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Tuesday, February 26, 2008

Latvia External Trade December 2007

According to the latest data from Latvijas Statistika:

Compared to November 2007, the value of exports in current prices in December 2007 decreased by 10.8% or 39.8 mln lats, but in comparison with December 2006 it increased by 12.9 % or 37.4 mln lats, reaching 328.0 mln lats, according to Central Statistical Bureau data.

However, the value of imports in current prices in December 2007 was 8.4% or 54.3 mln lats lower compared to November 2007, but in comparison with December 2006 the decrease comprised 6.2% or 39.5 mln lats, reaching 593.0 mln lats.

The total foreign trade turnover in December 2007 was 0.2% or 2.1 mln lats lower than in the corresponding period of the previous year and its value was as high as 921.0 mln lats.

The value of exports in current prices in 2007 reached 4025.2 mln lats – more by 732.0 lats or 22.2% compared to 2006.However, the value of imports in current prices in 2007 was more by 1342.5 lats or 21.0% compared to 2006 and reached 7721.0 mln lats.

So while year on year exports were still up by 12.9% year on year, they were DOWN by 10.8% on November, and indeed exports in November were down on those in October. And although the trade deficit reduced slightly, this is not the result of exports powering ahead to drive growth.

In fact the reduction in the trade deficit is basically a result of the fact that imports were falling even faster than exports, and indeed the year on year rate for imports is now negative. Which is a reflection I feel of the way in which internal demand in Latvia is now contracting rapidly. But if internal demand is contracting, and exports start to fall, then, if the governemnt go for a fiscal surplus, we should expect Latvian GDP to start to contract at some point, shouldn't we?

What we should note about the above chart is the slope of the imports chart. We should be getting used to seeing this in internal demand charts for the Baltic economies at the moment. We may also not that while year on year the rate of export growth was positive, the rate of increase is slowing by the month. One reason, apart from the slowdown in Germany, that this shouldn't surprise us is the degree of trade interlocking among the Baltic states. Latvia's two most important export destinations - and by quite a long way - are Estonia and Lithuania, and if internal demand is about to subside in these two countries, then so are Latvian exports.

Saturday, February 23, 2008

Latvia Producer Prices January 2008

Latvian producer prices in January were up 10.9 pct year on year and 1.3 pct compared with December last year, according to the latest data from the country's central statistics office.

Obviously the rate of increase in the PPI is now slowing rapidly, although there is still some considerable distance to go. Perhaps the most noteworthy trend in January was that export prices reversed to downward trend of recent months, and were up 1.7% on December. This is not good news.

Latvian Unemployment January 2008

Unemployment in Latvia seems now to have started to rise steadily accoring to the latest data from the Latvian State Employment Agency (NVA). Although slight, the increase in unemployment in Jan 2008 to 5 pct points to qualitative economic and labor market change, NVA said. And I completely agree. The market seems to have turned in November.

The level of registered unemployment had declined steadily from 8.7 pct in late May 2004 to 4.8 pct in November 2007. Since November the tendency is now up again. This is yet more indication of the presence of an economic slowdown in Latvia.

The unemployment rate in Latvia at the end of 2007 was 4.9 pct of the economically active population, while at the end of 2006 it was 6.5 pct. The unemployment rate increased 0.1 percentage point in January 2008 over December and reached 5 pct of the economically active population. There were 53,325 unemployed registered with NVA in late January 2007.

So my feeling is that Latvia is now out of the "extreme overheating" stage - and probably came out around in May-June (which isn't to say there wasn't a lot of momentum left in the system at that point). If you look at the charts included in my December Retail Sales post earlier this month you will see that retail sales growth really peaked during the first quarter. Manuafacturing output has been in fierce retreat since July, while the property market seems to have turned around May-June. In part this exiting from overheating will have happened becuase a process as fierce the one which took place in Latvia almost has to choke itself out of its own accord, and also possibly because of the tightening of the credit conditions applied after April, and the impact of this tightening on the housing market.

Also if we look at this unemployment data, it is clear that the labour market turned in October/November, and employment is normally a lagged indicator, which means it only responds after the horse has started to bolt. So my feeling is the overheating situation is now dead and gone, and what people need to think about are cushions to try and soften the landing. Which is why I am not 100% opposed to the idea of fiscal loosening at this point.

Friday, February 8, 2008

Latvia Inflation January 2008

Latvia's January inflation rate rose to the highest level in more than 11 years as prices for food, alcohol, tobacco and gas advanced, adding to concern not that the economy is overheating, since we just saw in the GDP estimate that it is now cooling - but rather that someone is in the process of applying a large dose of "super coolant" - since these rates of price rises even as the economy slows only serve to act like shovels of sand thrown into a rather delicate piece of machinery. In other words, watch out for the rate of the slowdown!

