Sunday, June 14, 2009

The 4.8 % solution and fish with socks?

Pauls Raudseps, a senior commentator specializing in economic matters with Latvia’s leading daily Diena and I got into a discussion about whether Latvia could recover from its present economic crash. It started on a new Latvian television talk show and continued afterwards. Both on air and later, Pauls pointed to a 4.8 % rise in Latvia’s industrial production in April from March. His argument was that this was the beginning of a turnaround in the Latvian economy that would lead to the real start of an export-led economic recovery in six months.

Pauls also said that he believed Swedish economist Anders Åslund’ s prediction that East European economies (including Latvia?) would recover faster than the West, thereby precluding a scenario where recovery in the West leads to mass labor emigration (based on widespread and rational “no future” expectations) and permanent stagnation in Latvia.

I have looked at what I believe are the same statistics that Pauls uses. The April month-on-month rise seems mainly to have come from increased production of clothing (+14.6 %) pharmaceuticals (+ 11.6 %), and chemicals (+9.7 %). These are seasonally adjusted figures. In laymen’s terms, a mathematical formula has been applied to even out surges of certain kinds of production related to the seasons – wood is easier to harvest and process when the forests are dry and the access roads are clear, etc. The other statistical comparison is adjusted for working days (holidays on workdays, etc.) on a year-to-year (April 2009 compared to April 2008) basis, which showed production plummeting by 16.9 % from April 2008, and by 18.7 % when manufacturing alone is measured. So no glimmers of hope there.

The April statistics are not broken down proportionately, but there is a proportional breakdown of exports, which Pauls and others think should be the motor re-igniting the Latvia economy. I don't disagree-- in theory. These figures are disastrous. Exports are down 30.9 % from April, 2008 and have plummeted in all of the largest export groups. Food products, comprising 18.8 % of total exports, fell 6.8 %, forest industry exports (15.7 % of total) plunged 40.7 % and textiles (including clothing) at 5.5 % of the total were dowm 31.1 %. Only knitted goods, which include socks, I suppose, were up 0.9 %, while a fast rising export (except for re-exported fuels) was fish, up 16 % and just behind pharmaceuticals, up 19%.

The thing is that fresh, frozen and smoked fish comprise only 1.7 % of Latvia’ s exports, about the same as “socks”, at 1.8 %. Even the seemingly rising rocket of pharmaceuticals makes up 5.6 % of total exports. I also suspect that a large percentage of pharmaceutical exports are contract-manufactured pills made by Grindex and other companies for a market with relatively steady demand. Finally, in the month of April alone, on a working days adjusted basis, the production of textiles as a whole (a larger category than knitted goods), was down 59.8 % from the year before.

I find it hard to see how the 4.8 % uptick in industrial production and seeming higher exports of fish and socks (and pills) are serious indicators of an upturn and the green shoots of recovery. It still looks to me like the Latvian economy is crashing. The accelerants of the crash, such as rapidly diminishing domestic purchasing power, a total lack of affordable financing for new businesses (or any business), deflation and an uncertain tax environment (several contradictory plans in one day and tax hikes still looming on the horizon) and the certainty of increased workforce emigration at first opportunity, are all there. The massive cuts in public spending and the even harsher cuts we can expect i 2010 and 2011 will increase unemployment and further cut or "export" the purchasing power of Latvians (with only some showing up in national accounts as expatriate labor remittances).

At some point things will “bottom out” in a kind of prolonged stagnation for the better part of the next decade. It doesn’t look like there is more to hope for than that. Any hopes should be placed on how the flows of repatriated earnings from up to 500 000 Latvians working abroad by 2015 (my wild guess) will be spread in the local economy.


Wannabe Sorosieši said...

Good morning Jūri!

I am a bit to lazy to go to CSB and hunt these numbers myself, so I will ask you if you know.

You cite a year-on-year decrease in exports - what is it compared to the previous month or quarter?

And the industrial output increases - are they y-o-y or compared to previous period?


Wannabe Sorosieši said...

Scratch the industrial output question. Just reread and saw the answer.

One key that you nodded at is the lack of investment funds available. That is because of banks (in LV) unwillingness to extend credit and outside investors fears of this region and its instability. This leads to my concern that any riots or significant disturbances next week will only exacerbate the perception that LV is not stable and keep investment from flowing in.

Of course, that is not the only reason. The various "open letters" from business and law firms show how alienated (from the political process) are even the most connected of people.

Juris Kaža said...

I have edited the post to add some clarification. The rise Pauls Raudseps cites is April from March 2009, the year on year export figures are month to year-earler month, but the first quarter does not look better. Latvia's trade volume is collapsing, but imports (which reflect domestic purchasing power) are falling the fastest.