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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.


jekabs said...

I took a look at how good the preliminary GDP growth numbers (flash estimates) from Latvijas Statistika have been. Here's what I see:

Quarter Estimate Actual Revision
2006-Q4 +11.9 +11.7 -0.2
2007-Q1 +10.7 +11.2 +0.5
2007-Q2 +11.3 +11.0 -0.3
2007-Q3 +11.1 +10.9 -0.2
2007-Q4 +9.6 +8.0 -1.6

It seems that the preliminary estimates have been somewhat upward biased.

Although this doesn't really change the clear trend of deceleration of growth, and even with revisions, we will be left with positive growth that's significantly lower that previous years.

Edward Hugh said...

Hi Jekabs,

And thanks for checking this out. This was my impression.

The data point I am struggling with is the quarter on quarter growth number of 1.2% for Q4 2007 that thre stats office supplied to eurostat.

Since the actual constant price GDP number contracted in Q4 over Q3, then the only way you can get a quarterly growth number is with a working day and seasonal adjustment. I have no idea the weightings they used, but that doesn't matter since this is simply moving the deckchairs around and if the Q4 2007 is upwardly weighted, then somewhere else needs to have a downward weighting, which means any excess upside attributed to Q4 2007 will need to be subtracted from subsequent quarters.


"we will be left with positive growth that's significantly lower that previous years."

Well my feeling we will be very lucky to see any positive growth at all this year, and we may even get a negative number for whole year 2007.

The contraction in internal demand is only going to continue for the rest of this year, and the external environment is only going to deteriorate. Fiscal deficit may help at some point, but you still have inflation raging, so nothing here is easy.

The big question really is though now: just how long can we expect this to last? At this point we have no good answer to this question, but I wouldn't be banking on any imminent recovery.

Latvian abroad said...

That 1.2% for Q4 looks weird. I don't think it's seasonal factors since previous years don't show any substantial slowdown in Q4.

It could be working day adjustment since we had two holidays more in Q4 2007 than in Q4 2006 (one was added by changing the laws, one was result of New Year's Eve falling on weekend in 2006 and weekday in 2007).

Robertas said...

I think the growth will rebound when 2 factors change.

First, inflation has to be down to 3% or so. Mainly, inflation is imported in all Baltic states. Commodities are the key. So, one term is the peak of commodities prices. I bet it will be the second half of this year for food and next spring for energy prices (excluding electricity).

Secondly, EUR interest rates has to go down. This would ease bad expectations and move the internal spending up. That's what Latvia companies misses now. Personally, I think the rates has to be cut by 0.25 starting now and once again at the end of summer. However, ECB top officials has different point of view at the economy problems as you know. They will stare at inflation numbers until Germany and France economy shouting numbers will slap their faces. Ironically, it might be the moment after decision people return from their nice summer vacations and take a glance at the sheet of paper with red numbers. And I suppose, Latvijas Banka should start moving down currency interest rates now as well. At least 2.00% this year down to 4%.

Latvia is too much depended on external factors as there are no big companies that could drive the economy. It is very interconnected. That's why I suppose those two (external) factors are the most important. Unfortunately, Latvia can do nothing about it in medium term. Sad story is unwinding for our braliukas.

My prediction is that the slow down will last until next spring.

Edward Hugh said...

Hi LA,

"It could be working day adjustment since we had two holidays more in Q4 2007 than in Q4 2006"

OK. Thanks for this. I have just put an update on the post, since I sort of had a flash of insight as I was looking at the data.

I think there obviously are seasonal elements at work between Q1 and Q2 - things like transport and agriculture, but the question is this year whether the slowdown in manufacturing, services and construction will be large enough to offset these upswings. My guess is that they may well be, in which case we will already be seeing year on year negative growth in Q2. It is too early to say for sure at this point, but equally there are few reasons to be optimistic at this point. The EU money perhaps, and some fiscal stimulus from the government. But then you still have all that inflation to worry about.

