Latvia Retail Sales Continue Their Fall, As Does Housebuilding, Even While Real Wages Continue To Rise

Latvian retail sales were down again in July, both on June 2008 and on July 2007. Compared to July 2007, the seasonally and working day adusted constant price index was down by 8.5%. The largest volume decrease was in non-food products group - by 9.4%. There was a slighly smaller decrease in food products, which were down by 6. The only increases were in mail order business – up by 7.2% and in retail trade in pharmaceutical and medical goods – up by 3.2%.

In July compared to June 2008 (seasonally adjusted data, at constant prices),sales were down by 0.2%. Retail sales of food products were down by 3.3%, but non-food products increased by 1.6% on the month.






In the January—July period, retail sales were down by 3.9% (working day adjusted data, at constant prices) when compared with the same period in 2007. Food products were down by 5.3%, and non-food products by 3.1%.




Housebuilding Continues To Decline


Latvian construction was up in the 2nd quarter of 2008 by 5.7% (at constant prices), when compared with the 2nd quarter of 2007, according to data from the Lavian Statistics Bureau.

There was however a big change in the composition of construction activity: new construction and repairs of main pipelines, communication and power lines were up 71%, motorways and streets 50.3%, factories and warehouses 32.9%. on the other hand the construction and repair of residential buildings was down 27.7%, the construction of hotels and similar buildings was down 41.5%, and wholesale and retail buildings were down 25.7%.


And Real Wages Continue To Rise

On changes of wages and salaries in the 2nd quarter of 2008 The information compiled by the Central Statistical Bureau shows that, compared to the 1st quarter,


Monthly average gross wages and salaries increased in Latvia increased in Q2 2008, when compared with Q1 2008 from 453 to 477 lats, or by 5.3%, while compared to Q2 2007 they increased by 23.6%. Gross wages and salaries grew slightly more rapidly in private sector (up by 23.9%), while in public sector the increase was 22.5%.

Net monthly wages and salaries in this period increased by 25.6% and reached 348 lats. Allowing for consumer price growth of 17.7% on the quarter, the real increase in wages and salaries amounted to 6.7%. So while the rate of increase declines steadily (see chart below) even in the midst of recession Latvian wages continue to rise far more rapidly than any accompanying productivity gains.




In private sector wages and salaries still were lower than in public sector. There in the 2nd quarter of this year they reached 568 lats, and, if compared to the same period of previous year, that is 104 lats more. In private sector 434 lats and increase comprised 84 lats, respectively.

If examining the gross wages and salaries in breakdown by kinds of economic activities, it may be concluded that, compared to the 2nd quarter of previous year, in the 2nd quarter of this year the most rapid increase of wages and salaries was in economic activities as education - by 28.8% (from 361 to 465 lats), hotels and restaurants – by 27.0% (from 233 to 296 lats), other community, social and personal services – by 24.8% (from 346 to 432 lats), real estate, renting and business activities – by 24.6% (from 401 to 500 lats) and trade – by 24.4 % (from 319 to 397 lats).

Among the Baltic States the highest gross wages and salaries in the 2nd quarter of this year, just like in all quarters of previous year, were in Estonia – 850 euro, in Latvia – 679 euro, but the lowest – in Lithuania – 648 euro. Compared to the 2nd quarter of 2007, Latvia witnessed the highest increase – 23.6%, Lithuania – 22.5%, and Estonia – 15.2%. But compared to the 1st quarter of this year, the highest increase in the 2nd quarter was in Estonia – 7.9%, in Latvia – 5.3%, and in Lithuania – 4.0%.

Estonia Retail Sales Fall, As Does Construction, While Real Wages Continue Rising

Estonian retail sales fell in July for the third successive month, suggesting the economy is now well and truly in the grips of recession. Retail sales, excluding cars and fuel, fell by an inflation adjusted annual 3 percent, compared with a 7 percent drop in June, according to the latest data from the Tallinn- based statistics office.




Total retail sales in July were 5 billion kroon. The grocery trade decreased by an annual 1% compared, while smanufactured goods decreased by 5%. Retail sales increased in pharmaceutical goods and cosmetics, by 13% and 6%, respectively. Retail sales of household goods and appliances, hardware and building materials as well as stores selling textiles, clothing and footwear decreased the most (10% and 8%, respectively).

