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Thursday, May 29, 2008

Latvia Wages and Salaries Q1 2008

According to the latest data release from the Latvian Central Statistical Bureau shows that monthly average gross wages and salaries in the country in the 1st quarter of 2008 increased from 354 to 453 lats, or by 28.1% when compared with the first quarter of 2007. This marks a slight slowdown, but is still a very hefty rate of increase.

Due to the growth in the basic tax allowance and tax relief on dependants, net wages and salaries increased more rapidly than gross wages and salaries. Compared to the 1st quarter of previous year, net wages and salaries in the three months of this year increased by 29.7% and reached on average 330 lats.

However when we take into account the consumer price growth of 16.4% in the first quarter, then we can see that the real increase in wages and salaries during the period was considerably less: 11.4%. If we look at the chart below where we can see the evolution in real wages month by month, it is clear that the rate of increase in real (inflation adjusted) wages has now been declining since last summer, and continues to do so. This declining rate of increase is however far from sufficient to guarantee the competitiveness of Latvian exports, but then, we will cross that bridge when we - more or less inevitably now - get to it.

Gross wages and salaries witnessed more rapid growth in private sector – by 28.6%, compared with 27.2% in the public sector.

Private sector monthly average wages and salaries were, however, still lower than in the public sector. Average public sector salaries were 516 lats in Q1. Compared to the first quarter of 2007, the increase was 110 lats. In the private sector the numbers were 424 lats and 94 lats, respectively.

It should be mentioned that the difference between wages and salaries of private and public sectors is growing. If in the 1st quarter of 2007 wages and salaries in the public sector were 76 lats higher than in private sector, in the 1st quarter of this year this difference was up to 92 lats.

Should this trend continue then it will of course eat into private sector competitiveness since the cost of public sector wages has to be paid for in some way out of non-wage costs in the private sector.

Looking at the breakdown in wages rises by kinds of economic activity compared to the 1st quarter of previous year the most rapid increase were in education - up by 32.1% (from 327 to 432 lats), transport, storage and communication – up by 31.4% (from 372 to 488 lats), commercial services – up by 30.0% (from 378 to 491 lat), construction – up by 28.7% (from 323 to 416 lats) and trade – up by 28.0% (from 297 to 380 lats).

Compared to the 4th quarter of previous year, in the 1st quarter of this year gross wages and salaries in the country grew by 1.6%. In private sector wages grew by 8.3%, but in public sector they were down by 8.6%. The decrease may be explained with the fact that annual and holiday bonuses are paid in the 4th quarter.

Among the Baltic States the highest gross wages and salaries in the 1st quarter of this year - as in all quarters of previous year - were recorded in Estonia (788 euro), while the lowest were registered in Lithuania (623 euro). Compared to the 1st quarter of 2007, Latvia witnessed the highest rate of increase (28.1%), with Lithuania at 23.8%, and Estonia at 19.5%. Compared with the 4th quarter of 2007, the highest rate of increase during the first three months of this year was in Lithuania (4.8%), with Latvia registering 1.6%, and Estonia 0.5%.

Monday, May 26, 2008

Latvia Producer Prices April 2008

I don't quite know how I missed this one, but Latvijas Statistika published the April producer price results last week. Compared to March 2008, producer prices in Latvian industry in April 2008 increased by 3.3%, according to the data of Central Statistical Bureau. Over the year (compared to April 2007) producer prices grew by 12.1%.

Compared to March, the overall level of producer prices in April 2008 was mostly influenced by the increase of the tariffs of electricity, gas, steam and hot water supply (growth of 2.5 percentage points). The price increase in the manufacture of food products and beverages, in the manufacture of non-metallic mineral products and in the manufacture and recycling of basic metals increased the overall price level by 0.2 percentage points in each economic activity. However,the overall level of producer prices was lowered by the price decrease in the manufacture of wood and wood products (except furniture) – by 0.2 percentage points.

Perhaps more to the point, as we can see in the above chart there is now a disconnect between producer prices in the export (tradeable sector) where prices rises are - not surprisingly - moderating towards zero, and those in the domestic sector, which even seem to be accelerating again at this point.

Tuesday, May 20, 2008

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 simple 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.

Monday, May 12, 2008

Latvia Inflation April 2008

Well when it rains it really rains! Following close on the back of the news that Latvia's first quarter growth marked a strong slowdown, we now have Latvia's April inflation rate, which showed another strong uptick and rose to the highest level in nearly 12 years.

According to Latvijas Statistika the inflation rate, which is the highest in the 27-nation European Union, rose to 17.5 percent in April from 16.8 percent in March. Month on month, consumer prices rose 1.5 percent over March, the same level as registered in the previous month.

