Monday, March 31, 2008
Apart from the general point which I made in the case of Estonia that, apart from noting the fact, we really need to wait a few more months to see where all this is leading before trying to draw any lasting conclusions, I also think that it is worth bearing in mind, as in the case of Estonia, that real wages (derived by subtracting the monthly rate of inflation from the rise in money wages) were still rising at an annual rate of 11.1% back in December (which is the last month for which we have data at this point), although as can be seen in the chart the rate of increase is decelerating rapidly (although again this is as much a by-product of the rapid acceleration in Latvian inflation as it is of anything else, since money wages were still rising at a 25.2% annual rate in December). So when we come to think about retail sales we should remember that for the time being people continue to have more money in their pockets, although as inflation comes under control this situation is almost certainly not going to last, and when it doesn't then that is when I think we will see the real impact on retail sales.
In February, retail sales were running at a level of 4.2 billion kroons, which is a half billion kroons more than at the same time a year ago. If we come to look at the volume index for retail sales (which is not seasonally corrected) we will see that the picture is far from clear.
We can certainly say that for one month the rot seems to have been stopped, but since January and February are far from being typical months in retail sales terms we would do well to wait a few more months yet before jumping to too many conclusions.
One factor which may well be worth taking into account when looking at these retail sales numbers is the fact that real wages in Estonia (at least up to December, which is the last month for which we have data) have been continuing to rise at a hefty clip. In December gross wages were still increasing at an annual rate of 18.05%, which, if you subtract the annual cahnge in the CPI for December of 9.6% still leaves a real wage increase of 8.45%. As inflation comes under control these kind of wage increases will obviously not be happening, and this will be noticed at the level of retail sales. So we should expect further, and more substantial corrections to sales to take place as wages are brought back gradually under control. In fact the length of time it takes to achieve this end will be one measure of the severity of the "stagflation" which we might expect to see in Estonia for some considerable time to come.
Thursday, March 27, 2008
Basically the rather volatile nature of Estonian exports makes it hard to draw any worthwhile lasting conclusions at this point, other than to note that the improvement in the trade balance will impact positively on GDP.
In January 2008 exports reached a value of 10.1 billion kroons and imports 13.2 billion kroons. Compared to January 2007 the value of exports rose 4% and imports fell 4%. The trade deficit was 3.1 billion kroons. Compared to January 2007, the trade deficit decreased by about a billion kroons.
In January 2008 the export share of EU countries was 75% and the share of CIS countries 10%. The most important export partners were Finland, Sweden and Latvia, which collectively accounted for 46% of total exports. Exports to the EU countries increased by 1.1 billion kroons when compared to January 2007.
The import share of the EU countries was 79% and that of CIS countries 12%. The most important partners in import terms were Finland, Germany and Sweden, which collectively accounted for 38% of the total imports. Imports from the EU countries increased by 272 million kroons when compared to January 2007.
The foreign trade deficit with the EU countries decreased from 3.8 billion kroons to 3 billion kroons compared to January 2007. Compared to January 2007, the trade deficit with the CIS countries dropped from 1.5 billion kroons to 0.6 billion kroons. The biggest trade surplus was achieved with Norway (247 million kroons) and Sweden (98 million kroons). The biggest trade deficit was with Germany (1.0 billion kroons), Russia (484 million kroons) and Lithuania (282 million kroons).
In both exports and imports the most important commodity section was machinery and equipment (the share 20% of exports and 21% of imports). Compared to January 2007, the greatest increase in exports was in the metals and products thereof (62%), transport equipment (20%) and agricultural products and food preparations (19%). The exports of mineral products decreased significantly (42%). The imports increased in the sections of raw materials and products of chemical industry (12%) and agricultural products and food preparations (10%). Among other commodity sections the imports decreased. The biggest decline in imports was in the section of wood and products thereof (18%) and paper and articles thereof (18%).
In annual terms the manufacture of food products and beverages made the biggest impact on the overall level of producer prices, increasing by 4.7 percentage points. The increase of the tariffs of electricity, gas, steam and hot water supply raised the overall price level by 1.7 percentage points.
Prices in the export sector were up 5.7% year on year, and 1.5% month on month. This last detail is important, because it should be noted in the chart above that both total producer prices and prices in the export sector alone have both - hopefully only temporarily - ceased their downward march in terms of year on year rates of increase. Like this it will be hard to sustain export competitiveness.
