2009 — the second year of crisis

LEEV KUUM,
Estonian Institute of Economic Research, leading researcher

The financial year proved to be harder for Estonia than anticipated in December 2008. The effect of the US-born financial crisis on the world’s economy exceeded the worst fears.

The crisis spread very quickly and drew in all of the major economic areas. What is even worse, the crisis strongly inhibited international trade. For Estonia as an export-dependent country, that meant a significant decline in gross domestic product. Estonia’s situation was made even more difficult by the fact that the global crisis was preceded by a rapid economic development here that culminated with a real estate boom just before the crisis. Also the great bank loan burden and the long-term external imbalances can be regarded as exasperating circumstances.

The big drop in added value in 2009 decreased the state’s budget revenues, the owners’ profits and the employees’ salaries. For many, the economic crisis meant losing their job. For companies, the central problem of the year was the adaptation to the catastrophically declined demand, for households, it was subsistence on decreased income, for the state, coping with a high employment rate and budget cuts.

The economic crisis forced the state and enterprisers to deal with mostly short-term (survival) issues, some of which, however, also had a more enduring positive impact. For example, the government set the goal of meeting the Maastricht criteria in 2009, which meant large cuts in the state budget. But now we know that those efforts were not in vain and Estonia is going to join the eurozone in 2011. The qualitative improvement of external balance (a positive current account balance) is no less important, even though it was largely the result of decreased recovery. Financial difficulties forced companies and the public sector to become more efficient and adapt to the tougher circumstances, which could have some beneficial effect also in the future.

Now, a more detailed discussion.

GDP
In 2009, gross domestic product (GDP) decreased by 14.1% in constant prices and amounted to 214.8 billion kroons in current prices (drop in current prices 36.7 billion kroons). The biggest causes of the decline were the processing industry, wholesale and retail trade and construction.
By quarters, the economic recession occurred as follows:
• 1st quarter 15.0%,
• 2nd quarter 16.1%,
• 3rd quarter 15.6%,
• 4th quarter 9.5%.

The smaller recession in the 4th quarter is partly explained by the peculiarity of the reference period – a considerable decline in GDP (-9.7%) had already occurred in the 4th quarter of 2008. But the 4th quarter was also the first one where the economy started to grow in comparison with the previous quarter (a 2.5% growth, compared to the 3rd quarter). Judging by the amount of GDP, the lowest point of the economy (bottom of the crisis) occurred in the 2nd and 3rd quarter.

GDP calculation by the consumption method shows that in 2009, domestic demand decreased by 23.9% compared to 2008, of which investments dropped by 34.5% and private consumption by 18.9%. The percentage of investments in GDP decreased substantially, adding up to 21.8% in 2009 (28.4% in 2008). The percentage of private consumption made up 51.5%, which is 3.3% less than in 2008.

Employment
The economic recession was accompanied by a significant decline in the number of the employed (which also shows the flexibility of the labour market). The average number of employed people was 595,800 in 2009, which is 60,800 people fewer than in 2008. The biggest drop in the employment rate occurred in the 2nd quarter (64,700 people in a year-on-year comparison). Substantial decreases in the number of employed people took place in industry (15,700) and construction (28,000).

The ever-increasing unemployment remained in the centre of attention throughout the year. The annual average unemployment rate was 13.8% (5.5% in the previous year), out of which 15.5% in the 4th quarter. The number of unemployed people grew from one quarter to the next in 2009:
• 79,000 in the 1st quarter,
• 92,200 in the 2nd quarter,
• 102,300 in the 3rd quarter,
• 106,700 in the 4th quarter.

Almost a third of the unemployed were out of work for a year or more. During the crisis, the percentage of full-time employees decreased and, accordingly, that of part-time employees increased. The number of work hours diminished more than the number of employed people, which resulted in an increase in work hour productivity, starting from the 2nd quarter.

