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Thursday, January 31, 2008

Estonia Retail Sales and Industrial Output December 2007

Growth in Estonian retail sales and industrial production weakened in December, offering the latest signs that the economy is now cooling significantly and rapidly.

According to Statistics Estonia, in December 2007 retail sales for retail trade enterprises amounted to 5.4 billion kroons, which is 630 million kroons up on December 2006, in money but not real terms (inflation remember). Retail sales growth eased to an annual rate of 4 percent, the slowest since at least 2001, and industrial output declined 2.1 percent on an annual basis, the first contraction in more than five years, the Tallinin-based statistics office said today.

Retail sales slowed from a 6 percent growth rate in November, mostly as a result of consumers having less available to spend due to the ongoing increase in food prices, the statistics office said. Retail sales grew 14 percent on average in 2007, it added.

Consumer confidence fell in January to its lowest level in almost three years on worsening expectations for public and personal finances. The number of property transactions also fell in the fourth quarter to the lowest level in almost three years, as interest rates keep rising and banks have restricted lending terms.

Industrial Output

According to preliminary data from Statistics Estonia, industrial production in 2007 increased by 6% compared to 2006. Rapid growth in energy production and mining were the main factors producing growth in total industrial output. Growth in the manufacturing component first slowed and then turned negative towards the end of the year.

In December 2007, Estonia's seasonally adjusted industrial production fell 7.3 % compared with November. As compared with the month of December 2006, total industrial production fell 2%, and in manufacturing 5.7%.

This contraction in industrial output, adjusted for working days, followed a revised 4.5 percent expansion in November, the statistics office said. Manufacturing, which is the main contributor to gross domestic product growth at this point, shrank by 5.7 percent, the weakest showing since May 1999, led by a contraction in furniture, wood and construction materials' output. This is not good news for Q4 GDP, and when coupled with the steady downward movement in year on year retail sales begin to raise serious questions about what Q1 2008 GDP may actually look like.

Industrial output growth was hampered last year by rising costs as companies faced increasing labor shortages, unemployment was at a 16-year low and domestic demand started to cool after a three-year growth spurt.

Looking at the retail sales and industrial output charts, all I would say is that if this is marking the line of a "soft landing", then I would hate to see what a hard one looked like. Really, perhaps the most preoccupying part about all this looking through the comments you see in the press is just how little idea most of the professionally paid analysts have of what is actually going on here.

Domestic demand is going the same way as Hungary, and short of a major adjustment in relative prices (which means basically a big downward revision in currency values) exports will obviously not be able to drive growth. In other words if the currency value problem is not - for one reason or another - not addressed then you are going to see some of the most severe wage deflation in any developed country in recent times to put exports back onto a cometitive footing. Which means very weak domestic demand over a period of years while everything corrects, meaning very low GDP growth numbers, and these, remember are the key years before post 2012 the ageing population problem really starts to lock-in. It is the lack of urgency and shoulder shrugging you find almost everywhere that continues to preoccupy. Clearly most people are well out of their depth with all this, but does anyone really realise that the whole future of Estonia as a nation is now in play?

Monday, January 28, 2008

Lithuania GDP Q4 2007

Lithuania's economy grew at the slowest pace in a year in the fourth quarter as accelerating inflation and tightening bank lending squeezed consumer spending. Growth slowed to an annual 7.9 percent from 10.8 percent in the third quarter, according to a flash estimate from the Vilnius-based statistics office today.

The statistics office also estimated full-year growth in 2007 at 8.7 percent, as compared with 7.7 percent in 2006. a number of indicators now suggest that growth is slowing steadily. The pace of retail sales growth in the last quarter of 2007 was the slowest in almost three years as inflation accelerated to 8.1 percent in December.

Estonia Consumer Confidence January 2007

Unfortunately the news is hardly surprising, but Estonian consumer confidence fell in January to its lowest level in almost three years on worsening expectations about public and personal finances according to the consumer confidence index published by the Tallinn-based Institute of Economic Research today. The index fell to minus 11 this month from minus 10 in December. In January 2007, the index was at 13.

