Profits increase in spite of decline in revenues

Several important economic indicators were updated last week. Despite strong growth in domestic consumption, the turnover of the business sector declined once again in Q3. Surprisingly, companies were able to increase their profitability, sadly at the expense of postponed investments.

The downturn in industrial output slowed in October, and it seems that the end of the year may end up being little better for the sector. The measures taken by the European Central Bank to weaken the euro also support the competitive position of Estonian businesses.

Business revenues continue to shrink
Compared to the same period last year, return on sales for the business sector shrank by 2.4% in Q3. Business revenues have been declining throughout the year, with rapidly rising labour costs having hurt profitability, but more importantly postponed needed investments.

Among the sectors with the highest turnover, sales grew in retail (+4%) and motor vehicle sales and service (+9%), affected by the acceleration in wage growth. The information and communications sector also showed a 3% increase in turnover. The source of this was not the area of programming and IT consultations – in which the return on sales fell by 15% – but primarily the growth in revenue of telecommunications companies. Perhaps a bit unexpectedly, the return on sales also increased in the areas of agriculture and forest management (+1.5%). Results for the sector were improved by the 5% growth in forestry; although in the areas of crop farming and animal husbandry, business turnover declined by only 0.8%. Among sectors with the highest turnover, the long-term downturn continued in the area of wholesale trade, transport and warehousing, at -5% and -6%, respectively. The sales in the construction sector also declined by nearly 6%, having demonstrated decent growth in the first two quarters of the year. The revenues of small construction companies, which grew quickly in the first half of the year, also entered a state of decline. Business has been complicated for some time for large companies dependent on large projects and financing from EU Structural Funds, although average wage growth has thus far been favourable for small construction. It seems that the initial momentum for renovating housing is falling flat.

For the manufacturing industry as a whole, the summer months were not very successful, with the sales declining by 3%. Even though industrial turnover was still growing in the first two quarters of the year, Q3 is also not as negative as it may seem to be at first glance.  The main contributor to the decline of the sector was the electronics industry, in which sales declined by nearly a quarter. The downturn experienced by the branch is largely due to reduced production of one company. If one were to remove the impact of the electronics industry, manufacturing industry sales would have grown by nearly one per cent and, for the majority of large branches, Q3 was more successful than Q2. At the same time, the overall picture was also influenced by some rather positive results – a very strong contribution was made to industry by the successful activity of the timber industry. The sales in the timber industry grew in Q3 by an incredible 15%, or nearly EUR 60 million. In the furniture industry, another highly successful branch this year, sales increased by 16%. Both branches have been supported by strong growth in exports to Scandinavia as well as Germany. Growth in return on sales has steadily picked up speed in the manufacturing of metal products, where the total turnover of companies grew by 10% in Q3. The summer months were better for the food processing industry, which had been in a decline in the first half of the year and where the fall in sales has now stopped. Among the large branches of industry, the sales over the course of the year have fallen sharply in the chemical industry, which has encountered difficulties. The 10-12% decline in turnover in the first half of the year fell to 22% in Q3. Sales have declined also in many of the smaller branches of industry.

Downturn in industrial output slowed in October
The shrinking of industrial output, which was still at 4% in September, slowed to -2% in October. The production of electric power, which comprises a large share of industrial output, has also been in a decline this fall in comparison with the previous year; although, while production during summer was nearly one-third lower, in October it was -14%. In the manufacturing industry, the volume of output remained at the same level as last October, which, taking into consideration the 25% decline in the electronics industry, is notable. As was the case with the return on sales for Q3, the timber industry – in which production grew by 9% in October – helped to balance the decline of the electronics industry. Other important branches that contributed to the growth in output were the food industry (+1%), electrical equipment manufacturing (+10%), and furniture manufacturing (+9%). It seems like the trend is beginning to shift in the production of metal products, where volumes began to shrink in September. In October, the volume of output declined by 6% in the branch which had previously shown successful growth.

A brighter future for industry is hinted at by a slowing of the decline in new orders. If in previous months demand, based on orders, has decreased by 10-20% in comparison with the previous year, then in October it was only 2%. Orders for machines and equipment, motor vehicles and trailers, pharmaceutical products and other means of transport (mainly small ship building), for example, have increased.

Central bank’s loose monetary policy continues
On Thursday, the European Central Bank announced that it was extending the asset purchase program and lowering the interest rate collected on deposits to -0.3%. Even though industry is shrinking in the eurozone, inflation clearly remains below the target level set by the central bank. The question remains, whether additional pressure on increasing the offering of money will bear fruit, if the problem is low demand. The steps taken by the central bank support the continued weakening of the euro against other currencies, which should provide additional breathing space for European exporters.