Lithuania Inflation March 2008

Lithuania's inflation rate continues to rise. The annual rate rose to 11.3 percent, the highest since January 1997, from 10.8 percent in February, according to data released by the Vilnius-based statistics office earlier today.



Prices rose 1 percent in a month, compared with a 1.1 percent gain in February. Food prices, the biggest item in the consumer basket with a 26 percent weight, rose an annual 18.1 percent. Housing expenses such as water, heating and gas, the second biggest item in the consumer basket, rose an annual 17.6 percent, the statistics office said.


Lithuania is struggling to get the inflation rate, which is the third-fastest in the 27-nation European Union behind Latvia and Bulgaria, under control. Growing prices recently lead to teachers' strikes over pay increases and helped provoke a no-confidence vote in the parliament which Prime Minister Gediminas Kirkilas survived. Parliamentary deputies voted 68-65 to reject the motion. Kirkilas, whose five-party coalition controls 72 of the parliament's 141-seats, became prime minister in July 2006. His government's term expires in October.

The Finance Ministry have recently raised the 2008 inflation forecast to 9.2 percent.

A comparative view of Baltic inflation is also quite revealing. As can be seen in the chart below, Latvian inflation is head and shoulders out in front, though this is one competition noone is very happy to be winning.

Estonia Inflation March 2008

Estonia's inflation rate fell back slightly in March from what was virtually a 10-year high in February as the growth rate in food and housing costs eased back slightly. The annual rate dropped to 10.9 percent from 11.3 percent in February, according to data from the statistics office in Tallinn this morning. Prices rose a monthly 0.8 percent.



Prices of food and non-alcoholic drinks rose an annual 16.7 percent, compared with 17.1 percent in February, the statistics office said. Housing costs rose 14.9 percent, down from 15.2 percent in February. But prices of services are still increasing strongly, transport is rising at a 13.7% annual rate (2.1% m-o-m) and hotels and restaurants at a 15.5% one (1.1% m-o-m). So core inflation is still very high, and in the background wages continue to rise at a very steep pace.




Update May 2 2008

This report in the press today about possible gas price rises in estonia caught my eye. At this point it is hard to say whether or not Eesti gas will get the full price rise they are seeking, but nonetheless the increase is still likelyy to be substantial, which really must raise a lot of concern about the level consumer price inflation will be running at during the first half of 2009.

AS Eesti Gaas, an Estonian gas company, applied to raise prices for consumers 41 percent between September and October, Eesti Paeevaleht reported, citing management board member Raul Kotov.

Gas prices would rise 35 percent for an average household if the application is approved by the Estonian Competition Board, the newspaper quoted Kotov as saying. Eesti Gaas, owned by Russia's OAO Gazprom, E.ON Ruhrgas AG of Germany, and Finland's Fortum OY, has 120,000 household customers, the newspaper said.

Estonia Growth Forecast and Budget Changes 2008

Estonia's Finance Ministry cut its 2008 economic growth forecast for the third time in under a year earlier this week, while indicating that lower tax revenue will require spending cuts to balance the budget through 2011.

Gross domestic product is now expected to expand by 3.7 percent this year and 6.4 percent in 2009. Last November, it had forecast 2008 growth of 5.2 percent and 2008 growth of 6.1 percent. I think we can safely leave the 2009 forecasts on one side at the moment, since frankly I am sure that no one at this point can see as far ahead as 2009. That is to say these forecasts are not really worth the paper they are written on.

3.7 percent is certainly a much more realistic figure for 2008 than the ones we have been seeing up to now, although even this may well turn out to be rather on the high side.As far as the present quarter goes it is not impossible that we will see some sort of bounce back from last quarters 0.8% quarterly growth rate. Certainly industrial output has been a lot better in the first two months of this year than it was in the last two of 2007. Retail sales are however down over the same months, and exports were better in January than in December, but the rate of increase was still below that achieved in October and November of 2007.