The rate, the highest in the 27-nation European Union, rose to 15.8 percent from 14.1percent in December, the Statistical Office said today in the capital Riga. Consumer prices rose a monthly 2.8 percent, compared with an gain of 0.7 percent in December. So as the economy decelerates, inflation accelerates.

Inflation is now almost five times the pace of the average price growth in the 15 nations that share the euro, making it more likely the Baltic nation will be unable to adopt the euro currency for many years to come.

Quite a lot of fuss is being made about the weighting given to food in the calculations of the local price index, but if we look at the european harmonised reading - which we don't yet have for January - which uses a more standard methodology, then inflation in December was 14% as opposed to 14.1% on the Latvian index, so the difference isn't that large (indeed it has always been within 0.1% over the last 6 months, so even using the harmonised index the reading is unlikely to be less than 15.7 - ie this isn't all about food by any means).

Latvia's GDP Q4 2007

Latvikas Statistika have just released a flash estimate for GDP growth in the 4th quarter of 2007. According to this data Latvia's economy expanded in the fourth quarter at the slowest pace since March 2005 growing by 9.6 percent. Still since this is still probably the fastest rate of expansion in the European Union, - and compares with 10.9 percent in the third quarter - it is not an especially useful data point for those of you who are interested in the finer details of things, and in particular for those of you who want to know whether or not the Latvian economy is going to "enjoy" a hard or a soft landing.

Another approach to this process would be to look at the quarter on quarter changes in GDP. During the 3 quarters prior to Q4 Latvian GDP has grown at 2.4, 2.7 and 2.8% respectively. That is, in Q3 growth was still accelerating slightly. Now we have no figure for Q4 yet, but doing some quick mental arithmetic, my guess is that q-o-q growth will come in around 1.5/1.6%, provided the original flash estimate is confirmed. Now this deceleration is quite fast, but it still isn't enough to tell us what kind of landing we will have with any high degree of certainty (as opposed to what my guts tell me). Look at the chart a moment.

Well, we can certainly see that the cycle has peaked, and the slowdown is certainly sharp, but look at the chart a bit harder, and you will see that after Q4 2002 there was another sharp slowdown, but in Q3 2003 there was a rebound. That is what the people who argue there will be a soft landing this type hope will be repeated. My view is that I don't see how this can happen with the Lat at its current high values, since to get export let growth, export prices in euros will need to be brought back down from where they will be once all that inflation is effectively "bled" out of the system.

What I do think though is that we need to see the reading on GDP for the next quarter. Unless there is a complete fudge in the data, my guess is that we will be able to say definitively at that point.

Which means we should know definitely one way or another on or around 8 May 2008. Those of you of a nervous disposition might like to take up knitting or crochet in the meantime.

Wednesday, February 6, 2008

Latvia Industrial Output December 2007

According to preliminary data from Latvijas Statistika total seasonally adjusted industrial production decreased by an annual 5.4% in December 2007. Manufacturing output decreased by 7.5%, while in electricity, gas and water supply there was an annual increase of 2%, and mining and quarrying the increase was 7.8%.

However if we look at the trend, month on month from November industrial output at constant prices decreased in December 2007 by 3.2% on the month, on a seasonally adjusted basis (seasonal and working day influence is taken into account). There was a monthly 1.7% decrease in mining and quarrying, a 1.8% one in manufacturing, and a 7.3% one in electricity, gas and water supply. So the picture is that manufacturing continues to decline, while the novelty is that output in mining, quarrying, electricity, gas and water are now also falling.If we add to this the likelihood of negative growth in retail sales, and no significant increase in government spending (ex EU grants) then it is hard to see where GDP growth is likely to come from as we move forward. Certainly we are a long way away from an export lead growth process at this point, and something will need to be done about relative prices if this is to become possible.

Looking at the charts we are still in the process of falling steadily off the roof, and if the degree of slope is anything to go by, we aren't falling slowly, in fact our rate of descent has just accelerated.

The details below which come from the statistics office are interesting since they give some idea of the distribution of the slowdown.

Compared to December 2006 industrial output in manufacturing of food products and beverages decreased by 14.8%, of which in manufacture of other food products (bread, confectionery, sugar) – by 36.1%, dairy products – by 11.2%, meat and meat products – by 6.8%, beverages – by 5%. Within the food product group only production in processing and preserving of fruit and vegetables and in processing and preserving of fish and fish products grew, by 28.8% and 11.8%, respectively.

