Estonia Retail Sales Fall, As Does Construction, While Real Wages Continue Rising

Estonian retail sales fell in July for the third successive month, suggesting the economy is now well and truly in the grips of recession. Retail sales, excluding cars and fuel, fell by an inflation adjusted annual 3 percent, compared with a 7 percent drop in June, according to the latest data from the Tallinn- based statistics office.




Total retail sales in July were 5 billion kroon. The grocery trade decreased by an annual 1% compared, while smanufactured goods decreased by 5%. Retail sales increased in pharmaceutical goods and cosmetics, by 13% and 6%, respectively. Retail sales of household goods and appliances, hardware and building materials as well as stores selling textiles, clothing and footwear decreased the most (10% and 8%, respectively).

Month on month retail sales increased by 3% in constant prices.


Basically it is quite possible that retail sales on a year on year basis will now continue to decline, but as the previous year's base effect moves around this data may well start to tell us less and less. More interesting perhaps is the seasonally adjusted, price deflated sales index for Estonia published by Eurostat.



Basically this index peaked in February 2008, and it will be interesting to see how long it is before last February's peak is once more attained. It should be remebered in this context that Estonia's population is both declining and ageing at this point, and both these factors are likely to prove negative for aggregate retail sales. Thus to get back above the earlier peak it would seem to be the case that Estonia needs to be able to generate a level of positive GDP growth which hardly seems likely at least for some quarters to come. The main question right now is just how far down the index will go before turning up again.

Estonia's gross domestic product shrank a preliminary 0.9 percent in the second quarter from the first three months of 2008, after a 0.5 percent contraction in the first quarter. Retail companies' confidence fell in August to the lowest level in more than nine years, with consumer confidence remaining at a 4 1/2-year low, Tallinn-based Konjunktuuriinstituut last week.

The Construction Decline Continues

According to the Statistics Office, in the 2nd quarter of 2008 total Estonian domestic construction output decreased 6.6% on a year on year basis.

The value of construction enterprise output was 9.7 billion kroons in the quarter, of which the value of building construction was 6.4 billion kroons and the value of civil engineering 3.3 billion kroons. Compared to Q2 2007 the volume of building construction decreased 12%, but the volume of civil engineering increased 10%. The building decline was mainly the result of decreased volumes in dwelling construction. Although the volume of civil engineering grew, its influence on the total construction activity was not great, as it accounts for only a third of the total volume of construction.




According to data from Estonia's Register of Construction Works, in the 2nd quarter of 2008 1,398 dwellings were completed - 559 dwellings less than in the same period of 2007. Similarly to the previous years, more than three quarters of completed dwellings formed part of blocks of flats. The recession, added to a continuous increase in interest rates for mortgage loans and difficulties in selling existing dwellings are having a strong impact on the demand for new dwellings. In the 2nd quarter of 2008 building permits were granted for the construction of 2,143 dwellings, which is down one third on the same period of 2007.

Average Wages and Salary Increases Ease Back Slightly

According to Statistics Estonia, average monthly gross wages and salaries were 13,306 kroons and the hourly gross wages and salaries were 78.26 kroons in Q2 2008. The rate of growth of wages and salaries that had been stuck around 20% over the last five quarters slowed in the 2nd quarter. Compared to the same quarter of the previous year, average monthly gross wages and salaries were 15.2% higher and average hourly gross wages and salaries were by 17.7% higher. This difference is probably explained by the fact that hourly wages are rising while hours worked are falling.



The consumer price index increased by 11.4% in Q2 2008, and thus, depsite the recession, real wages continued to grow at a 3.4% annual rate. The fact that real wages are still rising gives evidence of a labour market that is still tight, and in my opinion the underlying demographics make it very difficult for a labour market like this to adjust smoothly when faced with a downturn.

Estonia and Latvia Producer Prices July 2008

Prices of goods leaving Estonian factories and mines rose an annual 7.8 percent in July, accelerating for the second time in eight months (from 7.5% in June) as the cost of making electrical appliances and textiles increased.



Even more worryingly perhaps, the percentage change in the export price index was 0.1% compared to June and 4.3% compared to July 2007. Since the Estonian economy can now only realistically grow by increasing exports, and the kroon is pegged to the euro, these costs are passed directly on to many of Estonia's potential customers. The month on month export price index was mainly influenced by the increase in prices in the manufacture of chemicals and chemical products and food products and beverages and by the decrease in prices in the manufacture of wood and wood products and in the manufacture of rubber and plastic products.