Month on month retail sales increased by 3% in constant prices.


Basically it is quite possible that retail sales on a year on year basis will now continue to decline, but as the previous year's base effect moves around this data may well start to tell us less and less. More interesting perhaps is the seasonally adjusted, price deflated sales index for Estonia published by Eurostat.



Basically this index peaked in February 2008, and it will be interesting to see how long it is before last February's peak is once more attained. It should be remebered in this context that Estonia's population is both declining and ageing at this point, and both these factors are likely to prove negative for aggregate retail sales. Thus to get back above the earlier peak it would seem to be the case that Estonia needs to be able to generate a level of positive GDP growth which hardly seems likely at least for some quarters to come. The main question right now is just how far down the index will go before turning up again.

Estonia's gross domestic product shrank a preliminary 0.9 percent in the second quarter from the first three months of 2008, after a 0.5 percent contraction in the first quarter. Retail companies' confidence fell in August to the lowest level in more than nine years, with consumer confidence remaining at a 4 1/2-year low, Tallinn-based Konjunktuuriinstituut last week.

The Construction Decline Continues

According to the Statistics Office, in the 2nd quarter of 2008 total Estonian domestic construction output decreased 6.6% on a year on year basis.

The value of construction enterprise output was 9.7 billion kroons in the quarter, of which the value of building construction was 6.4 billion kroons and the value of civil engineering 3.3 billion kroons. Compared to Q2 2007 the volume of building construction decreased 12%, but the volume of civil engineering increased 10%. The building decline was mainly the result of decreased volumes in dwelling construction. Although the volume of civil engineering grew, its influence on the total construction activity was not great, as it accounts for only a third of the total volume of construction.




According to data from Estonia's Register of Construction Works, in the 2nd quarter of 2008 1,398 dwellings were completed - 559 dwellings less than in the same period of 2007. Similarly to the previous years, more than three quarters of completed dwellings formed part of blocks of flats. The recession, added to a continuous increase in interest rates for mortgage loans and difficulties in selling existing dwellings are having a strong impact on the demand for new dwellings. In the 2nd quarter of 2008 building permits were granted for the construction of 2,143 dwellings, which is down one third on the same period of 2007.

Average Wages and Salary Increases Ease Back Slightly

According to Statistics Estonia, average monthly gross wages and salaries were 13,306 kroons and the hourly gross wages and salaries were 78.26 kroons in Q2 2008. The rate of growth of wages and salaries that had been stuck around 20% over the last five quarters slowed in the 2nd quarter. Compared to the same quarter of the previous year, average monthly gross wages and salaries were 15.2% higher and average hourly gross wages and salaries were by 17.7% higher. This difference is probably explained by the fact that hourly wages are rising while hours worked are falling.



The consumer price index increased by 11.4% in Q2 2008, and thus, depsite the recession, real wages continued to grow at a 3.4% annual rate. The fact that real wages are still rising gives evidence of a labour market that is still tight, and in my opinion the underlying demographics make it very difficult for a labour market like this to adjust smoothly when faced with a downturn.

Estonia and Latvia Producer Prices July 2008

Prices of goods leaving Estonian factories and mines rose an annual 7.8 percent in July, accelerating for the second time in eight months (from 7.5% in June) as the cost of making electrical appliances and textiles increased.



Even more worryingly perhaps, the percentage change in the export price index was 0.1% compared to June and 4.3% compared to July 2007. Since the Estonian economy can now only realistically grow by increasing exports, and the kroon is pegged to the euro, these costs are passed directly on to many of Estonia's potential customers. The month on month export price index was mainly influenced by the increase in prices in the manufacture of chemicals and chemical products and food products and beverages and by the decrease in prices in the manufacture of wood and wood products and in the manufacture of rubber and plastic products.




Wage growth, the main impetus behind the growth in producer prices over the two years to November, is still close to its 2007 peak, as the labour market remains tight and wages refuse to correct moving into the recession. A weaker-than-expected slowdown in wage growth threatens the competitiveness of Estonian exports according to a statement from the central bank on April 16.


