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Tuesday, August 21, 2007

Estonian Producer Price Index Continues To Rise

Estonian producer prices rose in July at their fastest annual pace in 9 1/2 years, led by rising food and timber costs, a sign the country's competitiveness is under severe pressure.

According to the latest release from the Estonian Statistics Office producer prices rose in July 2007 at an annual rate of 8.7%, up from an 8.3% rate in June. As can be seen from the chart below, the annual rate of increase has been accelerating continuously over the months:

There is a small piece of good news if we look at the evolution of the index itself, since despite the large year on year increases registered recently the pace of increase seems to be slowing down, as can be seen in the chart below. Indeed over the last two months the annualised rate has been only something like 3.6%.

But this is of little comfort if we look at the export producer price component - export prices rose 0.9 percent in July from June and 9.1 percent from a year earlier, again see chart below - which has clearly been going steadily on its upward path:

Since domestic demand is now evidently slowing substantially, the need to obtain growth from exports is stronger than ever, but with these rates of increase in export prices this is going to be a very difficult matter indeed.

Estonia's economy is struggling to handle the dramatic increase in wage costs the growing labour shortage is causing - wages and salaries were up over 20 percent year-on-year in the first quarter of this year. And companies are cutting jobs, like Boras Waefveri AB, a Swedish textile company, who said in April they will cut at least 800 jobs, or a quarter of the staff, at its plant in Narva, Estonia, due to competition fromlow-cost imports from Asia.

Other companies, such as Elcoteq Network Oyj, a Finnish contract manufacturer for mobile-phone makers such as Nokia Oyj, have attempted to address the problem by cutting production and trying to move over to higher value-added production.

Others again, such as Nolato Telecom, a Swedish contract manufacturer of mobile phone components are simply packing their bags and leaving. Nolato Telecom announced in its second-quarter earnings report last month that it plans to close production at its Tallinn unit in the second half of 2007, but gave no reasons for the move.

If all of this continues the outlook will become grave indeed. This problem needs a much more extensive response, not only from the Estonian government, but from the European Commission itself.

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