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Monday, July 30, 2007

Climatic Change, Bioethanol and Food Prices

This article in Portfolio Hungary is interesting:

A likely damage in crop volumes induced by extremely hot weather and draught in Hungary will probably aggravate the situation in the food industry now that price hikes also seem to be hanging in the air. The rise of food prices, together with rising petrol prices, may cause some serious inflation pressure, Societe General has warned on Friday.

Now this article, which is basically about how food price inflation may interfere with the National Bank of Hungary's plans for monetary easing put me in mind of two things:

In the first place Daniel Antal has been complaining about the heat in Budapest. So are we seeing an already present on-cost to global warming? Certainly Serhan Cevik over at Morgan Stanley seems to think so. In an article on inflation in the Turkish economy, entitled appropriately enough "heat wave",and wriiten back in June he made the following point:

Weather anomalies present a threat as challenging as liquidity-driven capital flows
. Nothing seems to bring an end to the Istan-bull’s breathtaking run, pushing the Turkish lira to its strongest level in years, thanks to the lure of carry trades and strong economic fundamentals. In turn, the lira’s strength may have accelerated disinflation, even against strong inertia in certain sectors. On our estimates, consumer price inflation will decline from 9.2% in May to 8.8% at the end of this month. However, with higher energy quotes, weather anomalies present a challenge through the volatility of food prices. Surface temperatures in Turkey have already been 4˚C above the seasonal pattern, while average rainfall is running about 60% below the long-term mean. These dramatic changes in climatic conditions are not just specific to Turkey, but reflect a global phenomenon.

He then went on to explain how he felt all of this was having an impact on the Turkish economy and the inflation problem they have there:

Global warming is not just about warmer weather, but also — more importantly — leads to unpredictable changes in variability patterns. One of the immediate consequences of extreme weather conditions is droughts with greater severity that cause agricultural supply shocks and higher volatility in food prices (see Stay Tuned to the Weather Channel, August 4, 2006). And we may now be observing such an event on a global scale, as the ratio of stocks to consumption dropped to its lowest reading on record, leading to a sustained increase in food prices. Indeed, virtually every country around the world has experienced a surge in food prices and consequently pressures on headline inflation rates. This is a significant risk, especially for developing countries where food has a greater weight in consumer price indices. In Turkey, for example, food prices account for 28.5% of the CPI and thereby can turn into a major source of volatility. Over the last couple of years, food price inflation declined from 12% at the beginning of 2004 to 4.9% at the end of 2005, but then surged to 14.6% earlier this year. Although the year-on-year rate of change in food prices eased to 10.6% last month, meteorological data still point to a volatile outlook for (unprocessed) food prices.

Then secondly, this whole argument also put me in mind of something I had seen in the Financial Times a couple of weeks ago about how the increasing demand for biofuels was consuming agricultural land rapidly, and hence driving up - indirectly - food costs (again, there would seem to be no free lunches on offer here):

Surge in biofuels pushes up food prices

A surge in the production of biofuels derived from corn, wheat and soyabeans is helping to push up food prices so sharply that the World Food Programme, the United Nation’s agency in charge of fighting famine, is finding it difficult to feed as many hungry people as it has in the past....Food commodity prices are surging because of a number of factors including rising demand from China and bad weather, but the potential consequences of the rising demand for biofuels has caught the attention of those in the business of feeding the world. Mark Spelman, head of Accenture’s global energy practice, said the biofuel industry was at risk of creating a public backlash similar to wind power generation as food inflation continues.

The BBC also had a similar story:

Several other biofuel plants are planned in the UK but biofuels are already big business in the United States, where bioethanol is seen as a greener and more sustainable alternative to traditional petrol.The downside is that land which until recently was growing crops for food is now growing crops for fuel.The United Nations says a third of the total US maize crop went for ethanol last year.The International Monetary Fund say there's no question that demand for biofuels is driving up food prices - and that it will go on doing so - though in the UK the National Farmers Union disputes that.

So back to Hungary, and food prices. According to Portfolio Hungary:

The price of wheat, bread and milk may increase significantly, up to 15-30% this year and the National Fruit and Vegetable Council expect that watermelon turnover will be reduced by 30-40%.

Daily egg production in the current heat is way smaller than usual, which may lead to even a 40% increase in egg prices. This can filter down to CPI through a number of channels.

“Maize harvest may be reduced by 40% or more from 8 million last year to 4-5 million tones until the end of 2007. The number is chilling, as 4 million is needed to feed animals alone, not to mention food production or industrial purposes," the analyst added.