Nevertheless, disappointing as the Estonian figures are, they are still considerably better than the Latvian ones. Compared to June 2008, producer prices in Latvian industry increased in July by 0.3%, according to data from the Central Statistical Bureau of Latvia. Year on year (compared to July 2007) producer prices increased by 12.4%. And as regards export prices, compared to June 2008, producer prices in Latvian export industries increased by 1.3%, and year on year export producer prices were up by 7.1%.

Latvia GDP Contracts In Q2 2008

Latvia's GDP only expanded by 0.2% year on year in Q2 2008:



and quarter on quarter the economy contracted by 0.5% over the first quarter of 2008(Eurostat data):





This will be very brief coverage of these results at this point, since this is, at the present time, all the detail we have. A more precise and extended breakdown of second quarter GDP data will be published by the statistics office on September 8.

Exports Waning

Latvia's June exports dropped 3.6% over May, and were up 3.1% on June 2007. The rate of y-o-y increase in exports is thus dropping rapidly. In June compared to May the most rapid decrease was in exports of vodka (by 55.8%), of rough-cut wood (by 23.6%), of iron and non-alloy steel (by 22.0%), of chocolate and other food preparations containing cocoa (by 17.4%) and of clothing, not knitted or crocheted (by 11.3%), but exports of paper and paperboard, articles of paper increased by 44.1%, pharmaceutical products were up by 31.2%, and machinery and mechanical appliances by 14.6%.





Compared to June 2007 the largest exports increase was in wheat and meslin (exports to Lithuania, Oman, Denmark and Poland) which were up by a multiple of almost 13 times (increase from 187 thsd lats to 2414 thsd lats), in fish, fresh, chilled or frozen (by 85.7%), iron and non-alloy steel (by 43.5%), articles of iron or steel (by33.8%), pharmaceutical products – (12.1%). Exports of sawn wood decreased by 52.3%, furniture, including mattress and articles of bedding and similar furnishing was down by 33.0%, chocolate and other food preparations containing cocoa were down by 24.3%, and veneer sheets and plywood by 17.8%.

In June compared to May the most rapid increase was in imports of electricity – by 54.7%, of iron and non-alloy steel (by 48.4%), meat of swine, fresh, chilled or frozen (by 36.6%), of cigarettes (by 30.7%), but imports of agglomerated cork decreased by 35.9%, as did particle boards (by 28.0%), pharmaceutical products (by 17.2%), plastics (by 13.5%), electrical appliances and equipment (by 5.6%), and coniferous sawn-wood (by 4.4%).

Compared to June 2007 the most notable decrease was in imports of sawn wood (by 76.0%), passenger cars (by 49.7%), furniture, including mattress and articles of bedding and similar furnishing (by 37.9%), machinery and mechanical appliances (by 29.8%), clothing, not knitted or crocheted (by 19.8%). Imports of pork and pork products increased by 73.1%, iron and non-alloy steel (by 42.8%), residual fuel oils (by 36.8%), diesel oil (by 27.2%) and electricity (by 13.9%).



As a result Latvia's trade deficit increased again in June when compared with May.



Year on Year Inflation Eases Back Slightly

Compared to the July 2007, Latvian consumer prices increased by 16.7% in July, of which prices for goods increased by 16.4%, while prices of services were up by 17.4%, thus inflation is now down slighly from the May peak of 17.9%.



Compared to June 2008 the average consumer price level in July 2008 rose by 0.3%. The average price level for goods did not change, but prices of services increased by 1.1%.

Within the food group the price increase of meat and meat products by 3.1% had the major impact on consumer price level. Cereals, especially rice, non-alcoholic beverages, sweets, fruit, pastry-cook products, fresh fish and potatoes all became more expensive as well.

The price of transport services increased by 6.6%, of which the prices of tickets in intercity buses increased by 28.0%, while prices of tickets in passenger rail transport was up by 17.4%. The average prices of automotive fuel rose by 1.6%.

With the extension of the traditional seasonal sales period the prices of clothing decreased by 6.4%, but the price of footwear was down by 8.2%. Due to the sales the sports, camping and open-air recreation equipment, household textiles, glassware and tableware and bicycles all became less expensive. The prices of computers, TV, audio, video and photographic equipment, telephones, goods and services for the maintenance and repair of dwelling, flowers and toys decreased as well.

