Thursday, December 27, 2007
Import growth generally stalled in 2008 as Estonians spent less on cars, clothes and household goods due to rising interest costs and the weakening consumer sentiment. Export growth has also slowed as companies struggle with rising wage costs, which were up 20 percent in the third quarter.
Tuesday, December 25, 2007
Credit crunch, did someone use the expression credit crunch?
Thursday, December 13, 2007
Statistics Lithuania reports that, according to the labour force survey data, the number of the unemployed in the country in iii quarter 2007 was 63.5 thousand, i.e. The lowest over the recent 5 years. As compared to iii quarter 2006, the number of the unemployed decreased by 27.3 thousand persons, or by one-third. Over the year, the number of young unemployed persons (aged 15-24) decreased from 15.2 to 13.4 thousand.
The jobless rate dropped to 3.9 percent from 4.1 percent in the previous three-month period. The chart below shows the evolution in the Eurostat harmonised unemployment rate, which is calculated slightly differently, but the picture is broadly the same.
Lithuania's jobless rate has been falling since 2004. When the country joined the European Union the rate stood at 13 percent. Lack of available labor has forced employers to raise salaries, which accelerated an annual 18 percent in the third quarter. The unemployment rate has fallen steadily as people have emigrated to those European states that have opened their labor markets. Top destinations for Lithuania's migrants include the U.K., Ireland and the U.S., the statistics department said. Claus Vistesen has examined the Lituanian situation in some depth in "Lithuania Under the Loop" and "End of the Road in Lithuania". This twin pincer, of rapid economic growth plus large scale out migration is increasingly producing severe overheating, labour shortages and inflation all across the EU10 (with the honorable exception of Hungary which is spiraling downwards into recession). To the issue of migration must be added the long term presence of below replacement fertility, which means that new entrant cohorts are very small, and cannot compensate for the loss, and low male life expectancy, which means that poor health makes it very difficult to raise participation rates among older workers.
Tuesday, December 11, 2007
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.
When compared with October 2006, in October 2007 total seasonally adjusted industrial production output fell by 1.6%. Output in manufacturing decreased by 6.7%, while in electricity, gas and water supply there was an increase of 15.4%, and output in mining and quarrying increased by 17.3%. I think the following chart makes the trend reasonably clear.
And then is we trun to the data for manufacturing only, well, here's your slowdown, or at least one part of it, clear for the eye to see I would say:
As we can see, the high point was reached in Q1 2006, and since that time ever so surely and ever so steadily the Latvian enconomy has been slowing down. Compared to the corresponding period of previous year, in the 3rd quarter of this year Latvian GDP increased by 10.9%, according to data released by Latvijas Statistika last Friday. Interestingly one of the parts of the economy which has slowed most is manufacturing indutry, which actually decreased by 0.3% y-o-y in Q3, and mining and quarrying only managed a measly 2.4%. Construction managed a 13.2% y-o-y growth, but this is undeoubtedly due to large base effects earlier in the year, and the execution of previously signed contracts - as we are noting in the US, you need to wait nearly a year to see the full effects of a slowdown in requests for new buildings to execute.
Unfortunately Latvijas Statistika do not have the Q3 breakdon in their database yet, and they only give annualised data in the press release, when what is most interesting at this point are the quarter on quater changes. Still they do produce this reasonably informative chart about movements in some of the key expenditure components over the last year, and some things are reasonably clear (please click over image for better viewing).
As is obvious, final household demand peaked in the 4th quarter of 2006, and is now falling steadily. It is not clear when (ot whether) this component will ever recover to the extent of being able to drive growth, since we get into age related elements (which I know not many people agree with me on at this stage, but still) as Latvia's median age is climbing steadily, and calibrating all of this for Eastern Europe's comparatively low male life expectancy (ie calibrating how domestic constumption loses its relative strength as median age rises, in the way we have seen in Germany, Japan and Italy) is something noone has done at this point to my knowledge. In fact most people you talk to don't imagine that this is important, but then most of them didn't imagine that Hungary would fall into the hole it is currently falling into.
Now as we can see, these two countries (Latvia and Hungary) are pretty similar in the evolution of the relative population median ages. And if we come to male life expectancy, here is a comparison of Hungary, Latvia and Germany.
As we can see, male life expectancy is considerably lower in both Hungary and Latvia, than it is in Germany, and this must have consequences for economic behaviour and performance. Increasing the working life to 67 and beyond as they have in Germany is just not the same proposition at all in a lower life expectancy society like the other two, nor is the issue of getting employment participation rates among the over 60s comparable given the evident health problems of one part of the population.
