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Monday, February 9, 2009

Latvia's Economy Falls At A 10.5% Rate In Q4 2008

Latvia's economy is in freefall at this point in time. The economy contracted 10.5 percent in the fourth quarter of last year, the sharpest fall in the entire European Union, as the credit crunch bit deep, consumer demand collapsed and manufacturing spiraled downdards.

The drop in gross domestic product, the largest since quarterly annual records began in 1995, compares with a revised 5.2 percent drop in the third quarter.





Industrial Output Keeps Falling


Latvian industrial output declined by a working day adjusted 14.2% year-over-year in December, after falling 13.9% in November. Manufacturing was down 18.2% on an annual basis, while mining and quarrying production were down 10.6%. Month on month, industrial output dropped a seasonally adjusted 2.5% in December, compared with a 3.1% fall in the previous month.



Over the fourth quarter, industrial output decreased 6.3% over the third one and was down 12% from the previous year. In 2008, industrial production fell 6.7% compared to the previous year. At the same time, manufacturing output dropped 8.3%, while mining and quarrying output rose 2.4%.


Exports Fall Again In December

Latvia's trade deficit - at LVL 226.8 - was up in December over November, when it had been 210.5 million. Exports were down by 4.6% over November and by 11.1% over December 2007. Imports were up by 0.4% over November, and down by 15.2% over December 2007.

Exports Month on Month: the most rapid increase was in fish exporst (up by 22.5%), meat and fish products (up by 15.3%), tobacco products (up by 14.5%), (alcoholic and non-alcoholic beverages (up by 12.7%), pharmaceutical products (up by 20.5%), machinery and mechanical appliances (up by 18.1%). Exports fell in the following categories: rubber and articles (by 35.5%), iron or steel and their products (by 13.3%), wood and wood products (by 19.6%), furniture, bedding and lighting equipment (by 15.8%), clothing (stiched by 20.6%, unstitched by ).


Exports year on year: exports increase of cereal crops (exported mostly to Denmark, Morocco and Yemen) (3.3 times), alcoholic and non-alcoholic beverages (by 33.5%), essential oils, perfumery and cosmetics (by 45.5%), machinery and mechanical appliances (by 24.4%). There were declines in the export of iron and steel (by 54.5%), motor vehicles (including rail transport) and parts thereof (by 34.6%), rubber and articles thereof (by 41.4%), wood and wood products (by 39.3%), furniture, articles of bedding and lighting equipment (by 32.8%).

Imports month on month: unstitched clothing imports were down over November (by 34.9%), rubber and articles thereof (by 23.9%), mineral fuel, oil and refined petroleum products (by 16.3%). There were import increases in iron and steel (by 74.1%), machinery and mechanical appliances (by 31.2%), motor vehicles and parts thereof (by 15.8%), pharmaceutical products (by 24.1%), on vegetable and animal oils and fats; waxes (by 56.8%), meat and fish products (by 10.1%), coffee, tea and spices (by 8.0%).


Imports year on year: the most notable annual decrease was in imports of wood and wood products (by 63.0%), of motor vehicles and parts thereof (43.6%), articles of iron or steel (by 36.4%), rubber and articles thereof (by 30.0%), of electrical machinery and equipment (by 27.3%), unstitched clothes (by 23.0%). Imports of pharmaceutical products increased (by 40.9%), fish (by 25.3%), meat and offal (by 20.0%), meat and fish products (by 10.8%).


During the fourth quarter as a whole Latvia's foreign trade deficit hit a total of LVL 692.1 million - LVL 100 million less than during the third quarter. Imports totalled LVL 1.6898 billion and exports LVL 0.9977 billion. Since during the third quarter the respective figures were LVL 1.9761 billion and LVL 1.1822 billion, both imports and exports fell between quarters.During 2008 as a whole foreign trade turnover - at current prices - was up 0.3% or by LVL 31.5 million when compared with 2007. Exports grew 8.7% or by LVL 351.7 million and amounted to LVL 4.392 billion, whereas the volume of imports was down 4.1% or by LVL 320.2 million and totalled LVL 7.46 billion. Total foreign trade turnover at current prices in December 2008 reached 819.4 mln lats – less by 12.3 mln lats or 1.5% than a month before and less by 130.7 mln lats or 13.8% than in December 2007, according to provisional data of Central Statistical Bureau data.

