Latvia Unemployment April 2008 - Where's The Correction Mechanism?

According to data from the Latvian State Labour Board, Latvian unemployment in April was at 52,897 (or an umployment rate of 4.8%) this was up from 52,806 in March, but only slightly (93 people to be exact, although obviously there are seasonal factors to take into account here. But this figure was still substantially down from the 67,154 (by about 14,350 people) registered in March 2007. Given that the Latvian economy is contracting I think this result is significant.




and the unemployment rate has been dropping steadily.




And the picture doesn't change substantially if you look at unemployment using the EU harmonised methodology. According to Eurostat unemployment in Latvia was running at 4.6% in March 2007 and 4.5% in March 2008, ie it is still down year on year, even though GDP was growing at a strong rate a year ago and is contracting now.

The economy has gone into recession without generating sugnificant unemployment. Of course the labour market does follow movements in GDP with a lag, and we still haven't had the "hard landing", but still, this is a surprising result.

It also helps explain why the rate of wage growth - according to the laytest data we have which is for the last quarter of last year - has't slowed dramatically, although it may now do so.



The position isn't that different in Estonia, since according to the latest data from the Estonian Labour Market board the rate of unemployment in April was still incredibly low there too - running at 2.7% - with only 17,098 people registered at the employment offices. Using the EU hrmonised methodology, the rate is rather higher - some 5.5% in March which is the latest data we have from Eurostat - but to get a comparison this is not up enormously from the 4.9% rate recorded in March 2007 using the same methodology. ie on whichever measure you use unemployment has risen, but not that much, at this point, which would explain in part why wage rises have been so stubborn in coming down in terms of their annual rate. There simply is not that much "surplus labour capacity" in Estonia, and this is of course part of the whole inflation - and now stagnation - issue.




Basically I hate to be a bore, or "party spoiler" at this point, but this is the issue that has been worrying me from the start about the whole Baltics situation, the absence of the ability of the labour market - due to years of very low fertility and substantial out-migration - to correct during a recession.

Without getting too theoretical here, there simply is no homeostatic mechanism to fall back on here to guarantee stability. Since the cohorts leaving the labour force at the upper end are going to be consistently bigger than those enetering at the bottom, there is no build up of surplus labour in the "deposit" during the slowdown.

Leaving aside the length of the present slowdown and its possible severity, we are left with the very unfortunate situation that when growth eventually does start to pick up again, there may be very little surplus labour capacity available to fuel the growth, and logically inflation would then simply start to shoot up yet one more time. Basically I would say that finding a longer term solution to this problem is now one of the most urgent questions facing the Latvian (and Estonian, and Lithuanian) government.

Estonia Producer Prices and Unemployment April 2008

The prices of goods leaving Estonian factories and mines rose at an annual 7.2 percent rate in April, which was the slowest rate in 13 months. Producer-price growth, which is an early indicator of future movements in consumer inflation, slowed from an 8 percent rate in March, according to data released by the Estonian statistics office earlier today. Prices rose a monthly 0.8 percent, which was up when compared with a 0.1 percent rise registered in March.



Looking at the above chart the downward trend is now clear. Declining domestic demand is undoubtedly forcing companies to tighten up on cost inflation and this is surely slowing down the rate of wage-cost growth from the more than 20 percent registered last year. The Estonian economy, which was the European Union's second fastest-growing in 2006, slowed to an annual rate of 0.4 percent in the first quarter, the EU's slowest, according to preliminary data, compared with 4.8 percent in the fourth quarter, as consumption shrank and the housing boom cooled.


In April 2008 the percentage change in the export price index was 0.4% compared to March 2008 and 5.2% compared to April 2007, while the percentage change in the import price index was 0.7% compared to March 2008 and 5.5% compared to April 2007.




In separate data - confirming the decline in domestic demand - the Estonian Statistics office reported that in the 1st quarter of 2008 8,900 purchase-sale transactions in real estate had a total value of 9.4 billion kroons and that the number and total value of transactions decreased compared to the previous quarter, as well as to the corresponding quarter of the previous year.

The recession that started on the real estate market in 2007 thus continued in the 1st quarter of 2008. The total number of notarised purchase-sale contracts decreased more than a third compared to the 1st quarter of the previous year and by about a fifth compared to the previous quarter. The total value of purchase-sale contracts decreased by about a half compared to the corresponding quarter of the previous year and by a quarter compared to the previous quarter.


According to the latest data from the Estonian Labour Market board the rate of unemployment in April was still incredibly low - running at 2.7% - with only 17,098 people registered at the employment offices. Using the EU hrmonised methodology, the rate is rather higher - some 5.5% in March which is the latest data we have from Eurostat - but to get a comparison this is not up enormously from the 4.9% rate recorded in March 2007 using the same methodology. ie on whichever measure you use unemployment has risen, but not that much, at this point, which would explain in part why wage rises have been so stubborn in coming down in terms of their annual rate. There simply is not that much "surplus labour capacity" in Estonia, and this is of course part of the whole inflation - and now stagnation - issue.

IMF Warn That The Estonian Economy May Contract In 2008

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.

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.