Consumer spending weakened natably at the end of last year from record level earlier in the year under pressure from rising prices, rising interest rates and stricter bank lending conditions. Economic growth in the third quarter slowed to a four-year low of 6.4 percent. Rising inflation accompanied by slowing wage increases have also served to worsen consumer's expectations.

Sunday, January 27, 2008

Estonia Trade Deficit November 2007

The Estonian Statistics Office have published the Estonian trade data for November. According to the preliminary data, in November 2007 the Estonian foreign trade deficit was 3.6 billion kroons and was down both when compared to November 2006 as well as to October 2007. Compared to November 2006, foreign trade turnover increased by 6%, but decreased by 2% compared to October 2007.

In November 2007 the exports were 11.7 billion kroons (43%) and imports 15.3 billion kroons (57%). Compared to November 2006, the exports of goods increased 12% while the imports of goods was up 2%.

In November 2007 the trade deficit was 3.6 billion kroons November 2006 it was 4.5 billion kroons and in October 2007 — 3.9 billion kroons.

If we look at the chart for the monthly trade deficit, we will see that it has imporved somewhat, but if we look at the monthly imports and exports chart (second chart below) we will see that while there was some rebound in exports towards the end of 2007, a significant part of the improvement in the trade deficit comes from a weakening in imports, a phenomenon which is, to some extent, associated with the downturn in domestic demand.

Saturday, January 26, 2008

Lithuania 2007 GDP and Inflation

A quick medical check up for the Lithuanian economy in 3 quick data points. Firstly Lithuania's gross domestic product surged towards the end of the year and finally hit an annual growth rate of 10 percent in 2007 when compared with the 2006, according to preliminary figures released by the economy ministry last week. Lithuanian GDP grew by 7.5 pct in 2006 compared to 2005.

The economy is set to surge by another 8.1 pct, outstripping the previous forecast of 7.4 pct, the country's central bank also said in separate figures issued on Friday. If the expansion continues uninterrupted that is. But there are reasons to think it may not continue at this pace. The first of these is the inflation rate. During 2007 Lithuanian prices rose by 8.1%, and the bank is also forecasting that Lithuanian prices will rise by 7.9 percent in 2008 when compared with 2007.

Another reason to doubt sustainability is the current account deficit. We don't have detailed figures for 2007 here yet, but the IMF are forecasting that the deficit will come in around 10% of GDP.

Plenty of detailed reasons why this wonderful party can't continue that much longer are given by Claus Vistesen in this post here.

Monday, January 21, 2008

Swedbank Downgraded By Moody's

This news in Bloomberg this morning is hardly surprising, but does give an indication of the fact that such banks can't continue to fund a difficult situation indefinitely without seeing damage to their own balance sheet, and their own credit rating. According to Bloomberg the Baltic business accounts for 30% of their total profit (or if you like one third of their business), and that is not insignificant, or "small beer".

Swedbank AB, the largest bank in the Baltic region, may have its credit rating lowered by Moody's Investors Service, which cited concerns about the strength of the economies in Estonia, Latvia and Lithuania.

Moody's cut its outlook for Stockholm-based Swedbank's financial strength and long-term deposit rating to ``negative'' from ``stable,'' it said in a statement dated Jan. 18. It also lowered its outlook on Swedbank's Baltic subsidiary, AS Hansapank, to ``negative'' from ``stable'' and placed its C+ financial strength rating on review for a possible downgrade.

Swedbank is the largest bank in Estonia as well as Latvia, the fastest-growing economy in Europe, and the second-biggest in Lithuania. The Swedish lender's Baltic banking operations account for more than 30 percent of its operating profit.

``The rating action was prompted by Moody's concerns over the bank's high exposure to the overheating mortgage, real- estate and construction markets in the Baltic countries,'' the credit rating company said in the statement.

Friday, January 18, 2008

Estonian Property Shares Sell-off

It is very hard to know how to read this news in Bloomberg today:

Estonian builders and property developers, including AS Merko Ehitus and Arco Vara AS, tumbled in Tallinn trading on concern a global economic slowdown may deepen the decline in the Baltic real-estate industry. Merko Ehitus, Estonia's largest builder, dropped as much as 11 percent to 10 euros, the steepest decline this decade. It rebounded to trade 1.9 percent lower at 10.99 euros, the lowest level in almost thee years, by 1:30 p.m. Arco Vara, the only publicly traded Baltic property developer, fell 9.2 percent, its biggest-ever decline, to 1.08 euros. The price is a record low and is 56 percent below its initial public offering price in June last year.