I think we should have a much clearer idea about the immediate future when we get to see, say, retail sales, industrial output and exports for May, by that point the short term dynamics should be much clearer.

Incidentally, given the promising weather, and the level of agricultural prices, agriculture isn't to be sniffed at at this point.

Hi Robertas,

"First, inflation has to be down to 3% or so."

Yep. But we are a long way from this at this point, so we are in for a good spell of stagfaltion here it seems.

"I bet it will be the second half of this year for food and next spring for energy prices (excluding electricity)."

I think this is very hard to see, and I am not optimistic. It depends on the level of global economic growth - since the pressures are, as you say, global ones.

But if there is a major slowdown internaionally in 2009 then this will bring prices back down, but will hit your economy through the other door, since it will be much harder to export in a hostile environment.

But I am not convinced the developing countries (non Eastern Europe) will necessarily slow this time round. That is I am not sure we will get a global recession - although the IMF are at least giving this possibility a sort of 50% possibility for 2009. If we don't slow, and some of the big ones like India and Brazil simply power on through, and we get only a stagflationary recession across the OECD and not a major growth snarl up, then I wouldn't be looking for too much easing up on those prices, since even though Eastern Europe can see good harvests this year, prices globally may well still be up, and this is what matters.

I have a post on the Demography Matters blog - entitled Food Prices, Farmland, Global Rebalancing and Rural Labour Shortages - if you are interested.

"Secondly, EUR interest rates has to go down."

Yes, and I'm pretty sure they will do. Italy is already in recession, Spain is in a construction collapse freefall like the Latvian one, and now Germany seems to be slowing, but be careful, since given that the problem this time was a "credit crunch" - ie the lending conditions changed - the problem may not be very responsive to small movements in interest rates, and frankly I don't see the ECB coming down to Greenspan type 1% base rates anytime soon, especially not with all that inflation to worry about.

So it looks like it is going to be "belt tightening time" all round.

"My prediction is that the slow down will last until next spring."

Well I hope you are right, but I fear this may all now last much longer. To give just one example, Portugal slowed dramtically in 2001, and she still hasn't recovered in any satisfactory way. So while you may say, why should Latvia be like Portugal, I could say, well why shouldn't it be? We still have all the issues associated with the Lat peg to address yet, and we have just passed through a very dramatic "boom bust". These things are rarely without consequences.

I feel we should stay calm and just take this one day at a time at the moment. There will be plenty of time later to assess how long all of this is going to last. At this point we still don't know the extent of the damage.

Robertas said...

Hi Edward,

"So while you may say, why should Latvia be like Portugal, I could say, well why shouldn't it be?"

There is no such thing as "maniana" or "siesta" in Baltic people's mind. They are more up-and-doing ones. Another thing, recent news on the plans to strengthen Russian currency in order to ease the inflation would definitely help Baltic exporters to find the consumers. And Russia is one of the main partners here.

After reading your very loooong post in Demography Matters blog, I've got not so sure about the ease of food prices this year. There is total disaster with rise prices. However, Baltic region is more depended on wheat and corn. Let's hope there'll be good harvest this year and it will not go through the car pipe because of stupid decision to hedge high energy prices.

Also, commodities have entered a bubble region. Stocks, property and now commodities. You know, oil futures have reached $200 for the end of 2008. I don't think this will last long. Personally, I think new energy technologies are already on the way and OPEC players are trying to get everything as fast as the world economies can give. The limit could be that slowing of the global economy too much and entering global recession or depression would be worse for OPEC countries income as to stay at $100. Sadly, the limit is not reached yet as BRIC countries are still headed up.

"We still have all the issues associated with the Lat peg to address yet"

Truly, I don't believe unpegging Lat currency from Euro would help country to get back on track. Conversely, if it happens, there will be total mess: huge number of foreclosures and bankruptcies, big unemployment, huge inflation because of import prices jump, political instability, total crash of people 's sentiment, massive march of workers abroad from the country that has stolen the roof from their head, the job and simply life. I wouldn't do that. Maybe I would consider this if global severe recession comes, when people are able to get in to their minds that currency devaluation is the only right decision to save them from far worse and there is no other shining place on Earth you can find for your family.