Meanwhile, new bio-ethanol projects demanding hundreds of thousands of tonnes of maize are being unveiled week by week in Hungary. While only a few months ago the country was still struggling to deal with millions of tonnes of surplus maize, it is now facing a possible shortage of animal feed due to a drought.

Some experts, however, warn that the expansion of the bio-ethanol sector will be slower than expected, simply because investors will not find enough grain inputs. The draught may cause expansion-driven bio-ethanol plants to cover their input need from imports.

The announcement on new bio-ethanol projects “cannot be taken seriously", as they are “just to reserve a niche in the market", Imre Németh, state secretary at the Prime Minister's Office told Reuters earlier this week.

Hungary's bio-ethanol production capacity is expected to rise to 400,000-500,000 tonnes by the end of the decade and rise to 800,000 tonnes by about 2013, Németh added. The Agricultural Ministry said earlier this year that the 800,000-tonne output could be reached by 2009 or 2010.

The Forint Again

Well the Forint seems to be taking a real bashing at the moment:

The Hungarian forint fell as a decline in central European stocks and persisting concern about U.S. mortgage-loan defaults spoiled investors' appetite for riskier assets.The forint was set to post the biggest drop against the euro among the four central European currencies, extending losses suffered last week, on speculation investment may dwindle as the government tackles the largest budget deficit in the region with an austerity package.

Being curious about the real magnitude of the change I knocked myself out some charts from Yahoo.

First off, let's look at the five day chart:

As we can see, there is no mistaking the steady downward trend. Now lets look at the latest 24 hour chart:

Again we can see, while there is considerable volatility, the downward trend is being maintained. Now let's look at the three month chart:

As we can see, in only the last week a considerable fraction of the way back to the June 2006 lows has been covered. This is worrying, and we had better hope the US sub-prime and other stories which are unsettling emerging markets at the moment calm down. Incidentally, I don't buy the Turkish Lira story that portfolio hungary are selling. Turkey's underlying economic fundamentals are reasonably sound right now, especially after the elections: I wish I could say the same for Hungary's. Hungary is very vulnerable in the event of any sustained emerging market risk aversion, and this becomes doubly the case since this drop in the Forint will make it even more difficult for the NBH to lower rates.

Sunday, July 29, 2007

Pragmatism in Poland?

By Claus Vistesen

Cross Posted From Demography Matters

Well, it certainly seems as if something has dawned on somebody in Poland.

Poland is loosening its visa restrictions on workers from Ukraine, Belarus and Russia in order to ease a labor shortage in the farming and construction sectors, the Labor Ministry said Wednesday.

New rules go into effect this Friday, slashing the cost of work visas for citizens from the three former Soviet republics from 900 zlotys (US$330; €240) to 100 zlotys (US$37; €27), and easing bureaucratic restrictions, the deputy minister of labor, Kazimierz Kuberski, told the news agency PAP.

Under the new rules, workers would be granted three-month work visas upon presentation of a letter from a Polish employer.

"Because of the needs of Polish economy, we decided to open our job market in all sectors," Kuberski said.

Despite a jobless rate of about 13 percent, the European Union's highest, Poland is suffering a labor shortage that comes amid a booming economy desperate for construction workers.

The labor shortage has been exacerbated by the departure of hundreds of thousands of Poles to wealthier European Union countries for higher wages since the country joined the EU in 2004.

For a more comprehensive account of the situation in Poland I did a review and preview not too long ago over at my own blog. The main point is I think that while Poland's unemployment rate is still set in double digit territory the labour market is already suffering in key areas such as contruction. Furthermore, I would also guess that other sectors are lacking too. But where are all those Polish people going then? Well, it is of course difficult to give a comprehensive account but I can say that we are getting an awful lot of them in Denmark which is welcome news for our construction industry which indeed also is suffering from labour shortages but not, as it were, for the construction industry in Poland. The chart below gives a solid indication of the rise of the Poles in Denmark ...

Whether this surge signifies permanent placement is clearly an important question to answer but it is important to remember that if the economic situation in the home country deteriorates there could be a strong lock-in factor for the people who are living abroad to stay.

We are not quite done with Poland and Eastern Europe yet and I don't suspect we will be soon. As such, this is very much an ongoing (fast) process both in terms of what actually goes on the ground in CEE economies but also when it comes to our investigation of the matter. In the post below, I noted briefly how Poland is now taking concrete steps to address the issue of labour shortage. This piece from Ukrayinska Pravda further elaborates ...