So while we would not normally expect domestic consumption to run out of steam until the median age reaches 41/42 (this is the sort of lesson we can garner from Germany, Italy and Japan) there may be good reasons for imagining that this median age needs rounding down somewhat in the Latvian and Hungarian contexts. I will certainly stick my head out and say that this property boom, like the 1992 one in Japan, and the 1995 one in Germany is very likely to be the last of its kind we will see in Latvia, high median age societies just don't work like this. They do not ride on the backs of credit driven booms, and I would have thought that the reasons why would be obvious.
Monday, December 10, 2007
In January–October 2007 against January–October 2006, exports and imports increased by, respectively, 10.3 and 14.5 per cent.
The value of imports in September 2007 was 1.3% or 8.4 mln lats lower than in August 2007, and 8.5% or 49.7 mln lats higher than September 2006, reaching a total of 633.3 mln lats.
The total foreign trade turnover in September 2007 was 11.1% or 96.7 mln lats higher than in the corresponding period of the previous year and its value was 970.0 mln lats.
As can be seen in the chart, many of the lines in Latvia are down at the moment, including the trade deficit one, which is basically still as bad as it ever was.
The small positive change we can observe in the second chart is that the rate of increase in imports has slowed down dramatically since July basically (on the back of the slowdown in domestic demand growth presumably), while the rate of growth in exports is now no longer slowing, and we can see a small increase in the pace.
Monthly inflation in November was 1.4 percent, led by food prices, which increased 3.4 percent, Latvian Statistics said. Bread prices alone soared 16.3 percent over the month. The result is another blow for the outgoing government, which in March passed a series of anti-inflation measures to curb bank lending and speculation on the real estate market. The four-party ruling coalition resigned on Wednesday after having lost its credibility over the sacking of a popular anti-corruption chief in October.
The coalition, however, still maintains a majority in the 100-seat parliament and will likely form the next government. Outgoing Prime Minister Aigars Kalvitis said the next head of government would have to tackle economic issues immediately as Latvia's economy continues to face macroeconomic imbalances. I agree. Immediately!
Lithuania is struggling to contain consumer-price growth as the economy expands at the second-fastest pace in the European Union after Latvia. Gross domestic product rose 10.8 percent in the third quarter. On Dec. 7 Fitch Ratings followed Standard & Poor's in cutting Lithuania's credit rating outlook, citing the growing risk of an abrupt slowdown triggered by inflation.
Gas prices are scheduled to rise 69 percent for Lithuanian citizens next year.
Food costs, the biggest item in the consumer basket with a 25.9 percent weighting, rose an annual 15.4 percent in November. Household expenses such as gas, water and electricity, the second biggest category in the index, rose 11.3 percent.
Sunday, December 9, 2007
The total number of notarised purchase-sale contracts decreased by 25% as compared to the 3rd quarter of the previous year, and by 17% as compared to the previous quarter. The last time that less than 12,000 contracts were notarised was in the 1st quarter of 2004.
Also the total value of contracts decreased 25% when compared to the previous quarter and to the corresponding quarter of the previous year. Although the average value of contracts has decreased during last quarters as well, the decline has not been as drastic as in case of the number and total value of contracts.
The recession in the number of contracts is mainly caused by the decrease in the number of contracts for dwellings. Compared to the 3rd quarter of 2006 the number of contracts for dwellings decreased by a quarter and compared to the previous quarter by a fifth. In the 3rd quarter of 2007, 55% of the purchase-sale contracts were concluded for the transfer of dwellings, 23% for unimproved registered buildings, 14%for residential buildings and 7% for non-residential buildings. The decrease in the number of contracts notarised in Tallinn was greater than in the rest of Estonia. A dead fish, as they say, starts to stink from the head.
50% of real estate contracts were notarised in Tallinn in Q3 2007. The value of these contracts accounted for almost three quarters of the total value of purchase-sale contracts. The share of the number and the total value of contracts notarised in Tallinn has been decreasing since the beginning of 2006.
According to Statistics Estonia, the more conservative loan policies of the banks and the increase in interest rates (ie the credit crunch) have been the main factor influencing the slowdown of real estate market. If at the beginning of 2006 the interest rates on housing loans granted to individuals were still below 4% (these loans are largely, remember, denominated in euros), by September 2007 they had already reached 5.9% (although please note, if we look at the inflation rate - 9.1% in November - these are still extraordinarily negative), and of course, in Estonia, unlike the United States, there is no mega-conduit rescue proposal on the table to come to the aid of those paying the interest. If (or rather when) the value of the currency moves (as it surely has to if Estonian GDP is not to go into straight decline at some point) and more realistic interest rates (ie ones which bear some relation to the level of risk involved) come into effect, then distress among households will become severe. Basically a rescue package will need to be put together, and the capital (book) value of all these outstanding loans will have to be adjusted down according to the actual level of distress produced. Essentially, all those who from the sidelines - the EU Commission, the IMF, the ECB, the World Bank, the Economist, etc - have had a hand in all this with their constant stream of policy recommendations, recommendations which have been by-and-large followed (ie leaving out the odd 'detail' of excess here, too much government spending there, I mean here that policy needs to be realistic, humans, and even more to the point governments, are never perfect, so this part should be factored in from the start, by allowing a margin.....) - will need to accept their share of the responsibility for the mess which has been produced as a result. As Oscar Widle put it "to lose one parent might be considered a misfortune, but losing two, that has to be carelessness". Well the ECB has lost three plus (The Baltics, Bulgaria, Romania, possibly now Poland, and Russia is now definitely wobbling- this latter is not the direct responibility of the ECB I know, but is certainly is in the policy sphere of the World Bank and the IMF).
