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Saturday, February 2, 2008

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.


Latvian abroad said...

There's something puzzling in these numbers.

Latvian trade deficit is narrowing now, with exports growing faster than imports. Where do those exported goods come from, if the industrial output is decreasing (one of your next posts)?

I can't come up with a plausible explanation of that...

Edward Hugh said...

Hi LA,

Nice to hear from you.

"Where do those exported goods come from,"

well let's see If I can come up with an explanation. I haven't been through the numbers, but my guess is that there is a compositional shift taking place. That is, even while output in total is shrinking, export production is becomeing a growing share. This is what you would expect and want to happen.

I have posted a new chart here, showing the relative difference between tradeable export and non tradeable domestic industrial production prices. As economic theory would predict, the tradeable prices have been rising much more slowly, which gives some possiblity to export. Of course, it also helps that the general external environment has been quite favourable. This is now changing fast.

Basically, the contraction in output will have been most rapid in those sectors which are open to import competition, since import prices obviously rise much more slowly.

Clearly domestic demand has been slowing very quickly - look at the shape of the retail sales line - and so this is what you can see in the industrial output numbers.

I don't know if that makes it clearer. I haven't looked into the details of the data, but there are numbers for manufacturing output as a part of quarterly GDP, and there are numbers for quarterly exports, so it should be possible to see this at work in some way.

In a few weeks we will have Q4 2007 GDP numbers - at this point I have really no idea what they are going to look like, but when I go through them, if I have time, I will try and look at the aspect you are raising.

Basically the important point to grasp at this stage is the external environment - in terms of the EU countries - is deteriorating quite quickly (although not as quickly as Latvia) and this is going to make exporting hard for a bit. My guess is that Germany is on the point of entering recession too in this moment. If this is the case it is a question of how long this one lasts. My guess is that it could be a couple of years or so before the external export environment really starts to improve, and this is the time that countries like Latvia will have to "reinvent" themselves as export oriented economies, since I think domestic demand is no longer going to be a driver of growth. With the ageing element coming onstream, maybe this is done for good now, just like it is in Germany itself. I don't know, it is early days yet.

And then there is the ever so delicate question of what to do about the currency. I think it is now best to take all this by the day, but I think the immediate outlook is going to be difficult.

Don't miss the latest inflation numbers from Ukraine - 19.8% - they are running out of workers too at this point, and Russia is now up around 12%, so it is really a mystery at this point how all this can sort itself out.