Flash comment: Estonia - February 27, 2017
Non-financial corporations’ sector profits decreased third year in a row

In 2016, non-financial sector profits decreased 10% in Estonia. Profits decreased third year in a row. 

Robust wage growth has contributed to the decrease in corporations’ profits 

The major share of the decrease in profits came from manufacturing, real estate activities and transport sector, while the increase in profits in wholesale trade was by far the strongest among others. 

Although the growth of labour costs has decelerated, their share in corporations’ sector turnover has risen to the highest level of the last 15 years (excluding 2009 with recession). At the same time, profitability (the share of profits in turnover) has shrunk to the lowest level of the last 15 years (again, excluding 2009). Thus, robust wage growth and increased labour costs have contributed substantially to the reduction of corporations’ profits. In addition to the higher labour costs, decreased selling prices have been behind the weaker profits, as well. 

After two years of decline, corporations’ sector turnover recovered and reached 2% growth in 2016, contributed primarily stronger foreign demand and selling prices. Exports of goods and services increased 4% in nominal terms and producer and export prices started to increase at the end of last year. 

Corporations’ investments decreased fourth year in a row 

Despite the corporations’ improving confidence, accelerated increase of their credit portfolio and gradual increase of capacity utilization, non-financial corporations’ investments decreased already fourth year in a row (i.e - 12% in 2016). Approximately half of the contraction of investments came from the energy sector, whereas investments in transport sector increased the most (60%). The share of investments has dropped to the lowest level. Less investments together with the decrease in labour force and weaker productivity growth or even decrease (corporations’ sector productivity has decreased two years in a row) result in less potential economic growth. 

Despite the decrease in profits, corporations’ financial situation and their solvency is good 

Although the growth of corporations’ sector credit portfolio has accelerated, decrease in investments and less lending from abroad has restrained the growth of corporations’ debt. Despite the decrease in profits less investments contribute to the increase in liquid assets. Low interest rates contribute to less interest payments and thereby have positive impact on corporations’ solvency. However, the expected increase in investments and receding short-term loans, corporations’ debt liabilities are expected to increase in the coming years. Accumulation of profits has increased corporations’ equity (increase of equity has decelerated) and this does not considerably limit payment of dividends. 

Wage growth is expected to exceed productivity growth  

The deceleration of labour costs, increasing selling prices and stronger foreign demand are expected to improve corporations’ sector profits. At the same time, expected recovery of investments will work against it. Although the growth of labour costs has decelerated, shortage of qualified labour force contribute to the robust wage growth at least in the coming few years. Wage growth is expected to exceed productivity growth and thereby possibly impairing corporations’ competitiveness.

For more information please contact Mr.Tõnu Mertsina, +372 888 7589, tonu.mertsina@swedbank.ee

This letter is distributed by Swedbank in cooperation with Brightly. The letter is personal.