Tuesday, May 06, 2008

Latvian economy gets worse

Our statistics office reports that Latvian industrial production declined 5.5% year-on-year in March 2008. The previous numbers show that this trend goes back to 2007 but it is getting worse and worse. The decrease in industrial output was also observed in Estonia.

I'm usually a "cautious optimist" but, with these numbers, even I can't find any causes for optimism. Well, except for Latvian export statistics that show exports increasing by double-digit %. Both myself and some economy experts from Latvian banks are puzzled about how that fits together with decline in industrial production. Here are some explanation attempts, none of which seems to fit together.

Attempt #1: There is no export growth. It's just inflation in export prices!

Response: Inflation for Latvian export prices is around 5%/year, far less than the domestic market inflation. (With foreign customers, it's much more difficult to increase the prices by 20%...) And export growth has been around 20%/year in nominal prices, which would translate to 15%/year in inflation-adjusted prices.

Attempt #2: The domestic consumption is falling and the goods that would be consumed domestically are exported.

Response: The domestic consumption is falling slower than the industrial production. Retail sales were down by 3.6%/year in March and have only been declining year-on-year for 3 months. In contrast, industrial production has fallen by more % and longer.

Attempt #3: With the real-estate bubble collapsing, the domestic market construction-oriented industries are imploding while exporters are doing fine.

Response: I almost wrote a blog post on why this is so. But the breakdown of latest numbers by industry shows decreases for a number of industries which have no obvious link to the struggling Latvian construction industry. And news reports say that several exporters are in trouble.

Attempt #4: There's no export growth! It's a giant scam to extort VAT refunds from the Latvian tax service.

Response: Latvia has its share of "criminal entrepreneurs". So, VAT refund fraud is possible. But I don't see any indication that it has increased this year (or any reason why it should have increased).

Attempt #5: Latvian statistics are totally messed up.

Response: Well, since we can't come up with a better explanation...


vtv said...

Regarding #2: I think it might be not correct to compare percentages. I don't think that 1% decrease in domestic consumption is an exactly 1% increase in export. Could it be so?

Latvian abroad said...

Yes, 1% in one does not correspond to exactly 1% in the other. But I don't think that could be the primary explanation.

Industrial production went into decline year-on-year starting September 2007 and sales only turned negative in January 2008. So, we have to explain a period when exports and domestic consumption were both still growing and the production was falling.

There could be some sectoral differences here, with consumption for domestic production turning negative before the consumption for imports. I have no statistics on that, but it's plausible because of the imported items certainly had much smaller inflation.

And #3 could still account for part of what we are seeing. Construction-related industries could well be down by more than 5%.

So, there can be explanations but I can't think of anything simple and clear.