Inflation
The economic crisis affected the inflation considerably, which was to be expected. While consumer prices increased by 10.4% (annual average) in 2008, the corresponding number was 0.1% in 2009, indicating a small deflation. The check to prices can be explained by the sharpening of competition in the domestic market, caused by reduced demand, as well as the decrease in wages and income, a growth in work efficiency, etc. From the consumers’ perspective, the cheapening of food by 0.4% deserves a positive mention. The prices of transportation services (-6.4%) and communications services (-0.2%) also went down.
However, the prices of alcohol products (raised excises) went up by 11.4%, and clothes (0.8%), housing-related products and services (1.3%), and household products (2.6%) also became more expensive. For companies, the sharpening of price competition meant a substantial decline in profits.

Export and import
Export of goods decreased by 31.2 billion kroons in nominal price, or 23.5% in 2009, amounting to 101.3 billion kroons. Export took a very steep fall already in the 1st quarter.

In 2008, export turnover was 31–34 billion kroons per quarter, while in 2009, it was as follows:
• 1st quarter 23.4 billion kroons,
• 2nd quarter 25.5 billion kroons,
• 3rd quarter 25.8 billion kroons,
• 4th quarter 26.6 billion kroons.

In 2008, the enterprises of the processing industry exported 54% of their output, whereas in 2009, the respective percentage was 52.8%. The main export destinations were still the following:
• Finland (18.4% of all export),
• Sweden (12.5%),
• Latvia (9.7%) and
• Russia (9.3%).

Sweden and Finland were also the countries to which Estonia's export decreased the most (by a total of 11.2 billion kroons). The reason for that lies in the fact that a substantial portion of Estonia’s trade with Finland and Sweden takes place within an industry and depends on these countries’ export to third countries.

In 2009, the import of goods amounted to 113.6 billion kroons, which is 56.9 billion kroons less than in 2008. The main reasons for the decrease are the drop in export and the decline in domestic demand (for both capital equipment and consumer goods).
From the perspective of external balance, the decline in import is a positive thing, improving the balance of trade, which had been heavily in the deficit in the previous years. In 2009, the balance of trade deficit decreased from 36.0 billion kroons (2008) to 12.2 billion kroons, or almost threefold. In 2009, Estonia’s biggest negative balance was in the trade of mineral products (-5.9 billion kroons) and the biggest positive balance in the trade of timber and timber products (+5.8 billion kroons).

The balance of services was traditionally positive in 2009: export 49.4 billion kroons, import 28.4 billion (in the previous year, 55.0 and 35.8 billion kroons, respectively). The positive balance of services greatly improved the current account balance, which was positive for the first time this year: 9.8 billion kroons, or 4.6% of GDP.

Wages and salaries
The rise of wages, which had been continuous for years, was replaced by a reduction in 2009. Leaving aside the social aspects of declining wages, it reveals the flexibility of wages management, which certainly helped decrease the number of bankruptcy cases during the crisis. The annual average nominal salary was 12,264 kroons, which meant that salaries dropped by 5.2%. Real salaries decreased by a similar extent. With regard to areas of activity, the highest salaries were paid in financial brokerage (22,881 kroons), IT sector (20,062 kroons), energy sector (16,556 kroons), public sector (15,347 kroons).

Real estate
The real estate market experienced a major downturn for the third year straight. In 2009, 26,600 notarised real estate transactions in a total amount of 18.1 billion kroons were concluded. For reference, there were 60,200 transactions in the boom year (2006), sale transactions amounting to 73.8 billion kroons. The average value of a real estate transaction, which was 1,225,000 kroons in 2006, dropped below 700,000 kroons by 2009. The first signs of the recovery of the real estate market could be spotted at the end of the year.

Loans
The loan market experienced a decline for the first time. The loan portfolio dropped from 260.1 billion kroons (at the end of 2008) to 244.7 billion kroons (at the end of 2009). This was due to both the reduced demand and the hardening of loan conditions by banks. At the same time, people’s deposits in banks grew, reaching 60.9 billion kroons (the salary fund of about 8 months) by the end of the year.

Commercial enterprises 
The activity of commercial enterprises in 2009 is characterised by the following data: industrial production (volume index) declined by 25.5%, retail sale of goods (volume index) decreased by 15.6%, the current price value of construction work performed under own power dropped by 37.3%.

Last but not least, the balance of payments was in an equilibrium in 2009, and the over-expenditure on the consolidated budget of the public sector was 3.7 billion kroons, or 1.7% of GDP •