Latvia's GDP Q4 2007

Latvikas Statistika have just released a flash estimate for GDP growth in the 4th quarter of 2007. According to this data Latvia's economy expanded in the fourth quarter at the slowest pace since March 2005 growing by 9.6 percent. Still since this is still probably the fastest rate of expansion in the European Union, - and compares with 10.9 percent in the third quarter - it is not an especially useful data point for those of you who are interested in the finer details of things, and in particular for those of you who want to know whether or not the Latvian economy is going to "enjoy" a hard or a soft landing.



Another approach to this process would be to look at the quarter on quarter changes in GDP. During the 3 quarters prior to Q4 Latvian GDP has grown at 2.4, 2.7 and 2.8% respectively. That is, in Q3 growth was still accelerating slightly. Now we have no figure for Q4 yet, but doing some quick mental arithmetic, my guess is that q-o-q growth will come in around 1.5/1.6%, provided the original flash estimate is confirmed. Now this deceleration is quite fast, but it still isn't enough to tell us what kind of landing we will have with any high degree of certainty (as opposed to what my guts tell me). Look at the chart a moment.



Well, we can certainly see that the cycle has peaked, and the slowdown is certainly sharp, but look at the chart a bit harder, and you will see that after Q4 2002 there was another sharp slowdown, but in Q3 2003 there was a rebound. That is what the people who argue there will be a soft landing this type hope will be repeated. My view is that I don't see how this can happen with the Lat at its current high values, since to get export let growth, export prices in euros will need to be brought back down from where they will be once all that inflation is effectively "bled" out of the system.

What I do think though is that we need to see the reading on GDP for the next quarter. Unless there is a complete fudge in the data, my guess is that we will be able to say definitively at that point.

Which means we should know definitely one way or another on or around 8 May 2008. Those of you of a nervous disposition might like to take up knitting or crochet in the meantime.

Estonia Inflation 2008

Estonia's inflation rate rose to almost a 10-year high in January, led by an increase in taxes on fuel, alcohol and tobacco. Inflation accelerated to 11 percent, the highest since April, 1998, from 9.6 percent in December, according to the statistics office in Tallinn today. Month on month, prices rose 2.2 percent.



Continued high inflation triggered by rapid economic growth, a consumer spending boom and growing labour shorgages now increases the risk of an abrupt slowdown in Estonia, and puts mounting pressure to do something about the high value of the currency which makes exporting increasingly difficult.

Latvia Industrial Output December 2007

According to preliminary data from Latvijas Statistika total seasonally adjusted industrial production decreased by an annual 5.4% in December 2007. Manufacturing output decreased by 7.5%, while in electricity, gas and water supply there was an annual increase of 2%, and mining and quarrying the increase was 7.8%.

However if we look at the trend, month on month from November industrial output at constant prices decreased in December 2007 by 3.2% on the month, on a seasonally adjusted basis (seasonal and working day influence is taken into account). There was a monthly 1.7% decrease in mining and quarrying, a 1.8% one in manufacturing, and a 7.3% one in electricity, gas and water supply. So the picture is that manufacturing continues to decline, while the novelty is that output in mining, quarrying, electricity, gas and water are now also falling.If we add to this the likelihood of negative growth in retail sales, and no significant increase in government spending (ex EU grants) then it is hard to see where GDP growth is likely to come from as we move forward. Certainly we are a long way away from an export lead growth process at this point, and something will need to be done about relative prices if this is to become possible.

Looking at the charts we are still in the process of falling steadily off the roof, and if the degree of slope is anything to go by, we aren't falling slowly, in fact our rate of descent has just accelerated.







The details below which come from the statistics office are interesting since they give some idea of the distribution of the slowdown.

Compared to December 2006 industrial output in manufacturing of food products and beverages decreased by 14.8%, of which in manufacture of other food products (bread, confectionery, sugar) – by 36.1%, dairy products – by 11.2%, meat and meat products – by 6.8%, beverages – by 5%. Within the food product group only production in processing and preserving of fruit and vegetables and in processing and preserving of fish and fish products grew, by 28.8% and 11.8%, respectively.