These institutions cannot, like Pontius Pilate, simply wash their hands of all this (well they can, but they should at least be ashamed of themselves if they do), having aided and abetted it during the upswing by recommending policy proposals which quite simply failed to take account of the quite unique demographic characteristics of this whole region. You cab incant the mantra that Demography Doesn't Matter till you are blue in the face, but unfortunately it does, and I will tell you how we know it does, we know it does by looking at the macroeconomic data, in which (plagiarising Solow's famous dictum) we may not be able to discern the presence of the computer, but we can certainly see the impact of fertility, and especially of decades of below replacement fertility. As I say in my recent analysis of Russia's burgeoning inflation problem:
Well it seems to be the case that this sudden acceleration in growth and inflation is intimately related to the very specific and unusual demographic profile which most of Eastern Europe has inherited from its recent past. So one of my central arguments is that what we have here is certain a kind of mis-match. A mis-match between a basically third world. “developing-country-type” income level (for this reason they tend to be called “emerging economies”) and a very-first-world-type age structure - in the sense that many of these societies have now had below replacement fertility for decades, and in some cases several decades, with the working age group entry level cohorts (15 to 24) down to around 65% of their earlier high point, and the key 25 to 49 age group peaking nearly everywhere as a proportion of the total population, before the total working age population finally enters terminal decline. This is very different from the sort of demographic dividend driven growth we are seeing across most of the other strong growth emerging economies, and the economic consequences of this difference are now becoming all too evident.
Of course, we are still waiting for an adequate Mea Culpa for the Argentine case, but at least people have generally lined up and accepted their "haircut" with dignity. Now it will be the turn of all those who piled in and fuelled all this madness. It is easy to get things wrong, we all do, the important thing is to know how to accept when you have been wrong, to recognise mistakes, and to be "big" enough to take the necessary remedial steps.
We should note however, that in month on month terms there was a slight recovery in September, since sales were actually up 3% on September, when they were down 6% on August.
In October the largest increase continued to be in stores selling manufactured goods (13%), although compared with previous months the growth rate continued its decline. The growth rate in grocery stores was also slightly less in October compared with previous months, with the increase in these stores being 6% when compared with October 2006. Due to a large their share, grocery stores were responsible for about half of the total increase in the sales of the retail trade enterprises.
Among manufactured goods the fastest growth was in specialized stores (28%), with strong demand in stores selling textiles, clothing and footwear (all of which, please note, are subject to strong competition from ex-eurozone sources), and sales in this group increased by 20% year on year. Stores selling household goods and appliances, hardware and building materials also grew by a fairly strong 13% y-o-y.
Saturday, December 8, 2007
In October 2007, when compared with October 2006, the production of electricity increased by 28%, and the production of heat by 14%. The growth in the production of energy is partly the result of an increased demand for exports via Estlink’s submarine cable.
The underlying point is that growth in the manufacturing sector continued to be weak in October, although it did rebound somewhat from September, posting a 4.4% year on year growth. The industrial sector with the largest share - food production - increased output by 3%.
Compared to October 2006, the output growth was highest in the manufacture of precision instruments (39%). Output also increased in the manufacturing of chemicals, building materials and furniture, mainly due to increase in exports. In October the smallest growth was to be found in the manufacture of textiles, where there was an increase in sewn textile products, but the production of yarn and fabric continued to decline.
The downward trend in wood manufacture also continued, while the production of metal products decreased as well. The rise in the prices of raw materials now constitutes a serious problem in these sectors. The production of plastic products also decreased in October, the decline was mainly being influenced by the decline in production for export.
All in all, and little by little, we can see that the continuing increase in prices is having its corrosive effect on the manufacturing sector.
The largest impact on the price change was made by a 4.5 per cent leap in prices for food products and beverages, a 0.6 per cent rise in the cost of refined petroleum products and 0.7 per cent rise in electricity, gas and water supply. There was a 2.7 per cent fall in price of radio, television and communications equipment and apparatus, a 1.2 per cent fall in wearing apparel and a 2.5 per cent fall in machinery and equipment. Refined petroleum products excluded, prices for total industrial output sold grew by 1.3 per cent.
