The IMF have this morning suggested in a report that the Estonian economy may in fact contract this year (whole year 2008) as consumption wanes and exports falter.
The report was presented at a conference held in the Estonian capital of Tallinn. The IMF have not yet posted the report on their website, but the conference is being covered by Bloomberg's Ott Ummelas.
Sensibly the IMF saying that it is ``too early'' to make new ``numerical forecasts'' on the economy (this is my own personal position) but todays report already marks a substantial shift from April's WEO forecast, where the IMF said it expected economic growth to slow to 3 percent this year from last year's 7.1 percent, before accelerating to 3.7 percent in 2009. I think all these numbers just got scratched.
Estonian Finance Minister Ivari Padar is quoted as saying "In principle, we agree with the IMF's conclusions".
The core of the issue is summarised in the IMF view that a recovery will depend on the competitiveness of local industries, and a revival of exports or investment, adding that the slowdown will ``test'' the banking system. This is something I have been arguing from this blog for the last six months now. Basically It was always unrealistic given the pace of the slowdown to anticipate positive growth (let alone 3% plus growth) in Estonia this year (and it is far too early to start talking about 2009). Essentially continuing inflation (in the context of the currency peg to the euro) is eating away month by month at the vitals of Estonian export competitiveness.
Since Estonian domestic demand now looks to stay flat for the foreseeably future, the economy willneed to have export competitiveness to attract the inbound investment component. So everything now depends on getting relative prices straight, and without changing the peg quite frankly I don't see how Estonia is going to do this.
Basically when Estonia emerges from this crisis my feeling is that we will see an export driven economy on the pattern we can already see in some Scandinavian countries, and the reason for my holding this view is based on an appreciation of consumer demand dynamics in the context of a rapidly ageing population.
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Estonia GDP Q1 2008 (preliminary)
In fact, we can only at this point say something decisive about Latvia and Lithuania since Estonia has not yet posted Q1 08 figures.
Claus Vistesen earlier this week in his Have the Baltics Entered a Recession? post
Well, now we can finally help Claus out, since today Estonia has posted its Q1 2008 GDP growth data, and it is pretty unambiguous: Estonia is in recession, which means that all three Baltic economies are now in all probability in recession.
In fact Estonia's economy more or less stalled in the firs t quarter , with the economy growing at a preliminary year on year rate of just0.4 percent. This was the weakest year on year number to be registered since a 1 percent contraction in the third quarter of 1999, and follows 4.8 percent growth in the previous quarter, according to data realeased by the Tallinn-based statistics office this morning.
And this isn't really the worst part, since seasonally adjusted GDP at constant prices decreased by 1.9% in the 1st quarter of 2008 compared to the 4th quarter of 2007. That is the economy clearly contracted in the fisrt quarter of 2008 and is, IMHO, now undoubtedly in recession.
Estonian consumer confidence fell in April to minus 16, matching the lowest level in 3 1/2 years that it hit in February on worsening expectations over national and personal finances, the Tallinn-based Institute of Economic Research said on April 28. Property sales fell to the lowest level in four years in the first quarter, the Tallinn-based Land Board said on April 9.
``With huge external imbalances, we believe that the Estonian economy faces a number of years of sub-trend growth to reduce these excesses,'' Violeta Klyviene, the senior Baltic analyst at Danske Bank A/S, said before the report.
Monday, May 12, 2008
Latvia Inflation April 2008
Well when it rains it really rains! Following close on the back of the news that Latvia's first quarter growth marked a strong slowdown, we now have Latvia's April inflation rate, which showed another strong uptick and rose to the highest level in nearly 12 years.
According to Latvijas Statistika the inflation rate, which is the highest in the 27-nation European Union, rose to 17.5 percent in April from 16.8 percent in March. Month on month, consumer prices rose 1.5 percent over March, the same level as registered in the previous month.
Electricity prices grew 39.2 percent in April on the month adding the most to inflation, the statistics office said. Food prices, which make up about a quarter of the consumer-price basket, rose about 20.8 percent from a year ago.
This now has all the signs of a very hard landing indeed scenario, with Latvia trapped in the vice of a pretty vicious form of what is generally known as stagflation.
