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Sunday, December 9, 2007

Latvia Q3 2007 GDP

First off I would like to say that hello to all my blogging friends in Latvia. To Lavian Abroad, to Sam at FotoLat, to Aleks at All About Latvia and to Peteris at Marginalia. Despite all rumours to the contrary, I have not given up on the Baltics. Far from it. But I have been busy trying to improve my understanding of the problems, in part by looking at Romania, and even more to the point at Russia. If Mother Russia catches the Baltic illness, then we will all be in trouble, oh deary me! I have also been peering and peering into what is happening in Hungary, to try and see if anything can be learnt from finding out why Hungary is so different from the rest of the EU10, as well as what the correction in Hungary can tell us about what might happen next in the Baltics. The only definitive conclusion I can offer you is that addressing the domestic demand issue without takling the currency value question raises the danger of making any correction a very protracted and painful affair, and even then the problem may not be solved. So there are clear, and to the point, arguments for ripping off the band-aid in one foul stroke.

I have also been posting extensively about Estonia over the weekend on my Baltic Economy Watch blog, and many of the points I make there are pretty valid in the Latvian context, even if the pace and level of things differs from one country to another. Today I am looking at GDP, insutrial output and retails sales (to follow), but tomorrow promises to be an interesting day, since we shall have inflation data and foreign trade data.

Well, turning now to GDP, and as Latvian Abroad notes in a recent post, the Latvian Economy is slowing lost of signs of slowing. You can see it in the latest GDP numbers, for example.

As we can see, the high point was reached in Q1 2006, and since that time ever so surely and ever so steadily the Latvian enconomy has been slowing down. Compared to the corresponding period of previous year, in the 3rd quarter of this year Latvian GDP increased by 10.9%, according to data released by Latvijas Statistika last Friday. Interestingly one of the parts of the economy which has slowed most is manufacturing indutry, which actually decreased by 0.3% y-o-y in Q3, and mining and quarrying only managed a measly 2.4%. Construction managed a 13.2% y-o-y growth, but this is undeoubtedly due to large base effects earlier in the year, and the execution of previously signed contracts - as we are noting in the US, you need to wait nearly a year to see the full effects of a slowdown in requests for new buildings to execute.

Unfortunately Latvijas Statistika do not have the Q3 breakdon in their database yet, and they only give annualised data in the press release, when what is most interesting at this point are the quarter on quater changes. Still they do produce this reasonably informative chart about movements in some of the key expenditure components over the last year, and some things are reasonably clear (please click over image for better viewing).

As is obvious, final household demand peaked in the 4th quarter of 2006, and is now falling steadily. It is not clear when (ot whether) this component will ever recover to the extent of being able to drive growth, since we get into age related elements (which I know not many people agree with me on at this stage, but still) as Latvia's median age is climbing steadily, and calibrating all of this for Eastern Europe's comparatively low male life expectancy (ie calibrating how domestic constumption loses its relative strength as median age rises, in the way we have seen in Germany, Japan and Italy) is something noone has done at this point to my knowledge. In fact most people you talk to don't imagine that this is important, but then most of them didn't imagine that Hungary would fall into the hole it is currently falling into.

Now as we can see, these two countries (Latvia and Hungary) are pretty similar in the evolution of the relative population median ages. And if we come to male life expectancy, here is a comparison of Hungary, Latvia and Germany.

As we can see, male life expectancy is considerably lower in both Hungary and Latvia, than it is in Germany, and this must have consequences for economic behaviour and performance. Increasing the working life to 67 and beyond as they have in Germany is just not the same proposition at all in a lower life expectancy society like the other two, nor is the issue of getting employment participation rates among the over 60s comparable given the evident health problems of one part of the population.

So while we would not normally expect domestic consumption to run out of steam until the median age reaches 41/42 (this is the sort of lesson we can garner from Germany, Italy and Japan) there may be good reasons for imagining that this median age needs rounding down somewhat in the Latvian and Hungarian contexts. I will certainly stick my head out and say that this property boom, like the 1992 one in Japan, and the 1995 one in Germany is very likely to be the last of its kind we will see in Latvia, high median age societies just don't work like this. They do not ride on the backs of credit driven booms, and I would have thought that the reasons why would be obvious.

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