Wage growth, the main impetus behind the growth in producer prices over the two years to November, is still close to its 2007 peak, as the labour market remains tight and wages refuse to correct moving into the recession. A weaker-than-expected slowdown in wage growth threatens the competitiveness of Estonian exports according to a statement from the central bank on April 16.


Nevertheless, disappointing as the Estonian figures are, they are still considerably better than the Latvian ones. Compared to June 2008, producer prices in Latvian industry increased in July by 0.3%, according to data from the Central Statistical Bureau of Latvia. Year on year (compared to July 2007) producer prices increased by 12.4%. And as regards export prices, compared to June 2008, producer prices in Latvian export industries increased by 1.3%, and year on year export producer prices were up by 7.1%.

Latvia GDP Contracts In Q2 2008

Latvia's GDP only expanded by 0.2% year on year in Q2 2008:



and quarter on quarter the economy contracted by 0.5% over the first quarter of 2008(Eurostat data):





This will be very brief coverage of these results at this point, since this is, at the present time, all the detail we have. A more precise and extended breakdown of second quarter GDP data will be published by the statistics office on September 8.

Exports Waning

Latvia's June exports dropped 3.6% over May, and were up 3.1% on June 2007. The rate of y-o-y increase in exports is thus dropping rapidly. In June compared to May the most rapid decrease was in exports of vodka (by 55.8%), of rough-cut wood (by 23.6%), of iron and non-alloy steel (by 22.0%), of chocolate and other food preparations containing cocoa (by 17.4%) and of clothing, not knitted or crocheted (by 11.3%), but exports of paper and paperboard, articles of paper increased by 44.1%, pharmaceutical products were up by 31.2%, and machinery and mechanical appliances by 14.6%.





Compared to June 2007 the largest exports increase was in wheat and meslin (exports to Lithuania, Oman, Denmark and Poland) which were up by a multiple of almost 13 times (increase from 187 thsd lats to 2414 thsd lats), in fish, fresh, chilled or frozen (by 85.7%), iron and non-alloy steel (by 43.5%), articles of iron or steel (by33.8%), pharmaceutical products – (12.1%). Exports of sawn wood decreased by 52.3%, furniture, including mattress and articles of bedding and similar furnishing was down by 33.0%, chocolate and other food preparations containing cocoa were down by 24.3%, and veneer sheets and plywood by 17.8%.

In June compared to May the most rapid increase was in imports of electricity – by 54.7%, of iron and non-alloy steel (by 48.4%), meat of swine, fresh, chilled or frozen (by 36.6%), of cigarettes (by 30.7%), but imports of agglomerated cork decreased by 35.9%, as did particle boards (by 28.0%), pharmaceutical products (by 17.2%), plastics (by 13.5%), electrical appliances and equipment (by 5.6%), and coniferous sawn-wood (by 4.4%).

Compared to June 2007 the most notable decrease was in imports of sawn wood (by 76.0%), passenger cars (by 49.7%), furniture, including mattress and articles of bedding and similar furnishing (by 37.9%), machinery and mechanical appliances (by 29.8%), clothing, not knitted or crocheted (by 19.8%). Imports of pork and pork products increased by 73.1%, iron and non-alloy steel (by 42.8%), residual fuel oils (by 36.8%), diesel oil (by 27.2%) and electricity (by 13.9%).



As a result Latvia's trade deficit increased again in June when compared with May.



Year on Year Inflation Eases Back Slightly

Compared to the July 2007, Latvian consumer prices increased by 16.7% in July, of which prices for goods increased by 16.4%, while prices of services were up by 17.4%, thus inflation is now down slighly from the May peak of 17.9%.



Compared to June 2008 the average consumer price level in July 2008 rose by 0.3%. The average price level for goods did not change, but prices of services increased by 1.1%.

Within the food group the price increase of meat and meat products by 3.1% had the major impact on consumer price level. Cereals, especially rice, non-alcoholic beverages, sweets, fruit, pastry-cook products, fresh fish and potatoes all became more expensive as well.

The price of transport services increased by 6.6%, of which the prices of tickets in intercity buses increased by 28.0%, while prices of tickets in passenger rail transport was up by 17.4%. The average prices of automotive fuel rose by 1.6%.

With the extension of the traditional seasonal sales period the prices of clothing decreased by 6.4%, but the price of footwear was down by 8.2%. Due to the sales the sports, camping and open-air recreation equipment, household textiles, glassware and tableware and bicycles all became less expensive. The prices of computers, TV, audio, video and photographic equipment, telephones, goods and services for the maintenance and repair of dwelling, flowers and toys decreased as well.