Thursday, March 20, 2008
Obviously the rate of increase is falling back slightly, but certainly not far enough or fast enough at this point.
In February 2008 the percentage change in the export price index was 0.1% month on month and 6.4% as compared to February 2007. Month on month the biggest influences on the export price index were the increase in prices in the manufacture of plastic products and metal products and the decrease in prices in the manufacture of electrical machinery and apparatus. The import price index was down 0.6% in February compared to January 2008 and 4.6% compared to February 2007.
There is a long long way to go here to get back to restoring competitiveness in the export sector, from which Estonia will now need to live.
Thursday, March 13, 2008
What is quite evident from the above chart is that the growth momentum in Estonia has been declining since the first quarter of 2006. What is also evident is that the loss of momentum is moving in fits and starts. Q3 2007, for example, shows a certain recovery from Q2, but then the decline continues in Q4. What can we learn from this pattern? Well, we now know that Latvia entered recession in Q4 2007. If we look at the rate of decline in Estonia we could expect recession to arrive in Q1 2008, but this might not happen, and we might not reach the recession stage till Q2 2008. The recent uplift in Germany, and the further acceleration in some EU10 economies (Slovakia and Poland in the front) leads me to think that in fact Q1 2008 may not be as negatively monotonic as Q4 2007 was.
In terms of details, domestic demand grew by 5.5% year on year in the 4th quarter. Within the components of domestic demand, the growth rate of household final consumption expenditure decelerated to 3.3% compared to the 4th quarter of 2006 mainly due to the deceleration in the growth of expenditures on food and non-alcoholic beverages and due to the decrease in the expenditures on clothing and footwear. Capital investments grew by 5.6%. Investments by non-financial corporations supported the total investments of the economy the most, whereas the investments made by financial, general government and households’ sectors decreased.
Exports and imports of goods and services decreased at constant prices in the 4th quarter. Exports decreased by 0.2% compared to the same quarter of 2006, but imports decreased by 0.7%. Specifically, the exports and imports of goods decreased, whereas the exports and imports of services increased. Decrease in the exports of goods was mainly influenced by the decrease in the exports of mineral products and machinery and equipment. Decrease in the imports of machinery and equipment and metals and products thereof influenced the most the decrease in the imports of goods. Deficit of net exports in GDP increased to the level of 8.9%.
On the supply side of the economy, deceleration continued in the value added growth of manufacturing and real estate, renting and business activities, which fell to year on year rates of 4.9% and 0.6% respectively, in addition, decrease in the value added of wholesale and retail trade and transport, storage and communication activities, compared to the 4th quarter of 2006, influenced deceleration in the growth of GDP.
Growth in 2007
According to preliminary calculations of Statistics Estonia, the gross domestic product (GDP) increased by 7.1% at constant prices in 2007 compared to the previous year. In the 4th quarter of 2007, GDP grew by 4.8% compared to the same period of previous year.
GDP at current prices was 243.3 billion kroons and at constant 2000 prices it was 169.1 billion kroons. In 2007, the GDP growth decelerated gradually due to the deceleration of domestic demand and exports and imports of goods and services. The growth rate of domestic demand decelerated to 9.3% compared to 2006 (in 2006, domestic demand grew by 16.1%). A steep deceleration of household final consumption expenditure and capital investments in the second half of the year influenced the deceleration in the growth rate of domestic demand. Growth of exports and imports decelerated as well, whereas in the second half of the year both indicators even decreased. Thus, in 2007 compared to the previous year, exports increased only 1.5% and imports increased 2.8%. At the same time, deficit of net exports in GDP somewhat improved.
Deceleration in the growth of domestic demand and exports brought about deceleration in the growth of corporations’ sector to 5.8% (in 2006, the sector grew by 12.4%).
Value added growth of the majority of economic activities decelerated in 2007 compared to 2006. A more significant deceleration was in hotels and restaurants, wholesale and retail trade and real estate, renting and business activities. The annual growth of value added decelerated fast in the electricity, gas and water supply activity. However, the growth rate of this economic activity accelerated in the second half-year. Value added grew faster than in 2006 only in the fishing, mining, and public administration and defence activities.
Wednesday, March 12, 2008
The trade deficit was consequently down from 265 million Lat in December to 247.5 million Lat in January.