Compared to December 2006 output increased in manufacturing fabricated metal products (except machinery and equipment) – by 56.1%, in manufacture of motor vehicles, trailers and semi-trailers – by 11.1%, in manufacturing of basic metals – by 5.9% and in manufacture of pulp, paper and paper products – by 5%, but the most notable industrial production output decrease was recorded in manufacturing of rubber and plastic products – by 19.3%, in manufacture of non-metallic mineral products (manufacture of glass, ceramics, cement, concrete, brick, etc.) – by 18.6%, in manufacturing of chemicals, chemical products and man-made fibres – by 18.2%, in manufacturing of furniture; manufacturing not classified otherwise – by 15.5%, in manufacture of radio, television and communication equipment and apparatus – by 15.1%, in manufacturing of wearing apparel – by 14.9%, in publishing, printing and reproduction of recorded media – by 13.2%, in manufacturing of other transport equipment (repairing and construction of ships and boats) – by 10.9%, in manufacture of machinery and equipment – by 10.7%.

On an annual basis - compared to 2006 - industrial output in 2007 increased by 0.5%, of which mining and quarrying by 13.7%, electricity, gas and water supply by 4.2%, while industrial output in manufacturing decreased by 1%.

In 2007 increases were recorded in the manufacture of fabricated metal products, (except machinery and equipment) —by 19.4%, in manufacturing of rubber and plastic products – by – 13.6%, in manufacture of electrical machinery and apparatus - by 10.6%, in manufacture of pulp, paper and paper products – by 9.5%.

The most significant industrial output decreases were recorded in the manufacture of radio, television and communication equipment and apparatus – by 19.9%, in manufacture of wood and wood products – by 5.8%, in manufacture of machinery and equipment – by 6.8%, in manufacturing of furniture; manufacturing not classified otherwise – by 5.1%, n manufacturing of wearing apparel – by 4.5%.

Saturday, February 2, 2008

Latvia Producer Prices December 2007

Well the rate of increase in producer prices clearly peaked some months ago, but still the annual rate is very high, and this will be some time yet awhile working its way out of the system, although prices in the tradeable export sector are coming into line much more rapidly, and prices of both total production and the export sector did decline slightly month on month. We now need to watch very carefully the evolution in the consumer price index.

According to data from Latvijas Statistika over the year December 2007 to December 2006 producer prices in Latvian industry increased by 13.1%. Compared to November, in December producer prices decreased by 0.1%. A year before – in December 2006, compared to December 2005, the prices increased by 13.2%, and compared to November 2006 the prices rose by 0.7%. Export prices rose 5.2% year on year, but fell 0.7% month on month from November.

Latvia Retail Sales December 2007

According to the latest data from Latvijas Statistika the year on year rate of increase in monthly retail sales continues to slow. Compared to December 2006, in December 2007 retail sales grew by only 1.7% (data adjusted by number of working days).

In comparison with 2006, total retail trade turnover in 2007 increased by 18.8% (data adjusted by number of working days). The most rapid rates were rates of increase were recorded non-food products, where the growth rate was 25% (data adjusted by number of working days). Textiles, clothing, footwear and leatherwear lead the way (39.5%), and then came furniture, lighting fixtures, household goods, electrical appliances, radio, TV goods, construction materials, paints, glassware and other goods (by 37.9%). Slower increase rate was recorded in the turnover of retail enterprises selling food, where the growth was 9.3%.

If we look at the chart we will see that the continuing slowdown is evident (I am including Estonia since people may find the comparison interesting). For those who don't know a lot about economics the shape of the lines is reasonably important. There is no magic way this is going to stop when we hit zero. The rate will go negative. At some point it will bottom, and we should be able to see when this happens in the chart. But even when it bottoms, there are no good rational arguments at the moment to explain why we would expect a sudden rebound. So some months of negative growth (or contraction) in retail sales are more or less guaranteed. Now we need to follow industrial output and export growth so we can get a better idea of what is likely to happen to GDP growth in the coming months. All I can say at this point is that all the estimates I have been seeing look way too high.

We don't have the December industrial output data yet, but we can see from the chart that industrial output has been decelerating in similar fashion to retail sales. There was a slight rebound in November, and it will be interesting to see whether this is now confirmed - although if we look at the external environment and the general storm cloud atmosphere it is hard to be optimistic. We would need to see two or three months like November to talk of something actually bottoming.

And if we take manufacturing alone, well then obviously the picture does look pretty grim:

If we look at the trade deficit, then this has obviously "bottomed out" (see first chart below) but more due to a declin in imports given the slowdown in domestic demand (see wecond chart below). But anyway we still have a deficit, so this is a negative drag on GDP growth. And if we take into account the fact that the government may well go for a fiscal surplus in 2008 then it is hard to see where growth is going to come from (I some how doubt that this old advice from the IMF about fiscal surplus is as valid now as it was when the idea was first advanced over a year ago, since the "surplus demand" which there was in the economy is now all too rapidly evaporating).


In order to clarify a point from Latvian Abroad made in comments I am also posting this chart for the Latvian producer price index here, to show the difference between the way domestic prices have been rising and the much lower increase in the export - tradeables - sector.