But if we look at the the Estonian Institute for Economic Research surveys of Construction and Services and Construction activity, we see that the level of activity is not noticeably better, if at all, from that registered in the last three months of last year. So the position is far from being clearcut.



So I'm not sticking my neck out and actually saying that growth will be up this quarter, but it may not decline as quickly as it has been doing in the past. However as we move beyond Q1 2008 the numbers get ever more difficult to foresee, but given that the EU, eurozone and global economies are all slowing noticeably at this point, downside risk must abound here, so while we may see something in the region of 1% quarter on quarter growth in Q1, this may well be the strongest growth Estonia gets all year, so that 3.7% current forecast looks subject to revision, and lots of it, as far as I can see.

Meanwhile Finance Minister Ivari Padar told a news conference this week that the government will have to cut spending all the way through to 2011 to balance the budget. The government previously had a policy of targeting budget surpluses. He said the government had already decided to cut 2008 spending by 3.1 billion krooni, or 1.1 percent of gross domestic product. Parliament adopted the 2008 budget in December with a surplus of 2.7 billion krooni ($270 million), or 1.3 percent of planned GDP.


Prime Minister Andrus Ansip said last week public spending cuts are ``unavoidable'' given a slowing economy and waning tax revenue. Estonia uses budget policy as its main tool for controlling inflation because the Baltic nation has a fixed exchange rate under a currency board system, and in addition the Estonian government is legally constrained from willingly running a deficit, a feature which may well make it difficult to move in and offer support should the situation deteriorate more substantially later this year than any of us are currently forseeing.

The government have also revised their inflation forecast and prices, as now measured on the EU HICP, are now expected to rise an average 9.1 percent this year and 5.3 percent next, the ministry said. The previous inflation forecast had been for a 2008 inflation rate of 8.5 percent, and a 5.5 percent one for 2009.

Of course, I would be grateful if someone could explain to me how Estonia is going to be able to generate the level of export increase necessary to sustain the economy in the face of what will soon be long term very constrained domestic demand and maintain the currency peg with this kind of inflation over this length of time. Something here simply doesn't add up.


Update Tuesday 8 April 2008


Prime Minister Andrus Ansip said today that Estonia should delay any 2008 spending cuts until September, by which time the Cabinet will have a better understanding of how much needs to be trimmed. Ansip said in an interview with public broadcaster Eesti Televisioon that it may be necessary to cut more than the 3 billion krooni ($302 million) suggested last week by Finance Minister Ivari Padar. Even if cuts are delayed, ministers will have to find savings of 7 percent to 9 percent of their budgets by next week, the prime minister said. Ansip's coalition partners in the Reform Party, the Pro Patria and Res Publica Union and Padar's Social Democrats, support the passage of budget cuts in parliament as soon as possible, according to the Baltic News Service yesterday.

Latvia Has Budget Surplus in Q1 2008

Latvia posted a provisional budget surplus of about 70 million lati ($158 million) in the first three months of 2008, the state treasury said today. The government had a provisional surplus of about 2 million lati in the month of March. Official budget figures will be released in mid-April, the treasury said.

Latvia's economy is slowing rapidly and while a budget surplus of about 1 percent of gross domestic product had been envisaged for this year this now seems unlikely to be achieved. Indeed there has been some discussion as to whether it might not in fact be advisable - given the rate of the slowdown in Latvia - to move sooner rather than later into suplus to try to avoid the now much feared "hard landing". Be that as it may we are still at this point in surplus, although the situation is more than likely going to change as the economy slows and revenues decline.

``The pace of growth is no longer as strong as last year, when revenue in the first quarter grew 26 percent,'' Finance Minister Atis Slatkeris said in the statement. ``Second quarter results will show if this pace of growth will remain for a longer period of time,''

A deficit now seems quite probable, since it has been estimated that Latvia would have a deficit equal to 1.5 percent of GDP this year on economic growth of 5 percent (which is the latest Latvian government growth forecast for 2008 made by Prime Minister Ivars Godmanis earlier this week), and my feeling is we are already way below that rate.