In terms of products, agricultural products which constitute 16.8% of total exporst were up 58.9% y-o-y, machinery and equipment which is 10.3% of the total is up 15.6% y-o-y, while wood products which are 21.3% of the total are up 17.2% y-o-y.
In terms of countries exports to both Lithuania and Estonia (which are up significantly year on year) are both down in January from December, while exports to Germany are up massively on the month.
A similar process is to be observed in Latvia, according to data from the State Employment Board, although in Latvia the unemployment rate (at 5%) is somewhat higher, while the increase in unemployment between January and February - from 53325 to 53429, or 104 - was much more modest.
Since last time I had a close look at Lithuania not a whole lot of new data has been published. In this way, I can't make a comprehensive update most notably because the full range of data I am tracking has not been released for Q4 2007. However, among the pieces of data which actually have been released a couple of noteworthy things stand out. Firstly, the provisional estimate for Q4 GDP (q-o-q) was confirmed to have shown a contraction. This came on the back of a dubiously strong Q3 so I am not sure how much we can read into this in terms of determining the question on everybody's lip as to whether it will be a hard or soft landing. In this light, the y-o-y figures still look quite strong.
More generally, we have also seen that inflation measured by the EU HICP methodology continued to rise on a monthly (y-o-y) basis ticking in into double digit territory at 10 % in January. That is not the way we would like to see things moving. Bloomberg furthermore alerts us to the fact that wages continued their brisk growth rate in Q4 posting a 18.5% increase on an annual basis. All this is old news really but what has been persistently missing in the general discourse is an explanation of why exactly we have seen this very rapid rate of wage growth and inflation across the Eastern European edifice.
In my analyses I have emphasised how the exclusion of demographics as a variable grossly tend to oversimplify the situation. Now it seems that somebody somewhere is beginning to re-assess the way they look at this. I was consequently (positively) surprised to read the following Bloomberg snippet on the wage growth release from Lithuania ...Lithuanian wages grew an annual 18.5 percent in the fourth quarter as accelerating inflation and lack of available labor pressured employers to raise salaries. The average nominal monthly wage rose to 2,052 litai ($880), the Vilnius-based statistics office said on its Web site today. Wages grew 17.9 percent in the previous quarter. Lithuania's falling unemployment rate and labor migration to Ireland and the U.K. have fueled wage increases and added to inflation. Wages, which are advancing faster than productivity, are hurting the country's competitiveness and may hamper exports, banks including Goldman Sachs have said. So, Goldman et al. as well as the rest of us can all see the non-sustainability in this from the point of view of the fundamental relationship between wages/inflation, productivity and competitiveness. But this is merely the effect. What is much more important is the cause and it is pretty clear I think that the demographic dynamics need to be considered too. More generally, we could also invoke the point that almost all Eastern European countries saw their fertility rates collapse on the back of the Berlin Wall's fall and subsequent opening up towards the West. However, let us stay with migration for now. The graphs below show in pictures the point Bloomberg (Milda Seputyte) makes;
If we scrutinize the two first graphs it does not seem to be a coincidence that the beginning of 2005 was when the tightening of the labour market really took off. If we assert, as can be observed from the subsequent graphs fielded below, that the inflows of credit and investment really shot up in the middle of 2003 and if we build in the point that the labour market tends to lag the business cycle it seems perfect in line with economic theory. In Lithuania's and Eastern Europe's case however especially the pace of tightening and as a derivative inflation have been staggering. One of the key reasons for this has to be found, in my opinion, in the third graph which shows the net annual outflow of migration. We note immediately that the overall number of emigrants has declined substantially over an 11 year period with a clear break in 00-01. Yet if we couple this with the collapse of fertility seen in the beginning of the 1990s we get a blueprint for, at least a part of, the very rapid run on capacity in the Eastern European/Lithuanian economy.In this last part of this note I am going to shift gears a little bit. In my latest note on Lithuania I fielded graphs on Lithuania's net international investment position (NIIP) which measures the difference between a country's assets and liabilities and thus acts as proxy for the financing/composition of the external balance. Below I reproduce the graph ..