Inflation Still A Big Problem


Compared to December 2008 the average consumer price level in January 2009 was up by 2.2%. The average prices of goods rose by 2.1%, but of services - by 2.3%. In January prices of goods and services grew almost in all main commodity groups (except clothing, footwear and fuel), but the main influence was the tax change. Price growth of housing services, tobacco products and vegetables had the greatest impact on the price increase.

Price increases in food (+3.5%) were mainly influenced by the rise of value added tax (VAT), moreover, due largely to seasonal factors the prices of vegetables and fruit went up by 12.8% and 4.4%, respectively. Prices of alcoholic beverages on average increased by 3.3%, and that was mainly influenced by the ending of sales campaigns, while the growth in tobacco product prices (+7.0%) was influenced by the growth of excise duty.



The VAT change influenced the prices of water (+16.3%), sewerage (+16.8%), refuse collection (+16.6%), electricity (+4.6%) as well as pharmaceutical products, books, newspapers and periodicals. Price increases were also recorded for heating, natural gas, pet food, individual care goods, non-durable household goods, passenger transport services, housing maintenance services, catering services and outpatient services.



Due to continuation of seasonal sales campaigns, clothing (-5.7%) and footwear prices (-7.0%) decreased. Fuel prices on average decreased by 4.9%. Compared to January 2008, consumer prices increased by 9.8%, of which prices for goods increased by 8.9%, and for services by 12.2%. The annual average rate of change in 2008 was 14.9%.

Producer prices also continue to rise sharply, and were up by 9.5% in December, although the export PPI has been falling steadily, and was only up by 1.6%.





Basically it is hard not to form the opinion looking at this price data that, given the presence of a currency peg, and the need to lower prices rapidly to get exporting, that the VAT raise was a very bad decision indeed, since it both weakens domestic consumption further and keeps inflation running at quite a high level, something which makes wage reductions very hard to swallow.

14 comments:

Atis from Latvia said...

nothing special!

Atis from Latvia said...

I know solution to current crisis:
we need to drop Latvian lat and adopt potato currency (we buy & sell everything in potatoes)

by the way my daughter studies in London

Anonymous said...

Hello Edward!

There is also new import and export data available about Latvia.

Comparing december (2008) with november (2008):
Import has increased by 0.3%, while export has decreased by 4,6%.

Comparing december (2008) with december (2007):
Import has decreased by 15.2%, while export has decreased by 11,1%.

Source:
http://www.csb.gov.lv/images/modules/items/item_img_8942_clipboard01.gif

A.

Anonymous said...

If we look a bit closer to the structure of Latvia export, we can see this:

Comparing december (2008) with november (2008):

Positive:
Agriculture and food products: +17,6%
Chemical products: +15,3%
Machinery and equipmen: +9,5%

Negative:
Textiles and textile products: -20%
Wood and wood products: -19,6%
Transport equipment: -19,6%
Rubber and plastic products: -18,4%
Basic metals, metal products: -6,6%
Furniture, other manufacturing n.e.c.: -23%
Other commodities: -27,2%

Comparing december (2008) with december (2007):

Positive:
Agriculture and food products: +35,1%
Chemical products: +19,1%
Machinery and equipmen: +18,9%

Negative:
Wood and wood products: -39,3%
Basic metals, metal products: -39%
Transport equipment: -33,3%
Rubber and plastic products: -19,6%
Textiles and textile products: -13,7%
Furniture, other manufacturing n.e.c.: -33,5%
Other commodities: -18,8%

A.

Anonymous said...

The tendency seems rather clear to me.

