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Tuesday, February 26, 2008

Latvia Employment Trade and Producer Prices

Unemployment in Latvia seems now to have started to rise steadily accoring to the latest data from the Latvian State Employment Agency (NVA). Although slight, the increase in unemployment in Jan 2008 to 5 pct points to qualitative economic and labor market change, NVA said. And I completely agree. The market seems to have turned in November.



The level of registered unemployment had declined steadily from 8.7 pct in late May 2004 to 4.8 pct in November 2007. Since November the tendency is now up again. This is yet more indication of the presence of an economic slowdown in Latvia.

The unemployment rate in Latvia at the end of 2007 was 4.9 pct of the economically active population, while at the end of 2006 it was 6.5 pct. The unemployment rate increased 0.1 percentage point in January 2008 over December and reached 5 pct of the economically active population. There were 53,325 unemployed registered with NVA in late January 2007.




So my feeling is that Latvia is now out of the "extreme overheating" stage - and probably came out around in May-June (which isn't to say there wasn't a lot of momentum left in the system at that point). If you look at the charts included in my December Retail Sales post earlier this month you will see that retail sales growth really peaked during the first quarter.




Also manuafacturing output has been in fierce retreat since July, while the property market seems to have turned around May-June. In part this exiting from overheating will have happened becuase a process as fierce the one which took place in Latvia almost has to choke itself out of its own accord, and also possibly because of the tightening of the credit conditions applied after April, and the impact of this tightening on the housing market.

Also if we look at this unemployment data, it is clear that the labour market turned in October/November, and employment is normally a lagged indicator, which means it only responds after the horse has started to bolt. So my feeling is the overheating situation is now dead and gone, and what people need to think about are cushions to try and soften the landing. Which is why I am not 100% opposed to the idea of fiscal loosening at this point.

Exports and Imports

According to the latest data from Latvijas Statistika:

Compared to November 2007, the value of exports in current prices in December 2007 decreased by 10.8% or 39.8 mln lats, but in comparison with December 2006 it increased by 12.9 % or 37.4 mln lats, reaching 328.0 mln lats, according to Central Statistical Bureau data.

However, the value of imports in current prices in December 2007 was 8.4% or 54.3 mln lats lower compared to November 2007, but in comparison with December 2006 the decrease comprised 6.2% or 39.5 mln lats, reaching 593.0 mln lats.

The total foreign trade turnover in December 2007 was 0.2% or 2.1 mln lats lower than in the corresponding period of the previous year and its value was as high as 921.0 mln lats.

The value of exports in current prices in 2007 reached 4025.2 mln lats – more by 732.0 lats or 22.2% compared to 2006.However, the value of imports in current prices in 2007 was more by 1342.5 lats or 21.0% compared to 2006 and reached 7721.0 mln lats.


So while year on year exports were still up by 12.9% year on year, they were DOWN by 10.8% on November, and indeed exports in November were down on those in October. And although the trade deficit reduced slightly, this is not the result of exports powering ahead to drive growth.



In fact the reduction in the trade deficit is basically a result of the fact that imports were falling even faster than exports, and indeed the year on year rate for imports is now negative. Which is a reflection I feel of the way in which internal demand in Latvia is now contracting rapidly. But if internal demand is contracting, and exports start to fall, then, if the governemnt go for a fiscal surplus, we should expect Latvian GDP to start to contract at some point, shouldn't we?



What we should note about the above chart is the slope of the imports chart. We should be getting used to seeing this in internal demand charts for the Baltic economies at the moment. We may also not that while year on year the rate of export growth was positive, the rate of increase is slowing by the month. One reason, apart from the slowdown in Germany, that this shouldn't surprise us is the degree of trade interlocking among the Baltic states. Latvia's two most important export destinations - and by quite a long way - are Estonia and Lithuania, and if internal demand is about to subside in these two countries, then so are Latvian exports.

Producer Prices
Latvian producer prices in January were up 10.9 pct year on year and 1.3 pct compared with December last year, according to the latest data from the country's central statistics office.