One of the striking features of the situation in Lithuania and the rest of the Baltics is the extent to which bank loans have been used to finance the external deficit. Regular readers will know this story very well as it tells about how foreign banks have been very eager to supply loans denominated in Euros and Swiss Francs to an extensive part of households and corporations in the CEE and Baltic economies. We can all see and interpret the graphs above but what follows will be a more formal and, according to some, rigorous derivation of this relationship. As such beware since math and econometrics will now follow. In order to show this three models are estimated below. All models are estimated in first differences in order to correct for non-stationarity in the time series. Autocorrelation and heteroscedasticity have been deemed not to exist in the models on the basis of rudimentary graphical analysis. As such, we are dealing with three pretty dodgy models which nonetheless convey the message needed. The data is quarterly in LTL million from Q2 1997 to q3 2007.
The first model regresses the change in the NIIP on the change in the inflows of FDI, portfolio investments(PI) and bank loans(BL).
F'(NIIP) = -592.1B0 - 0.471F'(FDI) + 0.154F'(PI) - 0.353F'(BL) + ut
(t: -3.6) (t: -4,39) (t: -0.66) (t: -4.64)
The signs for all variables are in accordance with theory except for portfolio investments. However, this variable is not statistically significant at 5% so for all intent and purposed it could be excluded from the model over the sample period in question. All other variables are statistically significant at 5% with some margin. The model itself has a very high explanatory power which is quite as expected. The R-square is 0.534 with a subsequent F value of 14.5 which is significantly above the critical value in question. What I particularly take away from this model is that the coefficient estimated for bank loans is almost as high as the corresponding coefficient for FDI which is rather unusual I would say even if I don't have empirical evidence readily at hand. This thus confirms, in numbers, the relatively high importance of foreign credit in the Eastern European expansion assuming that the Lithuanian case mirrors the general CEE situation. The confirmation of this point leads to the estimation of the second model which regresses the change in the NIIP exclusively on the change in the inflow of bank loans.
F'(NIIP) = -896.1B0 - 0.365F'(BL) + ut
(t: -5.76) (t: -4.12)
At a first glance the second model does not seem to add much to the general picture. Both the intercept and the estimated coefficient of BL are statistically significant at 5 % with the latter almost equalling the value of model 1. However, if we look at the reported R-square of 0.2975 with a corresponding F value of 16.92 (highly significant at 5%) it conveys, quite remarkably I think, the point that especially foreign credit has been (and is) tantamount in Lithuania's expansion.
The last model or models involves the econometric technique of testing for structural breaks in relationships over time. And by all means, if you did not like what preceded this you won't like the following either. As can be observed from visual inspection of the figures above there seems to be a shift somewhere around Q2 2003. Such structural breaks if present can be shown with statistical tests. In the appendix below I reproduce the full derivation of the so-called Chow test. What suffice to know at this point are the main results. If we thus split up the data set from q2(1997) to q2(2003) and from Q3(2003) to Q3(2007) and test for a structural break in the model originally estimated with all variables we obtain an F value of 6.69 Under the H0 of parameter stability (no structural break) we clearly reject this hypothesis and thus conclude that a structural break is present both at 5% (against 2.69) and 1% (against 4.02)
I had a couple of objectives in this post. First of all I wanted to bring you up to speed with the latest news on Lithuania even if the whole range of data from Q4 is not yet available. Given the fact that GDP seems to be trending down at the same time as the rate of inflation keeps on rising confirms my general pessimist stance towards the soft v hard landing debate. I also noted with positive surprise that the main discourse now seems to be factoring in the region's demographics (in the specific case Lithuania's) in explaining the labour market and wage situation. Lastly, I ventured into the realms of econometrics and tried to formalize the relationship between the rolling financing of Lithuania's external balance and the inflows of bank loans.
The formal expression for the F value used to evaluate the hypothesis of a structural break is as follows; RSS is residual(error) sum of squares.
F = [(RSS(r) - RSS(ur))/k] / [(RSS(ur))/(n1+n2-2k)]
The F value in this case follows a F distribution with [k,(n1+n2-2k)] degrees of freedom. K is the number of explanatory variables including the intercept in the model (4 in this case) and n marks the sample sizes. RSS(r) is estimated by the original regression over the entire sample period and RSS(ur) is estimated from the regressions from the two sub periods. As such, RSS(ur) equals RSS1+RSS2 where RSS1 is the estimated RSS from sub period 1 and vice versa for RSS2. The Chow test formally evaluates the H0 that a1 = d1 = y1 against the Ha that a1 is not equal to d1 and y1 (sorry for lack of adequate notation). In the present case we are thus testing the following joint hypothesis. The subscript 1 and 2 denotes the sub period to which the estimated parameter belongs.