Labour Market And Wages Not Adjusting To Downturn

Neil Shearing of Capital Economics makes the following pretty valid points in a research note released soon after the Estonian GDP data were made available. According to Shearing there are three good reasons to think that things will get worse before they get better:

"Firstly, labour markets have yet to react to the slowdown in the first half of 2008. The unemployment rate has actually fallen in Latvia and Lithuania and has remained flat in Estonia. But surveys point to a rise in unemployment over the coming months,"

"Secondly, the growth outlook for the euro-zone has deteriorated in recent months. Since exports to the euro-zone account for roughly 15% of GDP in the Baltics, this could hit manufacturers in the region hard... it is becoming even more difficult for the region to rebalance towards net exports,"

"Finally, external financing conditions are likely to become more difficult over the coming year, as global liquidity dries up. This will make it much harder for the region to fund its huge current account deficits. As a result, these deficits will have to shrink, and this requires a further contraction in domestic demand," he concludes. "The upshot is that we expect the region to enter a deep and protracted recession."

As we can see Latvia's unemployment has risen very slightly in recent months, but it is still well below what it was only as recently as a year ago.There were 55,436 unemployed in Latvia in June, and the unemployment rate was 5.1%, only the same as it was in September 2007.



I would add at least one more issue to Shearing's list, the protracted inflation issue, and the difficulty of the elderly Latvian labour market in adjusting. What we are seeing in Estonia is more people retiring from labour market activity than are joining the market, and hence unemplyment has been falling. I don't imagine things will be that different in Lativa, and thus although unemployment will rise, it will not rise as much as some are expecting (many are saying that the labour market is a "lagged indicator" and this is true, but there is more than that at work here).

So given the labour market can't adequately correct, then wages and prices won't moderate as much as they should, which, given that domestic demand is now more or less done as a structural driver of Baltic growth, is going to make the issue of getting exports competitive very hard work indeed.

Bottom line: Latvian GDP will soon be going under water and into negative territory, my feeling is it will now be quite some time before we see it "resurfacing" again.

Estonia Fully Enters Recession In Q2 2008

Estonia's economy contracted the most in almost 14 years in the second quarter of 2008, becoming the second European Union economy to enter formally enter a recession since the start of the global credit crunch. Estonia's economy contracted by 0.9 percent from the previous quarter, following a 0.5 percent decline in the January to March period, according to preliminary data from the Tallinn-based statistics office last Thursday.



Gross domestic product shrank an annual 1.4 percent, the biggest decline since the third quarter of 1994. This is Estonia's third recession since regaining independence in 1991. The last one was in 1999 after exports to Russia collapsed the debt default there.



A sudden drop in consumption and falling real estate investment have been pressuring all three Baltic economies (Estonia, Latvia and Lithuania) since the middle of 2007. In addition severe labour shortages fuelled by a certain degree of out-migration coupled with long term low fertility has turned a dificult situation into an extremely complicated one.

Estonia's unemployment rate fell to a 16-year low in the second quarter, keeping pressure on employers to raise wages even after the Baltic economy entered a recession. The rate declined to 4 percent, the lowest since the second quarter of 1992, from 4.2 percent in the first quarter, according to the latest data. Estonia's jobless rate has dropped steadily since European Union entry in 2004. The decline in unemployment, which usually lags changes in economic growth, will almost certainly reverse somewhat in the coming quarters, but Estonia's underlying demography means the unemployment rate may not rise as much as many suspect, and one indication of why this may be is to be found in the latest data, since the statistics office point out that the main reason for this most recent decline has been the fact that more jobless people have been retiring. In fact the number of employed persons was the samein the second quarter as in the first quarter (657,000).

Estonia's labor force declined by almost 10,000 in Q2 from a year earlier to 683,900, with the number of jobless falling by 7,700 to 27,300, the office said. The number of live births fell dramatically in Estonia from the late 1980s, effectively halving by 1998 from a decade earlier. Labor supply has declined further after the opening of the labor markets of wealtier western European countries to Estonians after 2006. The falling unemployment has created a shortage of workers in skilled fields and boosted wages, up 19.5 percent in the first quarter, threatening to undermine export competitiveness.

