A deterioration in the external balance is to be expected in the recovery from the crisis
Economist at Eesti Pank
The external balance deteriorated during last year and the annual current account deficit was 1.2% of GDP. In 2011 the current account had run a surplus of 2.1%. The change was a result of a tripling in the trade deficit, the causes of which can be seen in terms of foreign trade or domestic demand.*
Foreign trade continued to increase through the export of both goods and services. Given that economic growth has slowed or stopped completely in our main partners, it is to be expected that the balance of trade should worsen. The continued growth in Estonian exports is a sign of the improved competitiveness of the Estonian economy in recent years.
From the domestic demand side, the balance of the goods and services account shows the relationship between savings and investment. Domestic savings remained near to their level of the year before last with only a slight decrease, meaning it was the change in investments that was primarily responsible for the current account deficit. The ratio of gross fixed capital formation to GDP was around 25% last year, which was larger than in 2009-2011 when it was nearer 20%. The driver in this investment last year was the government sector, mainly through the sale of emission quotas and through money dispensed from the budget of the European Union. No major increase in the investment activity of the government sector is expected in future.
In contrast, the ratio of investment in fixed capital in the private sector to GDP was less than 20% last year, indicating there is space for expansion. This figure is close to the average recorded in Finland over the last ten years. The convergence of incomes suggests that Estonia should in future also see convergence of labour and the capital-labour ratio, as this indicator is only a fraction of that in older industrialised countries, and this will in turn accelerate the growth in investment in comparison to the rates in older members of the European Union. In such circumstances, an expansion of the current account deficit in future is to be expected.
The Eesti Pank autumn forecast put the current account deficit for 2013-2014 at 2-3% of GDP. A deficit of this level is sustainable, as the common understanding in the European Union is that a current account deficit is a threat to balanced development when it is over 6% of GDP for a long time.
* For more detailed information, see the balance of payments commentary.
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