Estonia Unemployment January 2008

According to data released last week by the Estonian Labor Market Board there were 15,758 people registered unemployed in Estonia in January, and this was a rise of 11.7 pct compared with December. Now looking at the data for last year it is not unusual that unemployment should rise from December to January, but if you look at the chart you can see that unemployment touched a low in June, and since then has been steadily rising. In fact there is a 27% rise on the level of January last year.

Of course, as the Estonian economy slows this increase in unemployment is hardly surprising, but if we follow it as the slowdown deepens it should give us another measure of the extent of things. The difficulty is - in macroeconomic rather than human terms - that due to the very constrained Estonian labour market, and the low level of arrival of young people into the market, registered unemployment may not rise anything like as rapidly as demand collapses. This presents a difficulty, since it means that prices may not be able to adjust as quickly as they should (in the literature this is called "sticky prices"), thus making it difficult for the economy to adjust, and hard to "bleed" inflation out of the system. This is a technical problem, but its impact is real enough. The consequence would be the the recession would be longer and deeper than necessary (as we are beginning to see in Hungary) as domestic prices deflate back - by whichever is the preferred method of the Estonian authorities, real wage reductions or currency adjustment - to internationally competitive levels. This is important, since given the extent of the recent "excesses" and the impact of the correction on domestic demand when coupled with the population ageing component, it seems pretty clear that there will be a "before" and an "after" here, and Estonia will need to re-invent itself as an export driven economy on the Swedish or Finnish model. Anyway, we will keep following unemployment as we move forward here as there is a lot we can learn from Estonian labour market dynamics.

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%.