Things are definitely wobbling all over the place at the moment. You need to keep a close eye on what is happening in the stock markets across the EU10 at the moment. Two days ago Bloomberg ran this story about how central european stocks now seemed to be entering a "bear" market:

Central European shares fell for a sixth day, led by OMV AG and PKN Orlen SA, the region's biggest refiners. Austria's ATX extended its drop from a July record to more than 20 percent, a common definition of a bear market.

The NTX Index of 30 companies in the region fell 4.2 percent to 1,716.37 at 1:08 p.m. in Vienna, heading for the lowest close in 10 months.

Austria's ATX Index lost 4.5 percent to 3,833.1, bringing the drop since closing at a record on July 9 to 23 percent. A bear market is widely defined as a decline of 20 percent or more in a 12-month period. Austria followed Poland, Singapore, Hong Kong, Sweden and Japan in entering a bear market after last year's U.S. subprime-mortgage collapse.

The mention of Austria is significant since the Austrian banks are the most exposed should there be any large correction in central and Eastern Europe (all those Swiss Franc and Euro loans). The sell-off continued today:

Central European shares declined for an eighth day, the longest losing streak in two months. Erste Bank AG, Austria's biggest, and Komercni Banka AS led losses.

The NTX Index of 30 companies in the region declined 1.6 percent to 1,694.69 at 10.32 a.m. in Vienna, heading for the lowest close in more than 10 months. The measure has lost 8.2 percent this week.

Austria's ATX Index dropped 1.7 percent, the Czech PX Index slid 3.3 percent and Poland's WIG20 Index retreated 1 percent. Hungary's BUX Index added 0.3 percent.

Benchmarks in Austria, Poland and the Czech Republic dropped more than 20 percent from last year's highs this week, the common definition of a bear market, amid concern that the U.S. will enter a recession.

Erste Bank slid 2.1 percent to 39.05 euros today, while Komercni Banka, the third-largest in the Czech Republic, slumped 4.3 percent to 3,496 koruna. Raiffeisen International Bank Holding AG, Russia's biggest foreign lender, lost 1.6 percent to 79.68 euros.

Telekom Slovenije d.d. fell 1.9 percent to 340.20 euros. The shares have dropped 10 percent since Jan. 14, when the Slovenian government extended the auction of a 49.13 percent stake in its national phone company for a third time, with two bidders left.

The Romanian Leu continues to wobble, and as I note on my Romania blog perhaps the most ominous quote in the press on Romania at the moment is the following one, since it indicates that central bank policy may now become increasingly driven by the need to stem a collapse in the currency, rather than by a need to regulate internal demand conditions. If confirmed, this tendency would not be a positive one.

``Our rough calculations suggest that the main rate should be above 9 percent to fend-off the pressure on the leu,'' said Ilker Domac, an economist at Citigroup Inc. in Istanbul, adding that he expected another 50 basis-point increase in February.

Also I have a summary of the latest construction news from Hungary, together with a brief assessment of where we are in real economy terms there right now.

Basically I think we are all only waiting at this point to see who is actually going to be the first through the door.

Monday, January 14, 2008

Soft or Hard Landing in Lithuania?

By Claus Vistesen

Cross-posted from Alpha Sources

The fact that economic conditions in Eastern Europe are deteriorating is hardly news at this point. The only question which remains to be answered is the extent to which this will be a hard landing or perhaps more specifically which countries will fair better than others? It is fairly easy to get bogged down into details when it comes to Eastern Europe, something which the Eastern European Economy Watch (run by Edward and me) is a testament to. So, in this entry I will continue my review of Lithuania which, apart from my general notes on Eastern Europe, has constituted my anchor when it comes to understanding the details of the Eastern European situation or perhaps more aptly the situation in the Baltics in particular. If you want background on this you should follow the two links above which can lead you to almost everything Edward and I have written on the topic. However, and in terms of more official contributions to the issue the IMF as well as the World Bank have both made some fine reviews of the issues at hand.