Prices for products sold on the domestic market over a month increased by 1.2 per cent. The largest impact on prices here again was a 3.5 per cent increase in prices for food products and beverages, 0.7 per cent for electricity, gas, steam and hot water, 1.1 per cent for refined petroleum products. There was a 17.0 per cent decrease in prices for wearing apparel, a 5.1 per cent decrease in machinery and equipment, a 2.9 per cent one in radio, television and communication equipment prices, as well as 2.0 per cent decrease in the prices of electrical machinery and apparatus.
Among food products and beverages, the most noticeable increase in prices was observed for grain mill products – 30.8 per cent, dairy products – 9.7 per cent, feed-stuff – 5.8 per cent, bread and fresh confectionery – 3.0 per cent; mineral water and soft drinks went down in price by 2.8 per cent, fish and fish products – 0.4 per cent, meat and meat products – 0.3 per cent. Refined petroleum products industry excluded, prices for products sold on the domestic market increased by 1.2 per cent.
Prices for exported products in September 2007 against August increased by 1.1 per cent. The biggest factor was a 6.6 per cent increase in prices for food products and beverages, 0.5 per cent – refined petroleum products, 1.6 per cent – wearing apparel, as well as a 2.7 per cent decrease in prices for radio, television and communication equipment and apparatus, 0.7 per cent – electrical machinery and apparatus, 1.6 per cent – base metals.
I think if we look at the chart for the evolution of producer prices for the export sector, then the situation and the outlook is pretty clear.
Compared to the 3rd quarter of 2006, the average monthly gross wages and salaries increased the most in agriculture and hunting (28.6%) and the least in real estate, renting and business activities (7.2%).
Compared to the 3rd quarter of 2006, the average hourly gross wages and salaries increased the most in public administration and defence; compulsory social security (30.7%) and the least in real estate, renting and business activities (10.0%).
In October 2007 the percentage change in the export price index was -0.1% compared to September 2007 and 8.5% compared to October 2006. In October 2007 the percentage change in the import price index was 0.7% compared to September 2007 and 3.8% compared to October 2006. This is all now totally unsustainable, and two graphs tell it all.
Hungary, it should be remembered, still has a long hard road out there in front of it, with no easy answers readily to hand, but at least it is one year on into addressing this particular problem. Estonia is yet to start.
Compared to September 2006, total foreign trade turnover decreased 7% and compared to August 2007 it decreased 5%. The trade deficit was 3.7 billion kroons (4 billion kroons in September 2006 and 3.8 billion kroons in August 2007).
What all this means in simple language is that Estonia has been running a consistant foreign trade deficit.
and both exports and imports have been in decline of late, imports due to the slowdown in domestic demand, and exports due to the lack of price competitiveness of Estonian products. If we look at the year on year movements of the two, the downward trend is horribly clear I'm afraid.
And unfortunately, that August surge in exports looks rather like the last surge of something, at least until the issue of relative export prices is resolved, one way or another.
Friday, December 7, 2007
Well, now back to matters in hand, inflation in Estonia. According to Statistics Estonia, the percentage change of the consumer price index in November 2007 compared to November 2006 was 9.1%. On average, the prices of goods and services in November 2007 were 1.4% higher than in October 2007. The broke down into a 15.1% increase in food and non-alcoholic beverages, 13.4% for housing, 9.2% for health, and only 3.3% on household goods. Put another way, the rise in the nontradeable sector (apart from agriculture and fuel, where global prices do play a big role) carried the weight of the increase. In other sectors pressures for import substitution keep some sort of a lid on prices. As we will see in the chart, in recent months inflation - as in many other parts of the EU10 as well as in Russia and Ukraine - is now starting to climb up towards the roof.
What happens next? Well this is a difficult question to answer. Prices will obviously keep rising until they no longer can (dragged down by and inability to export and by falling domestic demand), but at the present time there is much less evidence of this in Estonia than there is in, say, Latvia, where the slowdown seems to be gathering momentum rather more rapidly.
Initiated by the dominant Swedish banks and encouraged by recent government restrictions, a supply-led credit slowdown is slowly but steadily developing into a demand-led slowdown. Private sector credit growth in Estonia slowed to 39% Y-o-Y in October, down from a 66% rate in mid-2006. In Latvia, the same measure was down to 42%Y-o-Y from 61% Y-o-Y.
The number of real estate transactions in Estonia has also fallen by 25% between Q2 and Q3 2007 to reach its lowest level for three years. So things are moving. But where? Well, watch out for more posting which should now come thick and fast over the next week, as little by little I try to work out what I myself really think about the answer to that question.