The quarterly unemployment rate, based on labor surveys, is above the monthly registered jobless rate, which rose to a 2 1/2 year high of 2.8 percent in July, as not all unemployed register themselves with the Estonian Labor Board which publishes the monthly figures.

Estonia Consumer Inflation Holds Steady In July

Estonia's annual inflation slowed slowed ever so slightly in July. The rate dropped to 11.1 percent, the fourth highest in the European Union, from 11.4 percent in June, according to the statistics office earlier today. Month on month consumer price rises accelerated slightly rising by 0.7 percent June when they were up 0.6% from May.



Not everything was going up, and clothing and footwear prices fell a monthly 2.9 percent in July leaving an annual increase of only 1.9 percent. Food prices, however, remained unchanged from the previous month, rising at an annual 16.8 percent.

What Now For CEE And Baltic Currencies?

By Claus Vistesen: Copenhagen

Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse in Europe and many places in Asia the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling à la traditionelle but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy. The main point would be that the main fault line of slowdown was observed across economies with external deficits; something which, I am sure most will agree, is sure to impact surplus economies too.

Now, that does not completely let the ECB off the hook since by maintaining a focus on inflation it also assumed the role, if only temporary, of the new anchor in a re-wamped version of Bretton Woods II as the Euro ascended to new highs. This bet on global re-balancing was always going to end in tears and in this light the Eurozone could not decouple from the US; that much, I think, is true.

The key issue here however, as I have argued time and time again is represented in two crucial interlocked questions which together form a key structural trend in the global economy. One is what happens when the surplus economies slow down and there is not sufficient demand to pull the economy back up? Demographics and a high median age are key variables to watch in this regard. The second question is the extent to which hitherto deficit nations can turn the boat around and increase savings (i.e. rely more on exports) and what it will mean for global capital flows when they begin this process?

In the context of the CEE economies the themes above are also present. In a recent note I detailed the change in sentiment from growth to inflation and what it might mean for Eastern Europe's economies and their respective currencies. The key situation as I sketched it was one of a dilemma.

On the one hand, the rampant inflation levels suggest that the exchange rate be loosened to allow appreciation and thus pour water on the roaring inflation bonfire. On the other hand however the Baltics, as well as many other CEE countries, are saddled with extensive external deficits financed by consumer and business credit denominated in Euros. It is not difficult to see that this represents a regular vice from which it will be very difficult to escape since as long as the peg remains deflation seems the only painful alternative as a mean of correcting.

(...)

Another point which is specifically tied to Eastern Europe is that if domestic nominal interest rate increase to keep up with inflation rates it will have a strong substitution effects towards Euro denominated loans. This can become a dangerous cocktail should the tide turn against the currencies.

Now that the focus seems to be changing back again it appears to be a good time to revisit the situation

Within this global nexus of what exactly to do with inflation relative to growth, many Eastern European economies has so far opted to go for inflation by raising interest rates. At an initial glance this seems quite reasonable and in many ways the CEE central banks merely latched on to market sentiment and expectations that many emerging economies would seek to use nominal appreciation as a tool to flush out inflation.

Consequently we have seen how both Ukraine and Hungary have chosen to loosen the peg to the Euro as well as other floating currencies in Eastern Europe have seen their yield advantage increase in an attempt to flush out inflation. This has not been without problems though or more specifically it is not clear that an appreciation of the currency is all for the good. Two points here would seem particularly important. One is the simple question of whether in fact an appreciation is deflationary in a world where capital flows, and in particular the hot kind, act strongly on yield. However, another point would be specifically tied to the situation in Eastern Europe. As such, nominal appreciation of the currency also increases the purchasing power which is not what many CEE economies need at the present time as they stand before the task of correcting a rather large external balance. Moreover, rising domestic interest rates will increase and exacerbate the credit channel by which loans denominated in Euros and Swiss francs become more attractive. I have shown this to be true, for example, in the context of Lithuania. The important thing to do note here would what would happen to the servicing of these liabilities should the domestic currencies depreciate.

What happens next then? Or more concretely, even though CEE currencies, in general, have enjoyed a rally on the back of market expectations of nominal appreciation fed by hawkish central banks what happens if and when central banks reverese course?