As I noted above this entry will deal exclusively with Lithuania and thus by derivative the Baltics although I think that many of the issues can be extended to the region writ large. A couple of days ago Edward fired a shot across the bow in the context of the Baltics where he asked whether in fact Estonia was heading for a hard landing? The evidence seems mounting that this might be the case and after having looked at Lithuania I find little reason to disagree with him in a general context. And we haven't even noted Latvia here where arguably the most dramatic degree of excessive capital inflows, growth rates, credit exuberance, and inflation have occurred. My analysis on Lithuania will take a close look at the following factors which cuts across the gamut of issues we need to factor in:

  • General growth rates - To show the general momentum and when/where it might be turning.
  • Prices - This is a natural but increasingly lingering effect of the sizzling growth rates we have seen recently. Basically, we need to think about capacity to grow here without stoking inflation and with the expectations levied on Lithuania (alongside the rest of the region) relative to the underlying capacity (i.e. the labour market conditions mentioned below) we are basically witnessing a huge mismatch which might unwind very rapidly with detrimental consequences to the economy and society as a whole.
  • The labour market - This is a very important aspect and essentially cuts into the point that Lithuania like virtually all other countries in Eastern Europe have moved through the demographic transition too fast and too brutish essentially suffering a severe overshot where fertility has declined (throughout the 1990s and into the 21th century) to alarmingly low levels. Coupled with a steady net outflow of migration this is basically hollowing out the human capital foundation of the economy at a speed which not even Edward and I had anticipated and thus the capacity to grow sustainably as well as to enjoy that much allured process of convergence/catch-up growth.
  • External balance - The Baltics have very large current account deficits at the same time as they are running currency pegs to the Euro through currency boards. This is not necessarily a recipe for disaster but the extent of the imbalances is mounting and if expectations at some point reverse as to the sturdiness of these pegs the situation could get out of hand. As I will show the condition of the situation rests upon the ability to sustain inflows of credits to consumers (and of course FDI) and given a global credit crunch as well as an unsustainable economic environment it appears that we are moving closer to a situation where the current development cannot be sustained. In general, I think it is reasonable to assume that in a traditional currency crisis framework the currency boards would be pretty helpless in defending the domestic currencies for an extended run. Of course this then gets us into the point about the households' balance sheets and what it will mean if the pegs run loose.
Let us get on with it then and begin with a look at the general development in GDP which, relative to my previous notes, now includes Q3.

As we can confirm from the graphs above Lithuania continued to thunder along in Q3 even though this constitutes somewhat of a backward looking focus at this point in time. What should be noted however is that while quarterly GDP rose a seasonally adjusted 5.4% private consumption actually declined. This does not fit the growth path by which Lithuania and the Baltics have grown the past years and may signal that something is changing. Especially, I will be watching private consumption since we see a slowdown from here on it will be very difficult to sustain the inflows needed to finance the current external balance and obviously also the headline growth in GDP. In this light the Q3 figures come off as a bit of a fluke really but coupled with a contraction in the external deficit (i.e. as in Estonia) it may be the first signal that things are about to change for the worse in the sense that whatever these countries are ready or not the imbalances are now set to unwind. In this respect the Q4 figures will be most interesting since they will indicate the direction and even more important the speed by which this is moving.

Having looked briefly at top line GDP figures I turn now to the more nitty-gritty parts of the analysis. In this way, it would perhaps be a good idea to have a close look at the evolution in prices since the very high rate of inflation has been one of the main detrimental effect of current growth spurt and one which has eroded the external competitiveness. The main reason for this is the well known relationship between productivity growth and growth in wages and how the latter by far has outpaced the former in Lithuania and the Baltics. More so, prices become important since if we were to identify a break-point in topline GDP growth inflation should follow down. This is likely to happen sooner or later of course but the flip side of this is the point that with their currencies pegged to the Euro the only way Lithuania can ultimately correct once growth stalls is through price deflation. In fact, you could argue that if the imbalances begin to unwind disorderly it may be difficult to stop this from happening which is why of course we need to make sure we don't get to that.