Compared to December 2006 output increased in manufacturing fabricated metal products (except machinery and equipment) – by 56.1%, in manufacture of motor vehicles, trailers and semi-trailers – by 11.1%, in manufacturing of basic metals – by 5.9% and in manufacture of pulp, paper and paper products – by 5%, but the most notable industrial production output decrease was recorded in manufacturing of rubber and plastic products – by 19.3%, in manufacture of non-metallic mineral products (manufacture of glass, ceramics, cement, concrete, brick, etc.) – by 18.6%, in manufacturing of chemicals, chemical products and man-made fibres – by 18.2%, in manufacturing of furniture; manufacturing not classified otherwise – by 15.5%, in manufacture of radio, television and communication equipment and apparatus – by 15.1%, in manufacturing of wearing apparel – by 14.9%, in publishing, printing and reproduction of recorded media – by 13.2%, in manufacturing of other transport equipment (repairing and construction of ships and boats) – by 10.9%, in manufacture of machinery and equipment – by 10.7%.

On an annual basis - compared to 2006 - industrial output in 2007 increased by 0.5%, of which mining and quarrying by 13.7%, electricity, gas and water supply by 4.2%, while industrial output in manufacturing decreased by 1%.

In 2007 increases were recorded in the manufacture of fabricated metal products, (except machinery and equipment) —by 19.4%, in manufacturing of rubber and plastic products – by – 13.6%, in manufacture of electrical machinery and apparatus - by 10.6%, in manufacture of pulp, paper and paper products – by 9.5%.

The most significant industrial output decreases were recorded in the manufacture of radio, television and communication equipment and apparatus – by 19.9%, in manufacture of wood and wood products – by 5.8%, in manufacture of machinery and equipment – by 6.8%, in manufacturing of furniture; manufacturing not classified otherwise – by 5.1%, n manufacturing of wearing apparel – by 4.5%.

Estonia Retail Sales and Industrial Output December 2007

Growth in Estonian retail sales and industrial production weakened in December, offering the latest signs that the economy is now cooling significantly and rapidly.

According to Statistics Estonia, in December 2007 retail sales for retail trade enterprises amounted to 5.4 billion kroons, which is 630 million kroons up on December 2006, in money but not real terms (inflation remember). Retail sales growth eased to an annual rate of 4 percent, the slowest since at least 2001, and industrial output declined 2.1 percent on an annual basis, the first contraction in more than five years, the Tallinin-based statistics office said today.

Retail sales slowed from a 6 percent growth rate in November, mostly as a result of consumers having less available to spend due to the ongoing increase in food prices, the statistics office said. Retail sales grew 14 percent on average in 2007, it added.




Consumer confidence fell in January to its lowest level in almost three years on worsening expectations for public and personal finances. The number of property transactions also fell in the fourth quarter to the lowest level in almost three years, as interest rates keep rising and banks have restricted lending terms.




Industrial Output

According to preliminary data from Statistics Estonia, industrial production in 2007 increased by 6% compared to 2006. Rapid growth in energy production and mining were the main factors producing growth in total industrial output. Growth in the manufacturing component first slowed and then turned negative towards the end of the year.

In December 2007, Estonia's seasonally adjusted industrial production fell 7.3 % compared with November. As compared with the month of December 2006, total industrial production fell 2%, and in manufacturing 5.7%.

This contraction in industrial output, adjusted for working days, followed a revised 4.5 percent expansion in November, the statistics office said. Manufacturing, which is the main contributor to gross domestic product growth at this point, shrank by 5.7 percent, the weakest showing since May 1999, led by a contraction in furniture, wood and construction materials' output. This is not good news for Q4 GDP, and when coupled with the steady downward movement in year on year retail sales begin to raise serious questions about what Q1 2008 GDP may actually look like.

Industrial output growth was hampered last year by rising costs as companies faced increasing labor shortages, unemployment was at a 16-year low and domestic demand started to cool after a three-year growth spurt.



Looking at the retail sales and industrial output charts, all I would say is that if this is marking the line of a "soft landing", then I would hate to see what a hard one looked like. Really, perhaps the most preoccupying part about all this looking through the comments you see in the press is just how little idea most of the professionally paid analysts have of what is actually going on here.

Domestic demand is going the same way as Hungary, and short of a major adjustment in relative prices (which means basically a big downward revision in currency values) exports will obviously not be able to drive growth. In other words if the currency value problem is not - for one reason or another - not addressed then you are going to see some of the most severe wage deflation in any developed country in recent times to put exports back onto a cometitive footing. Which means very weak domestic demand over a period of years while everything corrects, meaning very low GDP growth numbers, and these, remember are the key years before post 2012 the ageing population problem really starts to lock-in. It is the lack of urgency and shoulder shrugging you find almost everywhere that continues to preoccupy. Clearly most people are well out of their depth with all this, but does anyone really realise that the whole future of Estonia as a nation is now in play?