According to Latvijas Statistika the inflation rate, which is the highest in the 27-nation European Union, rose to 17.5 percent in April from 16.8 percent in March. Month on month, consumer prices rose 1.5 percent over March, the same level as registered in the previous month.
Electricity prices grew 39.2 percent in April on the month adding the most to inflation, the statistics office said. Food prices, which make up about a quarter of the consumer-price basket, rose about 20.8 percent from a year ago.
This now has all the signs of a very hard landing indeed scenario, with Latvia trapped in the vice of a pretty vicious form of what is generally known as stagflation.
Have the Baltics Entered a Recession?
by Claus Vistesen
As any mildly astute economist will know it is extremely difficult to call the exact turning point in an economic cycle and thus the point in time where a recession starts. Usually, such issues are resolved post mortem when the economic data has been firmly revised. Moreover, the actual determination of a slowdown's or a recession's starting point also quickly turns into a battle royal between economists as the alphabet soup of different national account measures easily ties up the discussion as we end up comparing apples and pairs. However, at this point in time I don't think we have the luxury to engage in such a battle among economic gentlemen. I don't think so because the Baltics' (and many of the other Eastern European countries') situation is a bit more complex than your average US type recession where a you clean up the mess with a couple of quarters of negative growth. What we consequently need to understand is that, depending on the turn of events and response from markets, the current slowdown may turn out to have quite far reaching consequences for the region. With these ominous remarks let us turn to the evidence suggesting that the tide is now finally turning in the Baltics.
In fact, we can only at this point say something decisive about Latvia and Lithuania since Estonia has not yet posted Q1 08 figures. The pace of growth however has been consistently lower in Estonia throughout 2007 compared to 2006 and in Q4 Estonia posted a growth rate of 0.9% q-o-q which is of course more than respectable but a significant slowdown in relative terms. What remains to be seen now is whether Estonia will kick off 2008 with negative growth rates or just eek out a positive showing. Indicators for retail sales suggest that Estonia may be lagging Latvia so I would not be surprised if Estonian Q1 is positive on a q-o-q basis. In the context of Latvia my colleague Edward Hugh has been keeping a watchful eye. Back in March he asked the question of whether we were heading into a recession in Q4 2007? At the time, strong circumstantial suggested that this was the case and now with the recent flash estimate from Q1 it is safe to say the coffin has now been supplied the final nails;
This leaves us with Lithuania. Since we just recently got Q1 2008 GDP figures (provisional estimates too) we should have a fairly strong picture of what is going on. First, we will have the visual inspection;
As can be observed in the figure above Lithuania stalled sharply from Q3 to Q4 and now posting a contraction in Q1 08 on a q-o-q basis. On a y-o-y basis the economy is still growing but this figure is basically pointless in so far as goes the determination of where the economy is at in the present time. The first graph speaks for itself and in this context the two additional graphs plotting the indexed values of GDP do not really add much to the general picture. I still think they have merit though. Especially the last one is interesting as it shows the 'momentum' of the slowdown. Basically the chart shows the rate of expansion relative to the previous period without saying anything about the level of growth (which is shown in graph number two).
In Summary
I have been very cautious in pulling out the R-word in connection with the Baltics let alone Eastern European in general. I still am. However, what is clear at this point is that we are now observing a hard landing. The rate of the slowdown since it began in the middle of 2007 leaves no other conclusion I think. What happens next then? This question is not at all insignificant. What we now have on our hands in the Baltics is, in macroeconomic terms, quite a predicament. Basically, the economic momentum now seems to be unwinding far too fast relative to the pace by which the inherent imbalances present in these economies can be expected to respond. Large external deficits and pegging currencies here are important since it means that the latter cannot adjust. The only possible alternative if the rout continues is consequently a transition into price and wage deflation. It is still early to say whether this will materialize but it is now a real risk rather than a theoretical possibility. Additionally, we now need to watch all those foreign banks who have set up shop across the Baltics helping to finance all those credit inflows. Will they stay or more specifically can they afford to? This is also now a question which must be considered as more than an academic question.
I am really sorry to start this week on such a nasty note but I do think that the genie is out of the bottle in the context of the Baltics. Now we need to watch carefully where it goes from here. If economic momentum (or lack thereof) continues to linger in the current territory we should be a prepared for a rapid change of fundamentals in the Baltics.
