Estonia Producer Prices January 2008

According to data released by the Estonia Statistics Office in January 2008 the percentage change in the producer price index was 1.3% compared to December 2007 and 8.3% compared to January 2007. In January compared to December 2007 the producer price index was mainly influenced by the increase in prices in energy and in the manufacture of food and beverages.

In January 2008 the percentage change in the export price index was 1.1% compared to December 2007 and 6.7% compared to January 2007, while the percentage change in the import price index was 0.5% compared to December 2007 and 5.6% compared to January 2007.



For those of you who are interested to see a chart which I would term having "bottomed out" - or in this case "topped out" - the above chart should serve the purpose, since a lot of the impetus has now gone out of the wave of increase in producer prices. But please remember they are still increasing, it is only that the rate of increase is slowing, but obviously with each month that passes and producer prices continue to rise (ie remains above zero price growth), the more pressure there is on the competitivity of Estonian exports and logically the more pressure there is on the kroon peg. The rate of increase in export prices, as can be seen from the chart below, is now slowing even more quickly, but still, unfortunately a lot of the damage has already been done.

Sharp Decline in Q4 2007 Estonia GDP Growth

Estonia's economy in the fourth quarter certainly grew at its slowest pace in eight years in Q4 as both investment and consumer spending drpooed dramatically. At annual rate (ie total economic growth over Q4 2006) Estonia's GDP grew at 4.5 percent, down from 6.4 percent in the third quarter, according to the Tallinn-based statistics office today. As can be seen in the chart, the slowdown is now evident and significant.




Well, nothing wrong with that people may say. 11% growth was obviously too high, so 4.5% may be a positive improvement. The thing is the Estonian economy is unlikely simply to reduce speed to 4.5% and stay there. If we look at growth quarter on quarter, and on a seasonally adjusted basis, the economy grew by 0.6% in the 4th quarter over the third. That's an annualised rate of just 2.4% and dropping, as we can see from the chart.



So this slowdown isn't suddenly going to come to a halt. At some point it will "bottom out", but we aren't there yet, and may not be for some few more quarters. When we actually get to the end of the drop we will be able to see the extent of the damage, but at the present time all I can say is that there doesn't seem to be anything "soft" about this landing at all.

Lithuania Current Account Deficit December 2007

Lithuania's current-account deficit narrowed by 38 percent in December when compared with November, but before we get too excited about this we need to examine what may be driving this improvement. Clearly exports continue to expand, and grew by 4.7% over November, but the change in the trade deficit - which is what really lies behind this data - was produced by a sharp drop in imports - 7.1% month on month - which was really a result of a movement back from the very high levels registered in November.



In fact imports increased to million LTL in November - up from million LTL in October - and then fell back again to million LTL in December. Thus a large part of the change was due to this movement in imports, although it is also the case that exports accelerated in December, as can be seen in the above chart.The effect of the correction in imports on the trade deficit can be seen in the chart below.




The current account deficit, which measures the difference between money flowing into and out of the country, narrowed to 254.5 million euros ($370 million) from 408.9 million euros in November, according to the central bank today.

But there is some slight longer term improvement taking place, since the gap narrowed in the fourth quarter to 11.3 percent of gross domestic product, compared with 12.3 percent in the third quarter, the bank said. The full-year deficit was 13.2 percent of GDP in 2007, compared with 10.8 percent in the previous year.

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.