50% of Latvia's export makes Agriculture and food (25%), as well as Machinery and equipmet (15%) and Chemistry products (10%).
There is considerable growth in all of them (respectively 35%, 19%, and 19% in 1 years time).

Machinery and equipmet as well as Chemistry products is good thing but how are we planning to catch Western countries by exporting agriculture and food? Does not seem the most value adding business to me.

At the same time we start to abandon exporting Wood and wood products (the third biggest part of Latvia's export at the moment - 13%). Wood and wood products export has decreased by almost 40% last year.

The interesting thing about all this is that we have still not defined our priorities. We have still no idea of which sectors to support.
So actually it is impossible to say if we should consider growing agriculture export a good thing or the other way round - the big impact of small-value-adding agriculture business in our export means that we should change our economic policy.

Any thoughts?

A.

Anonymous said...

To be precise - I talked only about goods (Not including services) export and import in my previous comments.

A.

Anonymous said...

Meanwhile our Minister of Economics Mr.Gerhards has informed us about industries which will be the most supported.

These are:
1) Manufacturing industry;
2) Hotels (maybe he thought about tourism in general?);
3) Printing and publishing industry;
4) IT

At least we have the priorities now. The bad thing is - I'm not convinced these are the right ones.

A.

Latvian abroad said...

A.,

which should be the right priorities, then?

My opinion on government's priorities:
1. Manufacturing - OK, although it's very general (which types of manufacturing? will they support everything?).
2. Hotels - OK.
3. IT - should be a priority but I'm not sure if they actually need government support.
4. Publishing - how is that going to help Latvia's export/import balance??? Are we going to export books in Latvian?

Edward Hugh said...

Hello everyone,

Sorry I have not been around, I just have so much to do at the moment.

I have added export, price and industrial output data to the post.

"but how are we planning to catch Western countries by exporting agriculture and food? Does not seem the most value adding business to me."

Well at this point you should be grateful for anything, and I'm afraid given recent policy decisions you are unlikely to be catching western Europe anytime soon, although, of course, if you can stop contracting Spain and Germany could get nearer to your level :)

But I wouldn't turn my nose up at agriculture either, since after the recession is over, with global population and incomes (outside the Baltics) rising and productivity in agriculture not keeping pace, there is (to some extent) "gold in them there fields" - at least yet awhile.

Basically, there is no way forward till PRICES (and not just wages) come down, and you recover competitiveness. This is not just to export, but to encourage import substitution.

So the decision to raise VAT was an incredibly stupid one, in my book.

Well, on and on we go.

rytu said...

Hi Edward,

I saw you quoted my words in another blog of you. Again I say I mostly agree with you here and there, even if I was a little surprised to see my attitude put on the same level of Dresda bombing.
I want to make clear, but probably you saw it from my other messages in the spain economy blog, that my aim is not a "vendetta", against who? I'm not touched by the crisis till today and also I said that foreign lenders have a great part in the Baltic growth and modernization, probably without them CEE countries should stay in the same gruop with many South Americans and Asian states, in terms of standard of livings.
I was not even calling for a mere moral approach, taking apart that it usually is the right one, if it'd not work.

My guess is that all the action and strategies will simply not work out, we will have to face the same problems only some years later and maybe soonew that we espect.

I agree with you that EU and internation institution have to provide the necessary aid. I also may agree in creating EU bonds to have more money to use.

My concerns are all about how to use this money, i.e.:
1- Till today all the banks' bailouts in USA and Europe are ment to save the institutions from bankroups, covering losses created by households defaults, but little or nothing has been done to help borrowers to avoid personal bankroups.
2- Last US plan is under hard critics due to the fact that a huge lobbing addressed most of the resources to expeditures poorly connected with the current crisis.
3- National European plans, as many feared, are going to support national industies that can do a stronger lobbing activities rather than the ones that really need aid, also creating a new protectionism, this really can be the killing shot to CEE aconomies.