Polish government facilitates entry in the country for immigrant workers from Ukraine, Russia and Belarus. It was announced by the deputy Minister of labor and social policy Kazimezh Kubersky, reports Interfax-Ukraine. According to his words, on July 20 a respective decree comes into force allowing the residents of these three countries work “in all sectors” of the national economy. When making a speech at the press conference Mr. Kubersky explained this decision by growing demand for workforce caused by economic growth. According to the estimates of the Ministry of Labor, Poland needs 500 thousand foreign workers annually, predominantly in agriculture and construction fields, and qualified engineers and health care workers are also in big demand.

According to the new rules, Polish enterprises get a right to employ immigrants from Ukraine, Russia and Belarus twice a year for the term of up to three months.

One thing which stands out I think is this number flung out by the Ministry of Labor which indicates that Poland needs about half a million workers annually. Now, as Edward points out to me in a mail it is difficult to say exactly what this means. Are we talking about a cumulative number here or what? But given the fact that human capital is a regionwide scare resource, and given the fact that many a ministry of labor might do some pocket calculations of their own across the region, it will at some point, I think, be difficult to see where the labor is to come from. Remember also here that while we could narrate this as a shortage of labor it is perhaps more a shortage of labor with the necessary skills we should be talking about. In this way there is a fundamental mismatch on the labour market (skill mismatch) as well as labor force participation rates across gender and cohorts could be better. The simple point we are making is however that in order to solve these issues you need time and time is exactly what these economies don't have. It is then here that the effects of strong outward migration to the West as well as a region wide population pyramid inversion as a result of a fertility collapse in the 1990s come in all this could end up being a sinister vicious circle if it is not already.

Moving back on track with Poland there is also the issue of the rather large unemployment rate coupled with mounting evidence that labour shortages are pretty acute. In short; something don't quite add up. However, the following snippet might help shed some light on this.

Warsaw, About Poland 29 January, 2007 Poland’s Minister of Labor says 30% of the unemployed do not want to work and that their files should be moved to a separate administrative unit. The Ministry would not spend time trying to help them to find work. They would simply continue to get benefits and the Ministry could spend more time helping those who want help.

Currently the unemployment offices spend a lot of time doing paperwork. Getting those who don’t want to work out of the system could reduce the paperwork load. The goal of the Minister of Labor, Anna Kalata is to allow the unemployment offices concentrate on helping those people who actually want work. Under the proposed change, those who refuse retraining or refuse job offers 2 or 3 times would be considered as not wanting to work. Their files would be essentially ignored. Under the Polish law, after two years people are considered as permanently unemployed and they stop receiving unemployment benefits. But they continue to get free health insurance.

The system is very convenient for those who run their own unregistered businesses. And the new change will make it much easier for them.

Even from this rather crude evidence it seems clear that the official unemployment statistics from Poland are much more opaque than we could perhaps have expected. Finally, there is this small piece from the Guardian which notes how Poland is looking for labor from other places than her peers in the CEE. As such, both construction workers from India as well as convicts are being considered ...

And so Poland has started to look elsewhere for the bricklayers, roofers, fitters, crane operators and bulldozer drivers who can throw up three stadiums, hotels, airports and hundreds of miles of motorway in quick time. It has found the answer: India.

"There are severe discrepancies in our labour market," said Poland's labour minister, Anna Kalata, who recently travelled to New Delhi to sign a memorandum of understanding with India to entice workers to come to the former eastern bloc country to fill the gaping hole. "The need for labour is particularly acute in the construction sector in the run-up to Euro 2012, and we need you," she told Indians. "The fact that the Polish economy is growing at a rate of over 7% is making the problem even more acute."


The shortage is so dire that the authorities are even reportedly considering using up to 20,000 convicts, under armed guard, to kick-start the construction. The problems are manifest in Warsaw, where construction projects dot the landscape but work proceeds at a ponderous pace.

And please also note this last paragraph ...

Some still hold out hope that at least some of the emigrants will return, enticed by the ever-increasing wages, so that the country can avoid turning - for the first time in its history - into a land of immigration. "But these hopes won't be fulfilled as long as the west remains more attractive," said Emil Szwezda, an analyst.

Now, we have already opened up the discussion on this issue in the post below. In general it is clearly difficult to say but given the outlook for the continuation of catch-up growth as well as the current wage wedge between east and west you cannot but think that the expecations of a reversal of the migration flows remain a fool's hope at best. An important qualifier to note here is of course the flow of remittances which in themselves represent a sort of proxy for how emigrating labor still contribute to their home countries' economies. However, could we not perhaps dig up some microevidence regarding the determinants of whether migration is permanent or not? Well, as it turns out we might be able to use this one ... (hat tip; IPEZone);

In this paper we analyze the demographic factors that influence the migration dynamics of recent immigrants to The Netherlands. We show how we can allow for both permanent and temporary migrants. Based on data from Statistics Netherlands we analyze both the departure and the return from abroad for recent non-Dutch immigrants to The Netherlands. Results disclose differences among migrants by migration motive and by country of origin and lend support to our analytical framework. Combining both models, for departure and returning, provides the probability that a specific migrant ends-up in The Netherlands. It also yields a framework for predicting the migration dynamics over the life-cycle. We can conclude that for a complete view of the migration dynamics it is important to allow for both permanent (stayers) migrants and temporary (movers) migrants and that return from abroad should not be neglected.

