Estonia Consumer Inflation February 2008

Estonia's inflation rate rose in February to what is nearly a 10-year high reaching an annual 11.3 percent - the highest since April 1998 - according to data from the statistics office this morning. The rate was up slightly from January's 11 percent in January, although month on month prices were only up by 0.4 percent, following the hefty hike of 2.2% between December and January.




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.

Latvia Retail Sales January 2008

According to the latest data from Latvijas Statistika retail sales in January - when compared to December 2007 on a seasonally adjusted basis - decreased by 1.5%. And in January 2008 when compared to January 2007 sales decreased by 0.7% (data adjusted by number of working days). That is we are also into negative territory on a year on year basis.



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.

Latvia Industrial Output January 2008

According to the latest data from Latvijas Statistika, when compared to December 2007 industrial production in January was up slightly. On a constant prices (considering the influence of the price changes in the reference period) and seasonally adjusted basis (considering the influence of the season and number of working days) it increased by 2%. Of this the increase in mining and quarrying activity was 8.3% (4.2% according to seasonally adjusted data), electricity, gas and water supply 7.8% (3.4% according to seasonally adjusted data), while manufacturing decreased of 8.8% (increasing 1.5% month on month according to seasonally adjusted data).

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.

Estonia Retail Sales January 2008, and Sweden's Banks in the Baltics

According to Statistics Estonia retail sales grew at a 1% annual rate (in constant prices, ie real terms) in January 2008 when compared to January 2006. The growth rate of retail sales has been decelerated significantly during the last part of 2007 - as can be seen in the chart below - and this deceleration has now continued into January 2008. We have no sign at this point of any slowdown in the rate of deceleration, and if things continue like this we will evidently enter the contraction phase as of February.



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.