So, taking Lat devauation as someting unavoidable, my idea of (posting again my words that really concerned you) "I'd favour a liberal approach, but it's only my humble opinion, anyway I think bad banks should have to pay for bad policies, households should have to pay for their reckless borrowing, governments should have to pay for communicating the sunstainability of currency pegs and expantion policies. I'd like to see these kind of attitude, negotiating a volunteer currency convesion and a longer repayment time for forex loans, sharing the losses and extra costs among banks borrowers and government. otherwise the ones who acted properly will not see any advantage in acting the right way." have exactly the aim to help the borrowers not to default.
I mean, instead of covering the losses the banks will suffer from personal default in forex loans, just let's try to prevent them, giving the choise to the borrowers to mantain a montly repayment they can sustain (ok, after currency conversion and with the new interest rates the loan will be more expensive, but no help is for free). The banks probably can't afford a massive delay in repayment, so at this point the central bank and the government have to provide them the necessary funds they need (again not for free, but with market interest rates). Finally EU, ECB, IFM, with the current funds or issueing Euro Bonds, have to provide assistance to those CEE government who have not enought resources for the plan.

This approach will load an heavy burden of debt upon households, bnaks and state, giving a hard future to everyone who needs to repay, with lower growth rates to all those state forecasting to reach western european standards of living in 5-10 years. Probably now they will take 20 or more, but that's what we have.

Again all my words were not ment to punish someone, or to seat and laught to the ones who fall down. It was simply a different approach as I really, really think we are not facing and solving this huge crisis, at least only buying (a little) time at a very expensive price.

rytu said...

Incidentanly, I'm in Ufa, in the deep Russia in the Urals, now and for the next 2 months. I was here in the past May and June for 2 months also.

I want to report some direct evidences that reaffirm what we are all saying. After the Ruble weakening, the shelves in the malls are getting empty. the possibility to choose have incredibly lowered, in many places I did not find ananas, tuna, olive oil and many other normal imported products.
In the past summer, here around Ufa, Kazan, Magnitogorsk and other cities in the region I was surprised to find so many Latvian and Baltic products, not only food but also cosmetics, clothes, accessories.
Now they are simply desappeared, even searching carefully I was not able to find any Baltic cheese.

Edward Hugh said...

Hello Rtyu,

My you do get around :). First off:

"I saw you quoted my words in another blog of you."

Look, thanks for this, obviously I couldn't ask first, and I did cite anonymously, since I wasn't trying to get at you, but at the argument that they nicely summed up.

"even if I was a little surprised to see my attitude put on the same level of Dresda bombing."

Yeah, well maybe this was a bit strong. What I mean is that even if we do want to get through to the people who took the relevant decisions (and please note, I am in no case arguing that managers and politicians should not be replaced, just that I would like this to be done in an orderly way, since stability here is very important). What I wanted to get through to was that indiscrimate punishment is not ethically justified, and I am sure you are not trying to justified, but those people in the South of Spain who stoned a bank with the employees inside were, and this is only the start of all this, since in countries like Spain people may well get desperate as the unemployemnt benefit runs out.

The same goes for Latvia and Parex. I can see no justification for castigating the whole Latvian population for decisions taken by a few people at Parex (who I think have been sacked): but that is what is happening.

Of course I think that those people at the EU Commission (and I will name names, Joaquin Almunia) and at the ECB (Jean Claude Trichet) need to be replaced, but again I would stress the orderly way I would like to see this done. I am simply against purches and mass hysteria, that is all, and this is what I think "quacks" like Taleb, with the argument that the "visionaries who saw it coming" should be in chardge bit are in danger of doing. They are stirring up a quilombo (shitstorm) and some of it will stick on all of us. I don't know if you saw the post by Paul Krugman on the Monty Pythom Marxist Quiz, but I think he really gets through to the point here.

(I would point out at this stage that I really respect K as an economist, even if politically I am one of those "centrists" he doesn't like to much: ie I am not political, and only want solutions).