H0: [bo= (b0)1= (b0)2], [F'(FDI) = F'(FDI)1 = F'(FDI)2], [F'(PI) = F'(PI)1 = F'(PI)2] , and [F'(BL) = F'(BL)1= F'(BL)2]
Ha: Essentially testing against the equality signs above.
In our context it leads to the following calculation.
F= [62625030-(4598233+8730034)/4] / [(62625030) / (25+17-2(4))] = 6.69
F~ [4, 34] = 2.69 (5%)
F~ [4, 34] = 4.02 (1%)
As 6.69 > both 2.69 and 4.02 we reject the Ho of no structural break.
All three Baltic states - Lithuania, Latvia and Estonia - are struggling to control inflation triggered by rapid economic growth, labour shortages and a consumer spending boom. Inflation in the Baltic countries is three times faster than the 3.2 percent pace of the 15 countries sharing the euro.
Housing costs such as gas, heating and water rose an annual 17.4 percent, the steepest gain of any category in the index. AB Lietuvos Dujos, a Lithuanian natural gas utility, has raised prices for household consumers by 62 percent since January as a result of the rising price for gas imports from OAO Gazprom.
Food prices, the biggest item in the consumer basket with a 26 percent weighting, rose an annual 17.2 percent. Meat, bread and pastry prices increased the most from the previous month.
Current Account Deficit
In a separate data release Lithuania's central bank announced that Lithuania's current-account deficit widened in January from December largely on crude oil imports.
The deficit widened to 394.6 million euros ($613.7 million), up from 254.5 million euros in December.
Lithuania's trade gap has been steadily widening as the boom in consumer demand has increased imports of goods, while continuing inflation has made domestic products less competitive. Lithuania must narrow the deficit to reduce the risk of some sort of financial turmoil accompanying the ending of the period of economic overheating.
Exports grew 4 percent in January from December, while imports increased 7.2 percent month on month led by crude oil, the statistics office said on March 7.
Tuesday, March 11, 2008
Basically if you look at the last two bars on the above chart you should be able to just make out that - at constant prices - Latvian GDP actually declined between Q3 and Q4 2007, down to 2.222 billion Lat from 2.227 billion lat in Q3 2007. That is a DROP of 0.23% (my own calculations) which might seem small but we should bear in mind that in Q3 the Latvian economy was still growing at a quartery rate of 2.8% (or around 11% annualised) so movin from this to an annualised negative growth rate of around 1% is not at all small beer, and constitutes very rapid deceleration indeed. So while the actually data point may not seem like much, the implications are really quite profound. Technically we could consider a recession as two quarters (back to back) of negative growth. Well, we just had one of them it seems, and with all the dials continuing to show negative we are surely now in the third month of the second one. Which means, on my call, that Latvia is fully in recession at this point, and the only question really left is how long and how deep the recession is going to be.
Of course you can get some idea of the speed of the slowdown from looking at the year on year growth chart, but this doesn't really give us enough detail at this particular point in time to get hold of the actual process taking place.
To answer one small potential quibble in advance, the Latvian Statistics Office do not seem to publish seasonally adjusted quarterly data, so I am working from original series numbers (corrected for constant prices). However, if we look at the cahrt from GDP on a quarterly basis since 2000, we can see that the seasonal variance is not large, and that in no previous Q4 so far this century has GDP actually fallen, and if there has been any notable seasonal impact it is in a slight slowing in Q1, when bad weather will presumeably have affected construction activity, and retail sales may be slow in the post xmas period. The current slowdown in construction has little to do with seasonal factors, and everything to do with the cutting off of the credit supply by the Scandinavian banks back in the late spring.
Moving on to look now at the Q4 "uses of GDP" side, the only area which showed positive movement was in fact the much berated area of government spending, which I think basically vindicates both me and the Latvian government for saying that during the last quarter of 2007 it was ridiculous to continue talking about trying to run a fiscal surplus since the economy had already turned (six months earlier, and then previous to that was a very different matter). If we start by looking in detail at private consumption for Q4 we will find that this was down from 1.637 billion Lats in Q3 to 1.612 billion in Q4 (or by -1.55%).