The first graph is particularly interesting since it takes us into the real world so to speak as it shows us the evolution in monthly prices which confirm that the increase in price growth seems set to linger in Q4. I have chosen to add both the main core index and the core index stripped of headline inflation in light of the order du jour in current economic and financial debates. So, pick your weapon of choice. Either way, the main index running at 8% as we exit 2007 demonstrate the generally elevated pace of things. If we move into the more finer grains of the price developments we see that wage costs increases are still in the >20% ballpark and that construction input prices are also running high up the ladder which is rather significant since the construction sector has been one of the main sectors driving the expansion. As for the PPI I am happy that we are seeing an increase since I have had some issues discerning why it was that low since it marked on of the peculiar ways in which Lithuania differed from its Baltic brethren. As a conclusion, nothing new from the front it seems when it comes to inflation and we will now have to see if growth slows down just what the transmission mechanism will be. However, as I have noted we could run into deflation at some point and really this would only be a matter of how long the pegs were able to hold and thus the 'willingness' to correct through bending the stick too much into one direction (deflation, massive fiscal tightening etc) relative to the other (letting the Litas go).

If inflation is one of the chief effects of the growth momentum we have observed lately what is the course then? Clearly, a high inflation rate is to be expected in emerging markets as higher relative growth rates also lead to higher relative inflation rates following the principles of growth convergence. But why have inflation rates been as high as we have seen in Lithuania? Well, in order to understand this we need to use some basic macroeconomic intuition as I also explain in my introduction above. Essentially, we need to look at the labour market and thus always remember the two stylised facts. 1) the trend of net outward migration in the most productive labor cohorts and 2) the collapse in fertility throughout the 1990s.

You don't need to be a macroeconomic literate to see that the general condition on the labour market is one of some tightness. Depending on the measure you look at and whether it be quarterly or monthly the unemployment rate is roughly running at 4% as we exit 2007 down from about 5% in the beginning of 2007. In numerical terms this corresponds roughly to a decline from 80.000 to 60.000 depending on the figures you look at. Now, this might not mean much but we need to consider a few things. The first thing is of course the relative tightness of the labour market from a general empirical perspective where we know that once we venture into the 3-4% range we get into serious bottleneck and mismatch issues. The job vacancy rate is a good proxy here and as can be seen from the last graph we are soon running into one of those 'does not compute' issues since with 60.000 persons unemployed and 30.000 vacancies it we are looking at a vacancy ratio of about 2 which is very tight. Another thing to take into a account is the net migration rate. Since 2001, Lithuania has 'lost' around 5000-6000 people each year and if we apply this average figure for 2007 we can easily see how the string is getting tighter by the day.

The labour market issues are important for two primary reasons. The first is the contribution of the tight labour market to inflation and wage costs and essentially how productivity increases stand no chance in following the increases in wages. The second point however is the risk that as growth stalls the unemployment rate will rise again. Now, this of course somewhat an argument non-sequitur in the sense that it is a foregone conclusion. An economy cannot 'run out' of labour but what happens to migration flows then? This is big issue for me and if a severe slump intensifies the outward migration of qualified labour (i.e. this is the labour most likely to move first) the human capital foundation of the country will simply get eroded. So, take note! This is something to watch and really I would like to see not only a endogenously generated response within Lithuania and the Baltics but also a EU wide response to this issue since it is a most pressing one and not merely one of how the EU15 can use Eu10 as a labour repository.

The final section of my note takes us to the dark vaults of balance of payment analysis and essentially constitutes an expansion relative to my previous focus on Lithuania in past notes. For an appetizer for what comes next my recent note on Poland's external position might be handy. Let us look at the graphs and then move our way through the argument.

The graphs are divided into two topics. The three first shows the evolution of the overall current account balance in various measures whereas the last two plots information on the net investment position (NIIP) which is a stock measure of the difference between a country's external financial assets and liabilities. If the NIIP is in the red as is the case here it means that external liabilities outweigh external assets.

