Wednesday, February 20, 2008

Troubling economy news

Rebir, a Latvian electrical equipment manucfacturer is laying off 1000 of its 1200 workers. Rebir is one of the few Soviet era factories which managed to survive throughout the 1990s transition to a free-market economy... only to close its doors now.

According to the news report, the insiders tell a story about younger people from Eastern Latvia leaving for higher wages in UK or Ireland, older workers retiring... and Rebir left with not enough qualified workers. The company tried to fix that by ordering some parts from China... only to discover that the parts and the resulting equipment is not of good enough quality and to see their buyers go away to another equipment supplier.

We don't have an economic crisis in Latvia yet. A few months ago, the unemployment rate was at 5%, the lowest level in more than 10 years and even now, it's only slightly above that level. But reports of this type are worrying. If that's typical of what's happening in Latvia now, we may have more difficult times ahead.



Edward Hugh said...

Hi LA,

This is truly worrying news indeed. In particular since, as you point out, even though the economy is slowing rapidly, unemployment is still staying low. This could, unfortunately give you the worst of all worlds, as you get a phenomenon known as "sticky wages", and wages and prices prove unable to adjust downwards (or towards stability) quickly enough to stabilise the economy as it slows. So inflation can remain ingrained (as we have seen rather in Hungary) even as the economy slides into recession. This situation can be to some extent structurally sustained by the two mechanisms you mention - younger workers leaving, and older ones taking early retirement - as the employment climate deteriorates, thus against expectation giving some stability to nominal unemployment levels.

This, for a whole variety of reasons (mainly theoretical) which it would be tiresome to go into here and now, is what I feared might happen when I wrote my original long piece back in July.

If your economy continues to keep inflation afloat it is just going to make it very very hard to get export lead growth and keep the peg.

On the other hand I am not at this point unsympathetic to your government trying to do some sort of counter-cyclical demand management on the fiscal side as your economy steadily grinds towards internal demand contraction, but to be able to do this convincingly inflation needs to be stopped, and now.

As you indicate, situations to be monitored.

Edward Hugh said...

Also, on unemployment, the numbers seem to have bottomed in November. I've been lookig at the monthly data from your labour board, and the level now seems to be rising. So I would say your economy has definitely turned.

Incidentally, if you are looking for more examples of the Baltic syndrome, I don't think you need go much further than Russia.

I just saw, flat prices in Moscow rose 10% from January to February, wages in January rose year on year at around 28%, and the CPI was up about 13%. So your rather large neighbour is about to join you in the "sin bin" at some point.

Basically the demographic problems are if anything worse in Russia, and then they send out oil rather than migrants to get money sent back home to fuel the boom. The details are different, but the end product looks pretty much the same.

Edward Hugh said...

OTOH, I'm not sure about Slovakia at this point, they are keeping inflation down, and they do still have quite a reserve of unemployment (although I have no idea at all about the skill quality), and Hungarians increasingly go over the border to work (in flight from their own crisis perhaps).So I have an open mind on Slovakia at this point, although as you suggest that sudden acceleration is reminiscent of something.

I would have Bulgaria and Romania on the list, and be keeping a careful eye on Poland and the Czech Republic. Inflation shot up in January due to some administrative price shooting in the foot from the czech government, and they may now find the spiral hard to shake off.

Meantime up go internal interest rates and the Koruna (and of course the euro denominated loans), and in comes the money looking for someone to lend to.