On the other hand gross capital formation was down from 920 million Lat in Q3 to 873,2 million in Q4 (a reduction of 4.69% - all numbers at constant prices).
External trade was also less of a drag in Q4, although the deficit was still substantial, dropping from 582.5 million Lat in Q3 to 561.4 million in Q4 (a reduction of 3.6%) .
As I say the only really strong point in all of this was government consumption, which increased from 303.5 million Lat in 343.3 million Lat in Q4 (or up by a hefty 13.1%). Since the Latvian economy now needs a very heavy and rapid blood transfusion if it is not to swoon completely, more power to the elbow of government spending in the short term should be the watchword from where I am sitting. The economy now urgently needs some sort of platform placing firmly underneath it, since otherwise with this rate of contraction the danger is that as the inflation peters out it will be followed by sharp and severe deflation.
So as a say at the start of this post, the great "hard landing - soft landing" debate is now effectively over, and a hard landing it is (although I haven't seen the touch judge raising his red flag yet). The only real outstanding issues now are how long the Lat peg can hold, and what to do now to drag the economy out of the mire into which it is steadily sinking.
Friday, March 7, 2008
Really this is the point where all the really important damage is going to be done as far as I can see, and when we will really get to see what a pernicious phenomenon inflation is, as domestic demand contracts and exports are unable to take over the weight due to lack of price competitiveness. The difficulties are only added to by the long term labour supply issue - a product of low fertility and out migration - since wages in the domestic market are - as we can see - proving resistant to any downward adjustment.
Thursday, March 6, 2008
Month on month turnover in retail trade enterprises selling textiles, wearing apparel and footwear decreased by 13.7% and in specialised stores selling mainly food, beverages and tobacco by 12.6%. Turnover in retail trade enterprises selling pharmaceutical and medical goods, cosmetics and toiletry increased by 2.5% month on month, while non-specialised stores, selling mainly non-food increased by 22.1% and stores selling furniture, household goods, electrical appliances and construction materials saw their sales rise by by 2.9%.
On another front I mentioned in this post about retail sales in Estonia that I didn't really see any major time lag between economic events in the two countries looking at the retail sales chart. Latvian Abroad chimed in with the following:
I think 2) (the one year time difference) used to be true - until the present credit crunch which was simultaneous. Construction boom took off 1-2 years later in Latvia (compared to Estonia) and so on.
Now, the events are mostly simultaneous. One exception is that Estonian exports are already declining year-on-year (loss of competitiveness?) while Latvian ones are still growing. Latvian salaries are 20-30% below Estonian which is around 1 year at the present salary increase rates - that could explain it.
Well this is an interesting point about wages that I hadn't really thought about. Basically I've been looking at year on year wage increase charts, but basically not coming from the region I'd missed something so obvious as the relative differences in wages between the countries. So I went and checked out the data a bit.
First of all the comparative wage indices for the two countries.
Well, so far so good I thought. All the way back to 1996 the two countries seem to track each other pretty closely, indeed with the last litle extra sprint arguably Latvia has more or less positioned itself vis a vis Estonia in the position it was back in 1996. But of course none of this tells us about the RELATIVE wages (as opposed to the relative movements in wages) between the two countries, and this was Latvian Abroad's point I think.
So then I checked out the data for average monthly and average hourly wage costs.
So there I think you can see it, Latvian Abroad is right, there is a significant difference in the wage levels between the two countries, although I wouldn't be tempted to move beyond this and make any more general comparison here (like Estonians are better paid than Latvians, although they may well be), since it all depends on the levels of productivity involved and the value content of the work people are doing. But the difference is striking and interesting, although going back to the wage index chart I can't see any real evidence of these proportions changing in any systematic way. Neck and necking it I would say, and when we start to look at the inflation side what we have to say is that what is going to matter is just how much all these wages will actually be worth - in either case - when the current "doin is done".
On the other hand Latvian Abroad's point about how it is that Latvia is still at this point able to increase exports to some extent while Estonia seems to have entered decline may well be an interesting and valid one.
OK, so much for the rigmorole, now what does all this mean? Well it means that in January and over the longer haul things were still getting worse, but that they were getting worse at a slighly slower rate than in December. If we look at the all-industry chart, we will see that the annual rate of decline was not only reduced in January, but annual break even point was almost reached with only a very slight reduction in output (-0.1%) taking place. But since the volatility (the ups and downs) in the data is so pronounced I think it would be foolhardy to try and read anything very much into any of this at this point.