But going back to the "visionaries" bit, I don't think it would be too hard for me, at least as far as Eastern Europe and the Baltic hard landing goes (and probably later devaluation, and of course Spain, and Italy, and Germany), to claim that I got a lot of this right, but I hardly feels that qualifies me for being put in charge. Offering some input, maybe, but I think the sort fo people who need to run policy are the sort of people who need to run policy, and that is that, love them or hate them. I certainly wouldn't put any country in my incapable hands. Like Groucho Marx said, I wouldn't join any club that would have me as a member.

"I want to make clear, but probably you saw it from my other messages in the spain economy blog, that my aim is not a "vendetta", against who?"

I understand that, and guess you probably agree with most of what I have said above.

I think we do need financial architecture reform, of course. People need to look at:

a) the whole issue of structured finance
b) incentive schemes in financial institutions
c) Lone to value and income rules, documentation procedures, the indepence of valuers etc etc.

This would just be a start, but all of this is not in my competence. I am a macro economist, and as such I am probably more aware than most of the macro economic conequences of what is happening. This is the part of the debate I can plug into.

Basically my view is that when you have a huge forest fire what you don't do is start saving to buy a new fire engine, you use whatever means you have at your disposal to put it out, and then you have a massive enquiry into what went wrong and what means of protection we need in the future, although obviously I am not arguing that this process can't start now.

And if people are sufficiently cynical to think that this kind of reform isn't possible, then I advise them to get on with their lives and forget about all this, since it is simply all going to happen again in 5 to 10 years time if we aren't collectively capable of putting some changes in place.

"National European plans, as many feared, are going to support national industies that can do a stronger lobbing activities rather than the ones that really need aid, also creating a new protectionism, this really can be the killing shot to CEE aconomies."

I really don't disagree with this at all, or the points you miake just prior to this. I just have to think about Spain and construction.

This is all so big, I can't simply handle it here, if indeed I can handle it at all :)

Lastly, thanks for the piece on your Russian experience. I have already quoted it in comments on the Baltic blog. Please do keep commenting (on the Russia blog too...)

And if you have a moment mail me, I have a mail in the sidebar.

Edward

A said...

Latvian abroad,

1) Manufacturing - ok, but I agree with you that we should be more direct and define specific types of manufacturing;
2) Hotels (why hotels? We don't even have tourism industry strategy to use as a justification);
3) Printing and publishing (why?? Do we export much of this? Is it so value adding?)
4) IT (what kind of IT are we talking about?).

As I said - I'm not convincd.
My point is - I haven't heard any explanation concerning these priorities.
It is possible they are right but in any case an argumentation is needed to cinvince me (and everybody).

A.

Philippe said...

Hi everyone,
Concerning the priorities, it is obvious that our "decision makers" still are disconnected from the reality and are working on fantasies.
1. Manufacturing: again, what kind ? Are we talking of metalurgy (see Liepaja, our only credible metalurgy plant that is not so healthy) ? value added wood products (doors, windows, furniture) - sorry but even Belarus is more competitive than we are. What else ?
2. Why specifically hotels ? The VAT hike from 5 to 21% just stabbed them in the back. We have too much so called "high class" rooms to fill, but are missing mid-range housing. There is no specific support for tourism though it is one of the few industries that really had a high added value here.
3. Either a spike of nationalism: let's print more Latvian translation of international best sellers ("make money quick", "money does make hapiness", "train your child to be a winner" to quote the recent publications). Or maybe the fact that quite a few deputies are "owned" by press groups.
4. This is the most difficult one: whatever the IT field that would be chosen, it is due to fail in the short term. We do not have engineers. We do not train engineers. We do not valorize engineers. This has been pointed out for the last 5 years that engineering and IT branches are our weakest point.

All in all, one cannot help finding some hidden agenda behind these choices, especially with a bit of knowledge of who is footing the bills of our parties. Shall we see it as a sign of Ventspils hercoga demise that oil transit is not one of these priorities :o)