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Saturday, August 30, 2008

Estonia Retail Sales Fall, As Does Construction, While Real Wages Continue Rising

Estonian retail sales fell in July for the third successive month, suggesting the economy is now well and truly in the grips of recession. Retail sales, excluding cars and fuel, fell by an inflation adjusted annual 3 percent, compared with a 7 percent drop in June, according to the latest data from the Tallinn- based statistics office.

Total retail sales in July were 5 billion kroon. The grocery trade decreased by an annual 1% compared, while smanufactured goods decreased by 5%. Retail sales increased in pharmaceutical goods and cosmetics, by 13% and 6%, respectively. Retail sales of household goods and appliances, hardware and building materials as well as stores selling textiles, clothing and footwear decreased the most (10% and 8%, respectively).

Month on month retail sales increased by 3% in constant prices.

Basically it is quite possible that retail sales on a year on year basis will now continue to decline, but as the previous year's base effect moves around this data may well start to tell us less and less. More interesting perhaps is the seasonally adjusted, price deflated sales index for Estonia published by Eurostat.

Basically this index peaked in February 2008, and it will be interesting to see how long it is before last February's peak is once more attained. It should be remebered in this context that Estonia's population is both declining and ageing at this point, and both these factors are likely to prove negative for aggregate retail sales. Thus to get back above the earlier peak it would seem to be the case that Estonia needs to be able to generate a level of positive GDP growth which hardly seems likely at least for some quarters to come. The main question right now is just how far down the index will go before turning up again.

Estonia's gross domestic product shrank a preliminary 0.9 percent in the second quarter from the first three months of 2008, after a 0.5 percent contraction in the first quarter. Retail companies' confidence fell in August to the lowest level in more than nine years, with consumer confidence remaining at a 4 1/2-year low, Tallinn-based Konjunktuuriinstituut last week.

The Construction Decline Continues

According to the Statistics Office, in the 2nd quarter of 2008 total Estonian domestic construction output decreased 6.6% on a year on year basis.

The value of construction enterprise output was 9.7 billion kroons in the quarter, of which the value of building construction was 6.4 billion kroons and the value of civil engineering 3.3 billion kroons. Compared to Q2 2007 the volume of building construction decreased 12%, but the volume of civil engineering increased 10%. The building decline was mainly the result of decreased volumes in dwelling construction. Although the volume of civil engineering grew, its influence on the total construction activity was not great, as it accounts for only a third of the total volume of construction.

According to data from Estonia's Register of Construction Works, in the 2nd quarter of 2008 1,398 dwellings were completed - 559 dwellings less than in the same period of 2007. Similarly to the previous years, more than three quarters of completed dwellings formed part of blocks of flats. The recession, added to a continuous increase in interest rates for mortgage loans and difficulties in selling existing dwellings are having a strong impact on the demand for new dwellings. In the 2nd quarter of 2008 building permits were granted for the construction of 2,143 dwellings, which is down one third on the same period of 2007.

Average Wages and Salary Increases Ease Back Slightly

According to Statistics Estonia, average monthly gross wages and salaries were 13,306 kroons and the hourly gross wages and salaries were 78.26 kroons in Q2 2008. The rate of growth of wages and salaries that had been stuck around 20% over the last five quarters slowed in the 2nd quarter. Compared to the same quarter of the previous year, average monthly gross wages and salaries were 15.2% higher and average hourly gross wages and salaries were by 17.7% higher. This difference is probably explained by the fact that hourly wages are rising while hours worked are falling.

The consumer price index increased by 11.4% in Q2 2008, and thus, depsite the recession, real wages continued to grow at a 3.4% annual rate. The fact that real wages are still rising gives evidence of a labour market that is still tight, and in my opinion the underlying demographics make it very difficult for a labour market like this to adjust smoothly when faced with a downturn.

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