I will have more to say about this paper later.


Just taking the liberty of updating Claus's post here. If anyone is skeptical, and thinks that Claus and I are exaggerating the significance of all of this, just check out this link from News Bulgaria (which reproduces an article which previously appeared in the WSJ), it may help put your doubts to rest. And please note that while many articles now refer to ageing workforces here, few have yet drawn the link back downstream to the longer term fertility issue which now underpins it.


Saturday, July 28, 2007

Hungary April-June Employment

Well the Statistical Office have the latest employment numbers (April-June 2007) out. Really, on the surface, there would appear to be no change:

Hungary's rate of unemployment dropped further to 7.0% year on year in the April-June period, from 7.3% in the previous three-month period and 7.5% in Feb-April 2007.

This level is the lowest in 2.5 years. Also:

"the number of unemployed was 296,900 and the number of employed totalled 3.943 million in April-June. The latter figure compares with 3.92 m in Mar-May. The number of unemployed dropped by 10,800 from the previous 3-m period and by 8,800 from the April-June period in 2006."

As can also be read off from the chart below, the most striking thing here is that the number of employed people is more or less stationary. In principle, given the weakening taking place in the economy this is good news, but it is also the measure of a historic lost opportunity, as global conditions being expressed across the rest of the EU8 are leading to rapid employment growth (and of course overheating). One thing the Hungarian economy isn't going to do in the coming months is "overheat" (despite the temperatures Daniel has been noting), au contraire, under-heating and the rapid arrival of an early winter are more the problem to hand.

Looking at the next chart (all courtesy of the KSH), the general recent evolution in economic activity is clear enough to see, and the evolution is not an especially good one.

Tuesday, July 24, 2007

Ukrainian Workers Headed For Poland?

This from Ukrayinska Pravda:

Poland Facilitates Entry for Ukrainian Workers

Polish government facilitates entry in the country for immigrant workers from Ukraine, Russia and Belarus.

It was announced by the deputy Minister of labor and social policy Kazimezh Kubersky, reports Interfax-Ukraine.

According to his words, on July 20 a respective decree comes into force allowing the residents of these three countries work “in all sectors” of the national economy.

When making a speech at the press conference Mr. Kubersky explained this decision by growing demand for workforce caused by economic growth.

According to the estimates of the Ministry of Labor, Poland needs 500 thousand foreign workers annually, predominantly in agriculture and construction fields, and qualified engineers and health care workers are also in big demand.

According to the new rules, Polish enterprises get a right to employ immigrants from Ukraine, Russia and Belarus twice a year for the term of up to three months.

With this aim a facilitated visa procedure is envisaged in Kyiv, Moscow and Minsk consulates.

Deputy Minister noted that even though the decree concerns three countries, at first it is planned to mobilize cooperation efforts in this field with Ukraine and only then extend the new rules to Russia and Belarus.

According to previous reports, Ukraine and Poland won the bidding process for common holding of Euro 2012 football championship and it was forecasted earlier that Poland may facilitate entry for working immigrants, in particular from Ukraine, for the reason of lack of its own workforce in the course of preparation for football championship.

Hungary Retail Sales May

Well the latest retail sales news isn't exactly encouraging:

Hungarian retail sales dropped by 0.1% month on month in May, according to data adjusted for calendar and seasonal effects, the Central Statistics Office (KSH) has reported on Tuesday. This was the fifth consecutive month when the KSH detected a m/m decline, although this fall was smaller than the one in April (revised upward to -0.6% from -0.5%). Accordingly, the indicator gauging changes in the past 12 months has also dropped - it stood at -2.8% in May, which is the greatest fall detected in this decade.

Looking at the chart below it is clear that they have fallen consistently for the last five months for which we have data, and indeed apart from a spike in November-December they have been in sharp decline since last August.

This makes the NBH decision yesterday a little more surprising, since you would have thought they would want to do something to try to support domestic demand at this point. Most commentators are agreed that most of the inflation will drop out of the system in the autumn - especially since Hungary is now about to become the one new EU accession country where labour supply isn't a problem - and my only conclusion is that they must be worried about the value of the Forint and all those Swiss Franc mortgages, and not doing anything to make matters worse.