Obviously the rate of increase in the PPI is now slowing rapidly, although there is still some considerable distance to go. Perhaps the most noteworthy trend in January was that export prices reversed to downward trend of recent months, and were up 1.7% on December. This is not good news. It certainly won't help to reverse that downward trend in exports.

Bottom line, the Latvian economy is now cooling rapidly, and looks to be headed towards contraction at some point in the not too distant future.
Posted by Edward Hugh at 1:05 PM

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Estonia At A Glance January 2008

Welcome to the Baltic Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data and which we hope will help the first time reader better assess and get to grips with the argument being presented here. The only really big question about the EU10 economies as we enter 2008 is - among the more vulnerable ones (the Baltics, Bulgaria, Romania, and Hungary) - who will be the first to go over the edge of the chasm which seems to lie out in front. Basically we have two sets of curves to look at. One set go up, and these essentially refer to prices and wages. The other set go down, and they refer to levels of domestic economic activity and consumer and producer confidence. We hope you will find the background data presented here useful in assessing the argument which we are presenting on this blog, which is basically that a key component in the emerging economic crisis which is arriving in Russia and much of Eastern Europe has its roots in the underlying demographics. Basically after years of low fertility, and in many cases out migration, there is just not the labour supply available to fuel rapid catch up growth without provoking strong inflationary pressures. We feel the evidence here is just to strong and to widespread to ignore. In the long run fertility does matter. Please click on thumbnails for better viewing.

Estonia's inflation rate rose in December to a nine-year high, led by food and housing costs. But we can already see that producer prices (lead by export producer prices which have been falling since the summer) have started to ease in October and November. This could be read as a first indicator for what is to come, since if there is a hard landing inflation will not be sustained-

GDP growth, which was of course strong, is now slowing, and unemployment, which has been trending steadily downwards, should really start to increase at some point. This will mean, basically, that the days when Estonia urgently needed to import migrant workers to try and avoid the huge spike in wages and prices which we have seen is now largely passed.

Private domestic consumption has almost certainly peaked, and is now in rapid decline. This is evident from the reatail sales data, and from the reducing number of notarial property contracts, which are a reasonable indication of the state of the housing market. So what happens next?


Well obviously this is now completely unsustainable, especially given that the EU10 and Eurozone countries (not to mention the UK) are all themselves likely to slow significantly during 2008. So now a hard landing seem unavoidable. How will this manifest itself? Basically we should expect to see increasing pressure on the Kroon currency peg, a pressure which, in the short term at least, the Estonian authorities will try and resist.


When I say that the time for fomenting rapid inward migration is now past this does not mean that in terms of longer term stability Estonia does not need to focus on raising fertility and attracting new citizens from elsewhere to compensate for those who have simply not been born: What I am getting at is that all of these issues will now take rather a back seat as the short term dynamics increasingly take over.

Unfortuantely opportunities have been lost, but there is no point in going back over old arguments. One measure of the very difficult situation Estonia will now in all probability find itself in is that the policy priority will now need to switch from attracting migrants to retaining the young workers it already has and avoiding an uptick in out migration.


The extent to which this will prove possible will depend on the level of distress which Estonia's citizen are faced with at the end of the day, and this depends on exactly how hard the hard landing turns out to be.


2008 Forecasts:Forcasts as such really go out of the window at this point, since pretty soon none of them will be worth the paper - or spreadsheet - they have been written on.

Once we see the measure of the problem we will be able to start to think about policy measures to help move forward. This is not the end of the world, but it is going to be a bumby ride and serious structural damage will be done. So all I can say is, fasten your seatbelts.

This blog will not have daily update posts on Estonia or the other Baltic countries (where the situation is not that different), until or unless events start to move at a pace which makes these desireable. There will be data updates from time to time, and extensive monthly reports, the next of which (for Estonia) will be at the start of February. I also recommend my two recent extenisive summary posts from Claus Vistesen:


Catch Up Growth and Demographics - Evidence from Eastern Europe
Translation Risk in the Baltics and other matters on Eastern Europe