Tuesday, May 20, 2008

Latvia Unemployment April 2008 - Where's The Correction Mechanism?

According to data from the Latvian State Labour Board, Latvian unemployment in April was at 52,897 (or an umployment rate of 4.8%) this was up from 52,806 in March, but only slightly (93 people to be exact, although obviously there are seasonal factors to take into account here. But this figure was still substantially down from the 67,154 (by about 14,350 people) registered in March 2007. Given that the Latvian economy is contracting I think this result is significant.




and the unemployment rate has been dropping steadily.




And the picture doesn't change substantially if you look at unemployment using the EU harmonised methodology. According to Eurostat unemployment in Latvia was running at 4.6% in March 2007 and 4.5% in March 2008, ie it is still down year on year, even though GDP was growing at a strong rate a year ago and is contracting now.



The economy has gone into recession without generating sugnificant unemployment. Of course the labour market does follow movements in GDP with a lag, and we still haven't had the "hard landing", but still, this is a surprising result.

It also helps explain why the rate of wage growth - according to the laytest data we have which is for the last quarter of last year - has't slowed dramatically, although it may now do so.



The position isn't that different in Estonia, since according to the latest data from the Estonian Labour Market board the rate of unemployment in April was still incredibly low there too - running at 2.7% - with only 17,098 people registered at the employment offices. Using the EU hrmonised methodology, the rate is rather higher - some 5.5% in March which is the latest data we have from Eurostat - but to get a comparison this is not up enormously from the 4.9% rate recorded in March 2007 using the same methodology. ie on whichever measure you use unemployment has risen, but not that much, at this point, which would explain in part why wage rises have been so stubborn in coming down in terms of their annual rate. There simply is not that much "surplus labour capacity" in Estonia, and this is of course part of the whole inflation - and now stagnation - issue.




Basically I hate to be a bore, or "party spoiler" at this point, but this is the issue that has been worrying me from the start about the whole Baltics situation, the absence of the ability of the labour market - due to years of very low fertility and substantial out-migration - to correct during a recession.

Without getting too theoretical here, there simply is no homeostatic mechanism to fall back on here to guarantee stability. Since the cohorts leaving the labour force at the upper end are going to be consistently bigger than those enetering at the bottom, there is no build up of surplus labour in the "deposit" during the slowdown.

Leaving aside the length of the present slowdown and its possible severity, we are left with the very unfortunate situation that when growth eventually does start to pick up again, there may be very little surplus labour capacity available to fuel the growth, and logically inflation would then simply start to shoot up yet one more time. Basically I would say that finding a longer term solution to this problem is now one of the most urgent questions facing the Latvian (and Estonian, and Lithuanian) government.

Posted by Edward Hugh at 2:47 PM

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Spotlight On Hungary

Welcome to the Eastern Europe Economy Watch Blog. By clicking the older posts link (at the foot of the page) you will be able to leaf through the normal chronological blog posts. But first we have our country of the month feature where we would like to present some charts which provide background data we hope will help the first time reader better assess and get to grips with the general argument being presented on the blog. Below you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.