Electricity prices grew 39.2 percent in April on the month adding the most to inflation, the statistics office said. Food prices, which make up about a quarter of the consumer-price basket, rose about 20.8 percent from a year ago.

This now has all the signs of a very hard landing indeed scenario, with Latvia trapped in the vice of a pretty vicious form of what is generally known as stagflation.

Friday, May 9, 2008

Latvia GDP 2008 Q1 GDP Flash Estimate

Latvijas Statistika published the following 2008 Q1 GDP flash estimate on its website this morning:

In accordance with flash estimate published the CSB, which is based on currently available statistical data and econometric models, the Gross Domestic Product (GDP) increased by 3.6%, compared to first quarter of 2007.

More precise data and more extensive analysis of first quarter 2008 GDP will be published on June 9, 2008. In the meantime we are rather left guessing again. First of here is the year on year chart:

If we look at the rate of decline indicated by the slope of the line over the last three quarters one thing is clear: this is now that long feared "hard landing". I think though that had already been clear for some time from the data we had been seeing from retail sales and industrial output.

I will try and put something more extensive up either later this afternoon or early tomorrow, but if we take into account that quarter on quarter growth over the 3 previous quarters had been at a rate of 2.4, 2.5 and 1.2% respectively, and that this added up amounts to 6.1% growth in 3 quarters it is pretty clear that we must have seen quite a strong contraction (in seasonally adjusted terms, since the other numbers are seasonally adjusted) in Q1 2008. More later.


What a chump I am sometimes. Basically the easiest thing to do in life is to miss the blindingly obvious. Now what we do know - according to the flash estimate, which can be revised of course, but as one commenter (see below) astutely notices normally the revisions have been downwards of late - we do "know" that GDP probably rose by something in the region of 3.6% year on year, and we do know that GDP in Q1 2007 was 2058.2million lats (I just looked this up at Lavijas statistikas). So if we increase this number by 3.6% we get 2132.2 million lats (since I just did the calculation), and that puts Q1 2008 at a level lying below the 2,192.1 million lats of Q2 2007 and below the 2,240.9 million lats of Q3 2007 (all at constant, inflation adjusted, prices).

That is to say that - in constant price terms - Latvian GDP hit a peak at some point between Q2 and Q3 2007 (lets say August 2007) and since that time has been steadily CONTRACTING. Now I know there are probably hundreds of different ways of skinning a chicken, and of course you can read data everywhichway you want to, and there are seasonal factors to take into account, but as far as I am concerned there is no getting away from it, on any reasonable criterion the Latvian economy is now in recession, and has been since the middle of last year, and as a result I am now more than happy to stick with my original recession call which I made when I first had site of the detailed Q4 2007 data.

As I say the Latvian economy is contracting, and I see no sign (or jutification for thinking) that it is going to start expanding again in the immediate future. Obviously some sectors like agriculture and transport will have picked up in the spring, but these will more than likely be offset by the continuing slowdown in other areas. So I really don't see where people are getting all those positive GDP growth numbers for 2008 from at this point, I really don't.

Wednesday, May 7, 2008

Latvia Industrial Output March 2008

In March 2008, industrial output in Latvia fell 5.5 percent on a working day adjusted basis and at constant prices when compared with March 2007, according to the latest data from Latvijas Statistika. Output in mining and quarrying shrunk 21.1 percent, and output in the manufacturing industry was down by 9.2 percent. Only output in power, gas and water supply increased - by 3.6 percent.

Compared to February, this March, Latvia's industrial output contracted by 1.5 percent on a seasonally and working day adjusted basis. This composite figure included a 10.8 percent drop in mining and quarrying, a 4.3 percent decrease in manufacturing and a 4.3 percent growth in power, gas and water supply.

Certainly if we look at the charts we will see that the slowdown is now pretty dramatic.

Over the entire first quarter of 2008, industrial output in Latvia declined by 3.1 percent, compared to the same period a year ago.Over the three-month period, output decreased by 4.7 percent in manufacturing and by 0.3 percent in power, gas and water supply, but rose 4.6 percent in mining and quarrying.

Now when we saw the GDP data for the last quarter of 2007 I was arguing at that point that Latvia had quite probably already entered recession (ie quarterly negative growth), and when we come to look at this industrial output data for Q1 2008and put it up against the retail sales data (see chart below) it is very difficult not to think that the Latvian economy is now well mired in recession, especially if we take into account the fact thgat at this point the Latvian government was still trying to run a fiscal surplus, so there is no relief on that front either. So Latvia has now almost certainly got itself well bogged down in recession (even while the inflation fire continues to roar). The only really big remaining question is just how long it will have to wait to come out of this recession, and just what the Latvian economy will look like (in a structural sense) when we get to that point.

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.
John Maynard Keynes