A Welcome 'Slowdown' in Lithuania?
The CEE and Baltic economies are interesting; that much I think is certain. This is especially the case in the light of the recent financial market turmoil which have crippled liquidity conditions. As such, my suggestion as it has been in my previous (main previous entry!) notes on Lithuania and the CEE economies in general is to keep a weary eye on these economies since they might very well end being up at the forefront of any kind of rapid unwind of the current economic climate. Before we dig into the recent economic data I should direct your attention to the fact that my coverage of Lithuania forms a small part of a much wider coverage of the Baltic economies which is conducted alongside Edward Hugh who is running his Baltic Economy Watch which is a poster blog covering the day-to-day evolution of these economies.
It has been while since the statistical office posted its estimate for Q2 GDP growth which came in slightly lower than the previous quarter. Generally, the GDP performance was narrated as a slowdown but in essence it is a very small one at that. In this way, Lithuania is still fairing at very high growth levels relative to the underlying and deteriorating capacity issues which are spelled out in my previous notes linked above. The graph below extents the GDP series to include Q2 2007 where growth nudged down ever so timidly to 8.0% from 8.3% in Q1.
As far as the other economic data which was treated the last time it is difficult to gauge a significant change. Regarding the CPI and PPI index my last figures already included Q2 and as last time we should be noting the steady upwards tick of CPI. Turning to labour costs and construction input prices only the latter seems to be updated relative to the last time we had Lithuania under the loop. The substantial y-o-y uptick in construction input prices suggest that activity in the construction sector by no means have cooled which indicates that the housing sector has not yet lost steam relative to what seems to be an obvious capacity ceiling. This further suggest, at least somewhat, that the risk of a sudden severe slump cannot yet be ruled out.
Another major thread in my analysis of Lithuania has been a rigorous analysis of the labour market as a proxy for assessing just what the underlying capacity issues were. Before we try to extent the analysis from where we broke off last time it serves to remember the inbuilt difficulties with securing adequacy in terms of analysing the human capital situation in Lithuania. The first issue relates to something which I have already briefly touched upon as it pits the data from the official Lithuanian Statistical Department against data from the Vilnius based Labour Exchange Office. The inbuilt downward bias in the data from the Labour Exchange Office suggest that capacity in Lithuania as measured by the unemployment rate and absolute number of unemployed persons is substantially lower than what is cited by Eurostat and the official statistical department. I cannot by no means give any indication as to which number to actually rely on but merely note that it is very difficult to provide a fixed point from which to make general analysis. However, what is very clear is that capacity in Lithuania is indeed declining and from already very low levels. The second point relates to general uncertainties regarding the population census which is well summarised in this small pointer from the Baltic Times.
Lithuania's state institutions do not know how many residents there are in the country, it has been revealed, with different bodies giving significantly differing estimates of the population. There are two offices subordinate to the Interior Ministry of Lithuania - the Migration Department and the Residents' Register Service. The names of the departments may give the impression that they keep track of population levels and how many passports have been issued, but this is not in fact the case, reports the Lietuvos Zinios newspaper. The Head of the Passport Division of the Migration Department,Danute Matareviciene,told the paper that she had no statistics on how many passports have been issued. The Residents' Register Service drew a balnk when asked as well.
The closest thing to an official figure can be found at the Department of Statistics. During the second quarter of 2007, 3,338,000 residents were registered in Lithuania, but only 3,162,879 have citizenship. Further confusion is created by data on official and unofficial emigration levels. Officially the number who left the country between 2003-2006 was 54,400. Unofficially the department puts the figure at 76,700, though other institutions suggest the number is actually as high as 500,000. Given the large number of Lithuanians working in other parts of Europe, and particularly the UK and Eire, this last figure seems far more realistic.
Apart from the obvious feedback mechanism with general labour market analysis this uncertainty also strongly affects my previous notes on net migration. Clearly, there can be no doubt that the trend is negative but when we think about this number of 500.000 cited as an unofficial estimate of net outward migration between 2003-2006 we also need to remember the inbuilt uncertainty relating to citizenship. More generally relating to the graphs I fielded in my previous main note the data is still more or less up to date. According to Eurostat the total amount of persons unemployed basically held steady in July at 75.400 compared to June's 75.300. This also translates into an unchanged unemployment rate at 4.7% in July 2007.
Lastly, and in connection with Edward's recent note on how Fitch downgraded Latvia foreign currency issuer default rating (IDR) to ‘BBB+’ from ‘A- as well as also downgrading the currency IDR to ‘BBB+‘ from A-. In this respect, Lithuania is still set on A and A+ respectively which reflects the fact that Latvia is showing stronger signs of overheating than its neighbour to the South. However, the recent move by Fitch on Latvia might be the first tentative sign that the current market turmoils will be followed by a more wide re-appraisal of risk. Especially in this light I will be looking closely at Lithuania and indicators such as labour costs, core inflation, and capital inflows since these indicators will be certain to raise the red lights quicker than they would have just a few weeks ago. Also, and since the genie now is pretty much out of the bottle in terms of coupling the current situation with the rumblings of 1998 the recent credit and capital inflows into the CEE economies should cause more than a few raised eyebrows.
As a final note I want to sketch out a bit where I am going from here on in my coverage of Lithuania and more generally the global economy. As such, I am thinking and collecting noted regarding a longer note on the rating agencies and their role in this whole debacle. On Lithuania, I will also try to look more closely at previously neglected areas in my analysis such as a detailed look at the balance of payment situation (i.e. source of funding) as well as the FDI stock which by no means is trivial. All this of course should be closely tied to the pegged currency and the strains this situation is set to be put in if the economy stays in its current high growth trajectory.
So in short, stay tuned.