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
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