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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.


David said...

Very interesting - and seems to follow a popular theme - but the hard landing does not seem to be being felt yet. My business data (transport related) does not seem to support it, as the number of airline tickets still seems to be increasing, not just nominal turnover in LVL. But there is clearly excess capacity in many sectors, as well as investment in very marginal business projects that you would expect to see in boom years!

Edward Hugh said...

Hi David,

And thanks for the insight.

"but the hard landing does not seem to be being felt yet."

Well no, it probably isn't, becuase we haven't really gotten there yet. It is just sort of programmed in at this point as it were.

Remember that real wages have still been rising quite fast (ie money wages have been going up much more than inflation), and the external trading environment, including Russia, has been very, very favourable.

Most of the slowdwon at the present time seems to have come simply from the credit squeeze, and the impact of this on the housing and construction sectors.

The probability is that this will now exten unfortunately to other sectors - unemployment is still pretty low at this point - and that the external conditions will deteriorate as the global economy itself slows.

That is when the strain will come, and the really hard, hard landing would come if the Lat wasn't able to hold to the euro peg with all the deterioration in the external trading position produced by so much inflation.

Lacitis said...

Seen from a Latvian tourism SME perspective, there's clearly a slowdown. That it may not be perceived yet in all the spheres of economy is quite obvious and is a part of the political problem.
There seems to be a "partial economical blindness" that affects the Latvian society fabric as a whole, and, specifically the Latvian ruling class.

Economy is the result of human actions and perceptions. How does the average Latvian perceive her/his country economy? Convinced Latvia is crashing hard, but convinced as well that there's nothing to be done about it, at least not at her/his own level. May the power to be do their job...
And this is where the problems get a new dimension. I'm not an economist (though a guest teacher in one of the leading business schools of the country) so I'll put it in plain terms:
-disguised in the skin of an hyperliberal state -"the state has no point in influencing the market"- there is very strong and permanent collusion (not to say, as show the many recent affairs, criminal agreement) between the legislator (we live in a centralized unicameral parliamentary system, without local representativity) and the internal market driving forces;

-A very big part of the available investment flow does not originate in the country. Latvia, as some of its neighbours, is -following historical trends- the playground for foreign investors (mostly from C.I.S. and Scandinavia). The country is rated as the most fragile in Europe as far as foreign investment vs. local ressources is concerned;

-No real inflation curbing policy was implemented. A so called "anti-inflation plan" was mostly directed toward the consumer with messages such as "spend less, save more", which, in a country riddled by low wages is wishful thinking. The only real instrument was the obligation for loans' applicant to prove their resources by producing an employer's certificate. "Oddly" enough, a rapid deflation off the "real estate bubble" ensued and is still keeping on.

-Most of the businesses first responded to inflation with a huge price hike without any medium or long term competitivity calculation. They are now using the same logic facing the slowdown: "our turnover peaks down, let's peak up our margin". As none of the government/parliament actions is directed toward them, they feel embolded if not authorized/encouraged to keep on their commercial management practices. This happens in a context when the State Control exposes (but does not sanction) many ministries' and agencies' "drifts" that show the state of local ethics as far as spending the taxpayer's Lats is concerned.

-Meanwhile, Riga's upper class is putting on its pink glasses, declaring that the "economy of the riches" is absolutely separated from the "economy of the poors" and that they can keep a "business as usual" model. It is true that, maybe from an inertial effect, the upper class still gets richer. It is true as well that, with a very important use of small loans, the middle class keeps growing and consuming.

The main "Democles swords" that hang over most of Latvian heads, corporate or private, are:
-risk of foreign investment withdrawal (let's not forget that the country of the main investors, i.e. Russia, has a 11.6 inflation rate and that the other main body -Scandinavia- has a proven tendency to outsource further when the going gets rough)

-credit crisis (though the main international groups are backing their Latvian operations on the Eurozone stability or on the Russian energetical rent, there are still a handful of local bank who accepted high credit risks -and still do- in order to increase their financial surface)

-Unemployment (6 years ago, Latvian workforce was praised as the highest level in Europe, last year, Latvian labour efficiency was rated the worst in Europe - 18 month ago a debate raged about the need to import "guest workers". Last July, unemployment rate peaked at 6.2 percent and looks like stabilizing at 5.3 But this does not account for the huge number of "brown envelopes' payments" whose beneficiaries can't show in whatever employment or unemployment statistics)

All three factors being interrelated as the development of one may acutely impacts the others.

So, are there some live-able options other than the:
-"let's make as much money as we can while we can" of the local "biznesmeny"

-"Let's wait until the storm passes and hope for the best" that unites the working class and the government?

England and France of the '70s and '80s used an "all points" economical rigour policy to successfully curb their inflation. Germany and Italy, facing the same problem, decided to revitalize their industrial sector -though they implemented at the same time "spending limitations".
What will be the Latvian solution? Won't it be too few, too late?

And eventually, is Latvia the model that will show the future evolution of "New Europe's" economy? Can we at least use it positively as a case study to prevent or limit a crashdown that would impact global Europe?

Have a sunny day. Inside or outside.