Classic textbook economics tells you that right now the best move for Hungary would be to devalue in an attempt to export its way out of trouble, and aggressively cut interest rates, while keeping a tight rein on government spending, but for one reason or another Hungary may just not be able to do this.

This is in danger of becoming a real tragedy, since this is obviously the moment of golden opportunity across Eastern Europe (as everyone else pushes up against capacity limits). But this situation will not last for ever, and again the biggest danger is a general correction with Hungary getting caught up in the mess.

We also need to keep a careful eye on the evolution of employment data. The total number of economically active people and employed people has been falling, and I have difficulty interpreting what this means. On the best account people could simple be "discouraged" and leaving the labour market. On the worst account some may be being attracted abroad by the general boom which is taking place. From this distance this is very hard to say.

The best case scenario I can see is that Hungary goes through an extended period of below par growth, just like Portugal from 2000 to date.

Thursday, July 5, 2007

The End of the Road In Lithuania?

by Claus Vistesen

Cross posted from Alpha Sources

I am sorry for the rather dramatic headline deployed above but I really don't think that any of this should be taken lightly. I will begin with this short yet very telling note from Bloomberg which informs us that unemployment in Lithuania dropped to a staggering 2.7% in June. This of course signifies an extremely tight labour market and quite simply this cannot go on for much longer. The clear evidence of this is first and foremost to be found in the quarterly y-o-y GDP figures which demonstrate Lithunia's sizzling growth rates much alike the other Baltic countries. As such, Q1 2007 saw an annual growth rate of 8.3% and on average the last five quarters saw a growth rate of GDP of 7.8%. This is of course putting strains of capacity in Lithunia and like in the rest of the Baltic countries the short term cyclical indicators point to very brisk growth in labour costs. Data on Lithuania shows an average increase of a whopping 21.8% in the last four quarters. However, it is the labour force we need to look at I think where Lithuania just can't keep on running up a near vertical hill; and indeed, when the hill turns into a wall the fall might be very far I fear. As such, it might serve us to go back a bit to a post here on AS about the general tendency in net migration in the Baltics. As you can see, outward net migration is particularly pronounced in Lithuania which of course only serves to exacerbate the general sittuation. Below, I field three seperate graphs (two on the labour market and one on net migration) and it should not require much mathematical skill to see how fast this is going in Lithuania and thus how unsustainable it is with the current growth rate. To put the numbers in perspective note that the total population in Lithuania is 3.384.700, that fertility (TFR) has been below 1.5 in more than a decade and that the population (and to some extent also the labour force) is diminishing by means of natural decline. Note especially the figure for unemployed persons which I have expanded with the data from the small Bloomberg piece linked above which notes that the number of unemployed stood at 63.343 in May down to 58.396 in June. In short; this is progressing very quickly indeed, especially if we take into account that the net migration most likely primarily takes its toll from the labour force.




As can readily be seen this is not sustainable much longer with the current growth rates and wage inflation. For a general economic perspective on the Baltic the FT has a nice piece this morning as well as of course Edward's recent note on the Latvian economy (linked above) is a must read. Note in particular how the tug-of-war with the rating agencies as well as Swedish banks supporting the credit boom has begun. People are increasingly beginning to smell a hard landing ahead which is of course prompting market participants to position themselves accordingly. In terms of the general dynamics we might be looking at, this I think is a good quote ...

Nevertheless, the danger facing all three states comes not so much from a collapse of foreign confidence – there is not much speculation in Baltic currencies and the banking sectors and public finances remain solid – as from the impact of any sudden change in consumer behaviour as expectations of continued future growth are dashed. This could lead to a collapse in house prices and a steep economic slowdown.

Such a “hard landing” could stop the three EU newcomers in their tracks as they struggle to catch up with western Europe. Even Estonia, the richest, is still only two-thirds of the EU average gross domestic product (GDP) per capita.

Of course, speculation in Baltic currencies could easily become the flavor of the day if rumours mounted that these countries might have to de-peg from the Euro in order to restore competitiveness. In the end, my advice will be to watch the labour market since the continuous tigtening, not only in Lithuania, at some point will put a ceiling on the current spurt after which the correction will come. Solutions are of course available in terms of bying these economies some time but time, as it were, is indeed running out. Yet, it still seems prudent to advice that inward migration is strongly stimulated and in Lithuania's case where labour force participation rates have been steadily declining for a decade it seems to be a trend which quite simply needs to be reversed although this will be difficult in the immediate short term context.