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Tuesday, December 11, 2007

Latvia Retail Sales October 2007

Compared to September, in October of this year retail trade turnover in Latvia fell by 1.1% on a seasonally adjusted basis, according to data from the Latvian Central Statistical Bureau. Compared to October 2006, the turnover grew by 9.1% (data adjusted for the number of working days). So retail sales are slowing in Latvia, and fast. I have prepared a chart comparing the situation in Latvia with that in Estonia.

The slowdown in sales is much more rapid in Latvia, and on a rule of thumb reckoning - take a look at the chart and estimate for yourself - I guess in two or three months we will be looking at zero year on year growth and then contraction. So Latvia is now about to transit from the "Baltic Syndrome" to the Hungarian one.

And to help us see how we might get there, here is the next chart, the industrial producer prices one. As we can see, the rate of increase in producer prices has now peaked, and we are on the way down, but the decline is not rapid as it is in the case of retail sales.

Inflation has really wormed its way into the system, and it may well prove recalcitrant to being flushed out, again as we have seen in the Hungarian case. But there is one big difference with Hungary, and this can be seen in the next chart.

Waht we can see above is that Hungary is achieving, via an efficiency drive and substantial real wage deflation, a real reduction in export prices. Latvia has now peaked on this front, and the prices are coming down (while Estonia is still to correct really). Looking at the chart, I would say Latvia is about where Hungary was around 10 months ago. So this is likely to be a lengthy process, and remember that Hungary is still on a downard trail as far as GDP growth goes, with under 1% GDP growth this year, and my guess is a little less next year. And in Hungary they still have to decide what to do about the currency issue, and all those Swiss Franc mortgages people have. Since this is all going to become such an important problem, and since there is always safety in numbers, I think the governments of Latvia, Estonia and Lithuania should get together with the Hungarian one (and possibly Bulgaria and Romania) and have a high level meeting in Brussels to start to sort out the details of the inevitable bail out. I mean, how much of the "hit" are the Scandinavian, Austrian and Italian banks who are into this up to their eyes (and certainly over their heads) going to stand, and who else is going to come up to the plate and put money in when the inevitable correction on the book value of these debts comes. Call this the European Mega Conduit.

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