As any mildly astute economist will know it is extremely difficult to call the exact turning point in an economic cycle and thus the point in time where a recession starts. Usually, such issues are resolved post mortem when the economic data has been firmly revised. Moreover, the actual determination of a slowdown's or a recession's starting point also quickly turns into a battle royal between economists as the alphabet soup of different national account measures easily ties up the discussion as we end up comparing apples and pairs. However, at this point in time I don't think we have the luxury to engage in such a battle among economic gentlemen. I don't think so because the Baltics' (and many of the other Eastern European countries') situation is a bit more complex than your average US type recession where a you clean up the mess with a couple of quarters of negative growth. What we consequently need to understand is that, depending on the turn of events and response from markets, the current slowdown may turn out to have quite far reaching consequences for the region. With these ominous remarks let us turn to the evidence suggesting that the tide is now finally turning in the Baltics.
In fact, we can only at this point say something decisive about Latvia and Lithuania since Estonia has not yet posted Q1 08 figures. The pace of growth however has been consistently lower in Estonia throughout 2007 compared to 2006 and in Q4 Estonia posted a growth rate of 0.9% q-o-q which is of course more than respectable but a significant slowdown in relative terms. What remains to be seen now is whether Estonia will kick off 2008 with negative growth rates or just eek out a positive showing. Indicators for retail sales suggest that Estonia may be lagging Latvia so I would not be surprised if Estonian Q1 is positive on a q-o-q basis. In the context of Latvia my colleague Edward Hugh has been keeping a watchful eye. Back in March he asked the question of whether we were heading into a recession in Q4 2007? At the time, strong circumstantial suggested that this was the case and now with the recent flash estimate from Q1 it is safe to say the coffin has now been supplied the final nails;
(...) in constant price terms - Latvian GDP hit a peak at some point between Q2 and Q3 2007 (lets say August 2007) and since that time has been steadily CONTRACTING. Now I know there are probably hundreds of different ways of skinning a chicken, and of course you can read data everywhichway you want to, and there are seasonal factors to take into account, but as far as I am concerned there is no getting away from it, on any reasonable criterion the Latvian economy is now in recession, and has been since the middle of last year.
This leaves us with Lithuania. Since we just recently got Q1 2008 GDP figures (provisional estimates too) we should have a fairly strong picture of what is going on. First, we will have the visual inspection;
As can be observed in the figure above Lithuania stalled sharply from Q3 to Q4 and now posting a contraction in Q1 08 on a q-o-q basis. On a y-o-y basis the economy is still growing but this figure is basically pointless in so far as goes the determination of where the economy is at in the present time. The first graph speaks for itself and in this context the two additional graphs plotting the indexed values of GDP do not really add much to the general picture. I still think they have merit though. Especially the last one is interesting as it shows the 'momentum' of the slowdown. Basically the chart shows the rate of expansion relative to the previous period without saying anything about the level of growth (which is shown in graph number two).
In Summary
I have been very cautious in pulling out the R-word in connection with the Baltics let alone Eastern European in general. I still am. However, what is clear at this point is that we are now observing a hard landing. The rate of the slowdown since it began in the middle of 2007 leaves no other conclusion I think. What happens next then? This question is not at all insignificant. What we now have on our hands in the Baltics is, in macroeconomic terms, quite a predicament. Basically, the economic momentum now seems to be unwinding far too fast relative to the pace by which the inherent imbalances present in these economies can be expected to respond. Large external deficits and pegging currencies here are important since it means that the latter cannot adjust. The only possible alternative if the rout continues is consequently a transition into price and wage deflation. It is still early to say whether this will materialize but it is now a real risk rather than a theoretical possibility. Additionally, we now need to watch all those foreign banks who have set up shop across the Baltics helping to finance all those credit inflows. Will they stay or more specifically can they afford to? This is also now a question which must be considered as more than an academic question.
I am really sorry to start this week on such a nasty note but I do think that the genie is out of the bottle in the context of the Baltics. Now we need to watch carefully where it goes from here. If economic momentum (or lack thereof) continues to linger in the current territory we should be a prepared for a rapid change of fundamentals in the Baltics.
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