If we look at the three first graphs we confirm the general idea that Lithuania is running a large external deficit. Especially the q-o-q measure of the trade balance expressed as percentage of GDP sums up the general picture I think with a trade deficit amounting to >35% of GDP. Another more cyclical thing note is the contraction in the external deficit in Q3 which coincides with the drop in consumption expenditure in Q3. This is not coincidental I think and as I say above we now need to watch closely what happens in Q4 since if the current trajectory continues Lithuania may run into trouble sustaining the inflows needed to cover its external deficit in the sense that we might just be moving into a situation where the trend is breaking with respect to growth in private consumption. So what is this all about then? This is where we need to the NIIP then. As two points should be noted from the graphs above apart from the obvious point that the NIIP is negative by some margin. The first is the composition of external liabilities where especially bank loans need to emphasised. What we basically have here is then the formal evidence for all the stories we have heard about how foreign banks have been entering the Eastern European/Baltic markets through provisions of consumer credit, loans and mortgages often denominated in Euros (in the Baltics) and Swiss Francs in Hungary and Romania. We see clearly then how bank loans have contributed heavily to evolution of the NIIP and if we sideline this with the evolution of private consumption not to mention the whole global credit crunch debacle it is not difficult to see how this link of the chain might be a bit corrosive as we move forward even if it is not yet certain that it will break. The second point is that we see evidence in Lithuania of the same inter temporal correlation between the inflow of direct investment and the income balance as in Poland. Basically, the inflow of direct investment means that foreigners will earn more on their assets in Lithuania than Lithuanians earn on assets abroad. This is not necessarily alarming in itself and quite natural if you factor in the economic dynamics. But in Lithuania's situation with its monetary policy tied to a currency board and with the current state of the external position a structurally deteriorating income balance will make it even harder to swing the external deficit into a comfortable territory.


So, is it crunch time in Lithuania? This is difficult to say but what is certain is a that significant slowdown is now coming. Whether it will be hard is another question. Essentially, a hard landing would entail a sharp stop in the inflows as foreign banks' subsidiaries retreat to their native territories. This could then unravel the whole edifice of a pegged currency regime and the households' un-hedged cross-currency liabilities. The real question is then whether the banks who represent the main life line for an orderly slowdown will stay pat and follow the growth down or whether they will back up their bags and cut their losses. The outlook on this will most likely hinge on two things. The general nature of the slowdown in Lithuania and by proxy the individual countries' relative slowdown in growth and secondly the risk that events in one country will spread to another. As for the first one it is likely to be rather abrupt as we see now that both consumer confidence and consumer spending indices are dropping sharply in almost every country. However, what might end up tipping the boat will be the likelihood that events in one country can spread to another. Here I am particularly looking for the risk that events in Hungary or Romania will act as the well known canary in the coalmine.

It remains to be seen at this point. Q4 will be important for Lithuania I think as well as will the general and ongoing nature of the global financial market turmoil. If things turn to the worse with respect to financial markets in general and if that famous spread between the LIBOR and the nominal rate widens again it could incite some of the banks most exposed in Eastern Europe to cut their losses while they can and if one goes they all go I think. So, this note does not emphasise panic but rather calm oversight. Yet, the risk of a hard landing is not decreasing as we move forward I think which is perhaps the real message to take away here more than an actual call. In this light, I would extent my voice to the fine people at the ECB and EU in general to keep a weary eye on events here since if things turn for the worse timely action will be needed and not a stick followed by some pointless rant about how Euro membership is now postponed for another decade.

Wednesday, January 9, 2008

Lithuania Inflation December 2007

Lithuanian's inflation rate rose in December to the highest level in a decade, adding to the general concern that the economy is overheating along with that of Estonia and Latvia. The inflation rate rose to 8.1 percent from 7.8 percent in November, the Vilnius-based statistics office today. Prices rose a monthly 0.5 percent, compared with a monthly gain of 1.1 percent in November.

Food costs, the biggest item in the consumer basket with a 26 percent weighting, rose an annual 15.5 percent in December, the steepest gain of any category in the index. The average inflation rate accelerated to 5.7 percent last year from 3.8 percent in 2006, according to the office.

Tuesday, January 8, 2008

Estonia Inflation December 2007

Estonia's inflation rate rose in December to a nine-year high, led by food and housing costs, raising concern that price growth will destabilize the currency regime by making exports increasingly uncompetitive at the same time as domestic demand plummets. Estonia's inflation rate jumped to 9.6 percent, the highest since August 1998, from 9.1 percent in November, the statistics office said in Tallinn today. Prices rose a monthly 0.7 percent.

