Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Thursday, October 9, 2008

Latvian Inflation Stays Stubbornly High In September

Latvia's inflation fell for the fourth month straight in September, and was down to 14.9 percent. Monthly inflation over August was at 1.1 percent, due largely to a jump in textile and education prices.



Latvia has had the European Union's highest annual inflation rate for more than a year now, a starnge trophy to obtain, this one. Inflation peaked at 17.7 percent in May, and has since been slowing steadily.

Latvia's economy posted 10.5 percent growth in gross domestic product in 2007, following 11.9 percent growth in 2006. Since that time Lativia's economy has turned sharply downward, with GDP expanding only 0.2 percent during the first six months of 2008 - down from 10.2 percent over the same period in 2007.

And the future seems to be even more bleak with the IMF forecasting that Latvia's gross domestic product will decrease 0.9% in 2008. Only Ireland and Estonia are forecast to see their GDP contract by more than Latvia – by 1.8% and 1.5%, respectively. The IMF also expects that Latvia's GDP will shrink another 2.2% next year.

The IMF also expect inflation to remain high in Latvia. According to IMF estimates, annual inflation in Latvia could reach 15.3% this year, 10.6% in 2009 and 6.7% in 2007. On the other hand, they expect the current account deficit to decrease to 15.1% of GDP this year and 8.3% in 2009.

Latvia needs to cut spending in next year's budget to avoid rising loan costs as turmoil in financial markets drives up borrowing rates, central bank Governor Ilmars Rimsevics said in Dienas Bizness.

``The global financial crisis has strongly dried up the flow of money: borrowing
abroad for a reasonable price has become practically impossible,'' Rimsevics
wrote in an Ed-op piece for the Riga-based newspaper.



The central bank forecasts growth between zero and 0.5 percent next year, which would widen the budget gap to as much as 4 percent. Rimsevics also said that Latvia may end next year with a fiscal deficit of 5.5 percent of GDP, in an interview with Leta newswire today. A shortfall that size would be ``unacceptable" he said accusing the Latvian government of having given up trying'' to cut spending. As can be easily imagined, Rimsevics song, when coupled with an IMF forecast of an 8.3% CA deficit for 2009, will be like sweet music to the ears of the global investment community at this point.

It is thus hardly surprising that Fitch Ratings recently cut Latvia's credit rating to BBB from BBB+, the second lowest investment grade, citing a deterioration of the European economy.
Posted by Edward Hugh at 10:29 AM

0 comments:

Post a Comment

Subscribe to: Post Comments (Atom)

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