Still, I suppose, Latvia will reach the bottom next year. Though, staying still at the bottom can last for another year.

p.s. did I thank you for your wonderful blogs? They are very interesting for me. Thanks :)

Edward Hugh said...

Hi again Robertas,

And thanks for the kind words about the blogs. I'll try and find the time to come back a bit more fully on your Latvia relevant points later, at the present moment I am busy with a Serbia post for the Global Economy Matters blog. But for now:

"recent news on the plans to strengthen Russian currency in order to ease the inflation would definitely help Baltic exporters"

This probably would help, but just remember two things:

1) Russia isn't stable (I guess in the Baltics you already know that, but I mean economically, arguably it is on a much larger version of the boom bust cycle which the Baltics just went through, inflation is currently going through the roof, and the political leaders don't seem that concerned about the problem, since they see the wage rises like Latvia's leaders did as a way of closing the living standards gap, of course Russia is cushioned by oil, and that is a big cushion, as long as oil prices stay high. But still there are problems looming - and possibly big ones - not least of them the fact that Russian oil output may now have peaked. See the last couple of posts on my Russia blog - and in particular the debate with the commenter who is pro-Medvedev).

2/ And possibly in the short term more importantly, there is no guarantee that they will let the ruble rise. There are two reasons why they are very reluctant to do this. The first is that since the price of oil is set externally (in dollars, but it wouldn't matter what the currency was), if the ruble rises against the benchmark currency then those who receive the revenues inside Russia will get less, and as we know some of these gentlemen are not without influence with the Putin/Medvedev administration.

But there is a second reason for the reluctance, and that concerns the competitiveness of Russian industry. My advice is to go over and read the debate on my Russian blog, but basically - as in Latvia - if inflation continues (and remember this is at least in part declining labour force, labour shortage driven) and the currency rises then Russia's industrial base will suffer (as the Latvian one undoubtedly has) and financial services and construction will increasingly drive the economy - until they don't - in which case the boom turns to bust, and the absence of competitive industry becomes a huge problem. I am sure you know the story.

But the worst of it all is that the Russian economy is being strategically manipulated for political purposes.

Last Thursday Putin said in the speech to the Russia parliament presenting his candidacy that he wanted "single-digit inflation within a few years" as part of a long-term plan to make the country a global economic leader by 2020.

This is sooooo complacent about the situation. What it means is that they are going to be soft on inflation and try to go for growth. As the Baltic states have already seen this is only destined to end in tears. But they seem obsessed by this crazy dream.

Just look at this:

Russia can outstrip Great Britain in terms of GDP at purchasing power parity as early as in 2008, former Russian President Vladimir Putin told a State Duma session, at which his nomination for Prime Minister is being considered. He added that this indicator in Russia already exceeded $2 trillion, while in terms of GDP Russia was seventh in the world. Commenting on prospects of Russia's GDP growth, Putin said the country was already in a position to take a further step upwards this year.

The PM candidate also indicated that Russia was able to and should within the next 10-15 years become one of the world leaders by household incomes and social security, life expectancy and housing. "

I'm sure that technically they are right that in PP terms and if oil
holds they can move past the UK in dollar value GDP total soon, but
none of this is sustainable, and the second para is just a sick joke, especially the male life expectancy bit.

Anyway the point is that Putin signalling he was ready to live with double digit inflation for another few years, and making no reference to the ruble have generally been interpreted as dampening expectations of a ruble revaluation.

So the bottom line is don't bank on anything here.

"There is no such thing as "mañana" or "siesta" in Baltic people's mind. They are more up-and-doing ones."

That's the spirit, so you will understand that in this situation you really can count on no one else bar yourselves. You are in a difficult mess, but with - what was it Churchill said, blood,sweat, toil and tears - I am sure you can see your way through. To his list I would add a bit of imagination and some unconventional policies, but we will get round to these later. Unfortunately sheer grit and hard work may not be sufficient.