Accelerating inflation and a widening current-account deficit triggered by a consumer spending boom are increasing the risk of an abrupt slowdown in the Baltics generally, economists including Lars Christensen from Danske Bank A/S have been arguing repeatedly recently. Estonia's inflation rate is the third- highest in the European Union, following, of course Latvia and Bulgaria.

And there is no sign of a slowdown in price increases in the near future. Finance Minister Ivari Padar recently forecast inflation in Estonia would be at least 10 percent in the first half of 2008 because of tax increases on alcohol, tobacco and fuel.

The consumer-price index was mainly pushed upwards by an increase in the prices of milk, cereals and meat products, as well as by rising prices for energy, heating materials and motor fuel, the statistics office said. Food prices rose 16 percent on the year and housing prices grew at 14.1 percent (a rate which is falling by the month, as the property boom has definitely bust in Estonia, but we still have high base effects from the first half of 2007 to work their way out of the system.

The average inflation rate rose to 6.6 percent in 2007, also a nine-year high, compared with 4.4 percent in 2006, according to the statistics office.

Monday, January 7, 2008

Estonia Retail Sales November 2007

Estonian retail sales growth slowed in November to the lowest level in more than four years as consumer confidence weakened. Retail sales increased an annual 6 percent, compared with an unrevised 9 percent in October, according to data from the Tallinn-based statistics office last week. It was the lowest growth since September 2003, according to statistics office data.

The statistics office describe the 5% month on month decline in sales as "characteristic of the period prior to Christmas marketing in December". This may well be, but the slope of the downward line in the above chart is remarkably constant. Still, we will soon know when we get the December data.

Banks such as Citigroup and Goldman Sachs have been increasingly saying the Baltic countries, and especially Latvia, face increased risk of a ``hard landing'' because of accelerating inflation and widening current-account deficits, and this has lead to increased speculation about a possible devaluation of the Latvian lats and the Estonian kroon. Finance Minister Ivari Padar forecast last month that inflation, which accelerated to the fastest pace in nine years last month, will be at least 10 percent in the first half of 2008 because of higher taxes on alcohol, tobacco and fuel.

Consumer confidence fell in December to its lowest level in more than 2 1/2 years on worsening expectations for personal and state finances, according to the Estonian Economic Research Institute.

The consumer confidence index fell to minus 10 this month from minus 7 in November, the Tallinn-based Institute of Economic Research said at the end of December. In December 2006, the index was at 7 points.

Consumer spending has weakened in the past months due to rising interest rates and stricter lending terms set by banks, slowing the Baltic country's economic expansion in the third quarter to a four-year low of 6.4 percent. Rising inflation, at a nine-year high of 9.1 percent in November, has also worsened consumer's expectations.

The latest release of the EU Commission Economic Sentiment Indicator for Estonia (published yesterday) gives us a very similar picture.

Copmparing the three charts, and observing how they mark such a very similar line, I would say the position now is very clear indeed.

Estonia Industrial Output November 2007

Estonia's annual rate of industrial production growth slowed significantly in November, with production falling in areas as diverse as dairy products and wood production fell. Output, adjusted for working days, rose an annual 4.4 percent, compared with a 5.9 percent rate in October. Production fell a monthly 0.7 percent on a seasonally adjusted basis, compared with a 1.3 percent increase in October. The economy is evidently slowing, although it would be hard to draw any definitive conclusion about how rapidly from this data.

Industrial output growth was hampered by a slowdown in manufacturing as companies faced increasing labor shortages with unemployment at a 16-year low while domestic demand has evidently started to cool. Estonian economic growth eased to 6.4 percent in the third quarter from 11.2 percent in 2006.

The sector of industry holding the largest share, i.e. the production of food, increased 4%. With regard to the branches of food production, the increase was observed in all branches except the production of milk products. The production of milk products, where the prices rose by more than one third during the year, decreased 4%. Output increased in all branches of machinery and apparatus manufacturing, mainly due to increase in exports. Compared to November of the previous year, the growth of production was the highest in the manufacture of precision instruments (37%).