If we look at the year on year chart for manufacturing only, then again the annual rate of deceleration in manufacturing decreased. Of course this is basically good news, but we need to see first whether this is sustained or just a blip.
Perhaps the most revealing chart if the one for the all industry index itself. What we can see here is that December 2007 was a very bad month, while December 2006 was a very good one. So last months year on year number was unflatteringly low, and some bounce back was to be expected. Bottom line: we are still effectively contracting.
Tuesday, March 4, 2008
Basically, if you keep following this blog you will one day get to see when a process of sharp deceleration finally gets to "bottom out", but that day evidently has not yet arrived.
On another front the Swedish banking sector is evidently begining to notice the wear and tear associated with its exposure in the Baltics. We have already reported on the decision by Moody's Investors Service to cut its ratings for Estonian banks on concerns of "weakening asset quality due to high exposure to the cooling property market". Moody's assigned a negative outlook to Estonian banks, including AS Sampo Pank, fully owned by Danske Bank A/S, and Balti Investeeringute Grupi Pank AS. This followed hard on the heels of their decision on Jan. 18 to lower the outlook of AS Hansapank, the top Baltic lender and a fully owned unit of Swedbank AB, to ``negative'' from ``stable.'' Hansapank accounts for more than half of Estonia's banking industry assets.
At the end of last week, in a revealing article in the Financial Times entitled Uneasy Calm At Sweden's Banks, David Ibison argued that all is not as straightforward as it seems in Sweden's banking system, and one of the reasons it isn't is the exposure out in the Baltics.
At the same time, the share prices of two of the banks – SEB and Swedbank – have been hit hard over misplaced concerns over their exposure to the emerging Baltic markets of Latvia, Lithuania and Estonia. Particular attention is being paid to the depressed valuation of Swedbank, whose Baltic operations are conducted by Hansabank, a wholly owned subsidiary.
Fears of a sharp slowdown in the Baltics and a related contraction in bank lending to the housing market have sparked worries that Hansabank will suffer and that its problems could have a knock-on effect on Swedbank.
At Swedbank's current price, Hansabank is valued at almost nothing, in spite of the fact there are no signs of problems with its Baltic loan book, which is well capitalised and where non-performing loans are well in hand.
Ronit Ghose, an analyst at Citigroup, said: "Hansabank has gone from a multiple in the mid teens to close to zero . . . The market is taking a negative view of these countries and of Swedbank's share price and is overlooking the positives."
Finally, and for those of you interested in comparative charts and urban legends, here is a retail sales comparison for Latvia and Estonia (Latvian retail sales actually declined slightly in January).
Now I mention urban legends here, since I think that in the Baltic context we have had two:
1/ The Baltic countries were so small that Nordic banks would have no difficulty keeping them supplied with funds, so there wasn't too much to worry about.
2/ Estonia was running along the same path as Latvia, only one year ahead (or was that behind?).
The first of these legends, as is shown by the material posted above, is now evidently false, the Nordic banks are now going to have to think very carefully about every move they make in the Baltics.
And the second also looks to me to be a bit ridiculous when you look at the two charts for retail sales movement, since what is striking is how similar they are, and given the level of external trade interlocking, and hence the dependence of export performance on internal demand in the other, this shouldn't surprise us terribly. Latvia's downturn is accelerating slightly more rapidly at this point than Estonia's, but the difference is secondary, and not one of substance. Certainly the credit crunch must have been applied at roughly the same moment last spring in both countries, and now a very similar process is working its way through the two systems. And in neither case, it seems, do the political authorities have any sort of coherent emergency "plan B" to deal with what is now an all too evident emerging eventuality.
And for those of you who are addicted to comparative charts, here is the latest EU economic sentiment indicator for the Baltic states. Here we can see that it is the case, Estonia did take off downwards rather earlier than Latvia, but Latvia has been fast catching up, while in the last couple of months sentiment in Estonia does seem to have stabilised. Whether or not this stabilisation constitutes an early indicator of "bottoming out" we will get to see over the next couple of months from the real data as it comes in. Certainly one to watch for. On the other hand it does seem that Lithuania WAS a "late developer" which is now also, and in its turn, in the process of catching up.