An initial warning shot across the bow was handed to us as the governor of the Czech central bank mused that he might lower rates come next meeting due to the strenght of the Koruna and the subsequent effect on exports. Also Poland recently opted to abandon the hawkish stance as rates were kept steady. In light of this event Macro Man managed, as ever, to hit the proverbial nail on the head.

There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way.

This is exactly the issue which now confronts many Eastern European economies. What to do as growth visibly tanks at one at the same time as inflation stays high. One thing here would be for the central banks to hold their raising cycle which in itself should ease the pace of appreciation but what if they need to lower rates.




Now the numbers above do not, in themselves tell anything remotely interesting. For one, the difference between the economies are quite big. For example the Czech Republic has been able to gain, with a comparatively low interest rate, currency appreciation which has actually helped the external balance in so far as it has made imports cheaper. Obviously, at this point the benign effect on the trade balance is just as much down to decreasing domestic demand as the value shield of a dear currency. On the other hand, if we consider especially Ukraine, Romania, and Hungary the price has been dearer and the subsequent effect on inflation less pronounced. One could always argue that the situation would have been much worse, but one thing is certain; the ensuing loss of competitiveness has not been compensated for with a decrease in inflation. And one has to wonder whether pushing nominal interest rates ever higher would be a sound solution.

The key here is that these high interest rates carry with them a high lock-in premium which makes it difficult to reduce them without causing substantial pain to the currency. Add to this that as long as interest rates stay in this territory the incentive to borrow in foreign currency remains very appealing. In fact, the incentive structure here is quite disruptive as many of these economies have higher rates on domestic currency deposits and lower rates on foreign credit. This incites consumers and companies to place their deposits in local currency while funding themselves in foreign currency. Finally, there is of course the more standard economics 1-0-1 point that whatever nominal rate is ascribed to a currency and an economy the latter needs to be able to provide the structural demand for which to satisfy the yield. Otherwise you just pour more gasoline on an already raging bonfire.

Obviously, as long as the local currency remains strong and on an upwards march or the trading band is kept in place the show goes on. But the longer this structure lingers the more difficult it will be to break free; and break free they must since I am quite sure that Eurozone membership is off, for the immediate future at least.

Another more hard hitting point would simply be that whatever growth momentum these economies had going into 2008 it is now steadily levelling off. Now, these economies need to rebalance their external accounts at the same time as they labour under the yoke of slowing growth, high interest rates which are difficult to reduce and/or a quasi fixed exchange rate to the Euro. Can you feel the chilling cold of deflation blowing across the Urals? I can.

Basically, the past years' rapid process of nominal convergence will now need to be kicked into reverse, since it is quite obvious that many CEE economies have been riding a blade too tough.

Be Careful Indeed

Last time I massaged this specific topic I summarised by ominously stating that the CEE economies and their central banks should be careful what they wished for in terms of using higher interest rates and subsequent nominal appreciation of their currencies to flush out inflation. The key point was that the effect would likely be limited and only further worsen the imbalances in the economies. And thus, here we are.

Another more subtle point in the context of market reactions would be the boomerang effect which comes from the currency appreciation as interest rates are increased (and the peg/band abandoned) to the subsequent plunge when the economic tide turns. In line with the change in global sentiment towards growth and deflation (see e.g. here) and the fact that other hitherto strong yielders (e.g. the Kiwi and Aussie) are beginning to falter we may be at an inflection point in the whole discourse of upwards movement in CEE currencies. Stephen Jen's recent tour of global FX markets is a fine addition to this argument.

As ever, this is obviously still a dilemma for most of these economies since inflation continues to rage ahead. In Romania for example the PPI rose at its highest pace since 2004. However, as long as the credit tap stays open and as long as the purchasing power is increasing so will the the demands for higher wages stay strong. This is particularly true in the context of the CEE economies as these are in possession of structurally broken population pyramids after two decades worth of lowest low fertility and, in the cast of the latter decade, net outward migration.

The main point I would like to emphasise here is that correction is coming and that it will only become harder the higher the currencies move upwards. In a more general light this correction will not be a small one and it most certainly will not be felt exclusively in Eastern Europe. Basically, the big hidden data point in all of this is the dependence of Germany on CEE imports. So far, this has moved along just nicely but Germany is in for a rude awakening once the link breaks ... and break, I am afraid, it will.