As I say, thanks for the comments and the interest and please stay round for the debate as this develops.

Edward Hugh said...

"However, Baltic region is more depended on wheat and corn. Let's hope there'll be good harvest this year and it will not go through the car pipe because of stupid decision to hedge high energy prices."

Yep. I think this year you may get some relief in this area. So we have a short term (this year) where the problem may ease slightly over last year, and GDP even get an uplift (but where next year could easily be as bad as 2007, we simply don't know about the weather), a mid term (1-5 years) where the problem is likely to get structurally worse as large third world countires consume more food and energy, and a long term (15 to 20 years) where the problem may be sorted by appropriate investment and human capital formation across the planet. Basically we need hi tech industrial agriculture run by highly trained professionals.

In the short term I was interested to note in the week that Economic analysts (and CEE specialists) 4Cast are predicting a significant recovery in agricultural performance across the region this year, driven by a massive rise in crop yields and farming output.

They say weather conditions seem favourable in many countries in the region as well. Gábor Ambrus, analyst at 4Cast in London. believes the effect will be most visible where the share of farming is high, i.e.: Ukraine and Romania, while Poland slightly may not benefit especially as it was spared from much of the regional draught in 2007.

In Hungary for example the summer draught pushed farming output down by some 20% yr/yr, shaving around 0.6-08pp off the headline GDP growth rate.

The harvest of the most important crops, wheat and maize, was only around 8 million tonnes in 2007, vs. 12.7 m tonnes a year earlier and some 30% below the average yield of the preceding decade.

(of course, as you note, some countries like Hungary have gone mad on biofuels. Hungary's bio-ethanol production capacity is expected to rise to 400,000-500,000tonnes per annum by the end of the decade and to 800,000 tonnes by about 2013, according to Imre Németh, secretary of State at the Hungarian Prime Minister's Office speaking last summer. The Hungarian Agricultural Ministry had previously said that the 800,000-tonne output could be reached by 2009 or 2010, but the impact of the drought sudenly made people change their ideas).

According to Ambrus “This year however looks very different in Hungary. The estimates of farming minister Graf and that of domestic farming associations indicate a crop output of a staggering 16mn tons, more than 43% above the average of the past decade and nearly twice as much as the output of 2007,"

He also suggests that the good weather is a regional phenomenon; and that other countries in Central and Eastern Europe have also reported very good crop prospects.

He sees Romania and Ukraine as particularly likely to benefit from this effect. (The share of Romanian agriculture in GDP is 7-8%, hence even a 30% increase in farming output (may boost GDP by 2pp above expectations.)

The effect on Ukraine is even more pronounced with the agriculture having some 17-18% share in GDP. The crop estimates of UkrAgroConsult indicate a 35% increase in crops, and this could boost GDP by as much as 6pp (!) over 2008, offsetting much of the slowdown coming from other sources, Ambrus noted.

If these trends are confirmed not only will agricultural prices in the CEE not continue rising in the short term, they may even fall. Here's hoping.

Edward Hugh said...

Claus Vistesen just sent me over a mail which contained the following:

I am just looking at Lithuania ... Q1 2008 volume figures are out and the rate of contraction compared to Q4 2007 is massive ... (even y-o-y are we observing contraction by some measures)

1. -12.5% in current prices!!!! (q-o-q) not too weird since inflation makes this figure worse.
2. -3.22% in previous year's prices (q-o-q)
3. -1.5% in index=2000 seasonally adjusted (q-o-q)
4. -2.1% in index=2000 seasonally adjusted (y-o-y!)

Basically, ladies and gentlemen ... the Baltics are now in a recession it seems!

Robertas said...

well... yeah. this is very bad news for Lithuania. It is very strange that no one from media is talking or writing about that in Lithuania. Do they afraid of panic or what? Everybody concerns rising inflation and mentions satisfying y-o-y GDP figures only. Let's hope it's a cash flow problem and wait for another interesting post from Edward.