Labour Market And Wages Not Adjusting To Downturn

Neil Shearing of Capital Economics makes the following pretty valid points in a research note released soon after the Estonian GDP data were made available. According to Shearing there are three good reasons to think that things will get worse before they get better:

"Firstly, labour markets have yet to react to the slowdown in the first half of 2008. The unemployment rate has actually fallen in Latvia and Lithuania and has remained flat in Estonia. But surveys point to a rise in unemployment over the coming months,"

"Secondly, the growth outlook for the euro-zone has deteriorated in recent months. Since exports to the euro-zone account for roughly 15% of GDP in the Baltics, this could hit manufacturers in the region hard... it is becoming even more difficult for the region to rebalance towards net exports,"

"Finally, external financing conditions are likely to become more difficult over the coming year, as global liquidity dries up. This will make it much harder for the region to fund its huge current account deficits. As a result, these deficits will have to shrink, and this requires a further contraction in domestic demand," he concludes. "The upshot is that we expect the region to enter a deep and protracted recession."

As we can see Latvia's unemployment has risen very slightly in recent months, but it is still well below what it was only as recently as a year ago.There were 55,436 unemployed in Latvia in June, and the unemployment rate was 5.1%, only the same as it was in September 2007.



I would add at least one more issue to Shearing's list, the protracted inflation issue, and the difficulty of the elderly Latvian labour market in adjusting. What we are seeing in Estonia is more people retiring from labour market activity than are joining the market, and hence unemplyment has been falling. I don't imagine things will be that different in Lativa, and thus although unemployment will rise, it will not rise as much as some are expecting (many are saying that the labour market is a "lagged indicator" and this is true, but there is more than that at work here).

So given the labour market can't adequately correct, then wages and prices won't moderate as much as they should, which, given that domestic demand is now more or less done as a structural driver of Baltic growth, is going to make the issue of getting exports competitive very hard work indeed.

Bottom line: Latvian GDP will soon be going under water and into negative territory, my feeling is it will now be quite some time before we see it "resurfacing" again.

Estonia Fully Enters Recession In Q2 2008

Estonia's economy contracted the most in almost 14 years in the second quarter of 2008, becoming the second European Union economy to enter formally enter a recession since the start of the global credit crunch. Estonia's economy contracted by 0.9 percent from the previous quarter, following a 0.5 percent decline in the January to March period, according to preliminary data from the Tallinn-based statistics office last Thursday.



Gross domestic product shrank an annual 1.4 percent, the biggest decline since the third quarter of 1994. This is Estonia's third recession since regaining independence in 1991. The last one was in 1999 after exports to Russia collapsed the debt default there.



A sudden drop in consumption and falling real estate investment have been pressuring all three Baltic economies (Estonia, Latvia and Lithuania) since the middle of 2007. In addition severe labour shortages fuelled by a certain degree of out-migration coupled with long term low fertility has turned a dificult situation into an extremely complicated one.

Estonia's unemployment rate fell to a 16-year low in the second quarter, keeping pressure on employers to raise wages even after the Baltic economy entered a recession. The rate declined to 4 percent, the lowest since the second quarter of 1992, from 4.2 percent in the first quarter, according to the latest data. Estonia's jobless rate has dropped steadily since European Union entry in 2004. The decline in unemployment, which usually lags changes in economic growth, will almost certainly reverse somewhat in the coming quarters, but Estonia's underlying demography means the unemployment rate may not rise as much as many suspect, and one indication of why this may be is to be found in the latest data, since the statistics office point out that the main reason for this most recent decline has been the fact that more jobless people have been retiring. In fact the number of employed persons was the samein the second quarter as in the first quarter (657,000).

Estonia's labor force declined by almost 10,000 in Q2 from a year earlier to 683,900, with the number of jobless falling by 7,700 to 27,300, the office said. The number of live births fell dramatically in Estonia from the late 1980s, effectively halving by 1998 from a decade earlier. Labor supply has declined further after the opening of the labor markets of wealtier western European countries to Estonians after 2006. The falling unemployment has created a shortage of workers in skilled fields and boosted wages, up 19.5 percent in the first quarter, threatening to undermine export competitiveness.

The quarterly unemployment rate, based on labor surveys, is above the monthly registered jobless rate, which rose to a 2 1/2 year high of 2.8 percent in July, as not all unemployed register themselves with the Estonian Labor Board which publishes the monthly figures.