estonia, latvia, lithuania - who has done the best?! kaspar oja

Estonia, Latvia, Lithuania - who has done the best?!

Kaspar Oja

GDP and domestic demand – recovery is about to begin

100

120

140

160

180

200

220

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Estonia Latvia Lithuania

100

110

120

130

140

150

160

170

180

190

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


-20%

-15%

-10%

-5%

0%

5%

10%

15%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


-40%

-30%

-20%

-10%

0%

10%

20%

30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


GDP, volume 2000=100

Domestic demand, volume 2000=100

GDP, yoy growth

Domestic demand, yoy growth

GDP and domestic demand 2

• Economists seem to belive that Estonia will have the fastest recovery

• …however Lithuanian GDP fell less during the crises

• Growth of domestic demand is going to be sluggish due to high unemployment in all three countries, growth has to come from the exporting sector

Sharp decline in consumption due to low savings

-30 -20 -10 0 10 20

EstoniaLatvia

LithuaniaUnited Kingdom

DenmarkSlovakiaFinland

PortugalCzech Republic

NorwaySwedenHungary

SpainNetherlands

AustriaFrance

ItalyBelgium

GermanySlovenia

Decrease in consumption of households (2009)

Household saving rate 2004-2007

Investments as % of GDP

05

1015202530354045

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


Industrial production shows good growth

• Estonia had the sharpest decline in industrial production during the crises

• …however the recovery is also the fastest

405060708090

100110120130140

2000

M01

2000

M06

2000

M11

2001

M04

2001

M09

2002

M02

2002

M07

2002

M12

2003

M05

2003

M10

2004

M03

2004

M08

2005

M01

2005

M06

2005

M11

2006

M04

2006

M09

2007

M02

2007

M07

2007

M12

2008

M05

2008

M10

2009

M03

2009

M08

2010

M01


-40%

-30%

-20%

-10%

0%

10%

20%

30%

2005

M01

2005

M04

2005

M07

2005

M10

2006

M01

2006

M04

2006

M07

2006

M10

2007

M01

2007

M04

2007

M07

2007

M10

2008

M01

2008

M04

2008

M07

2008

M10

2009

M01

2009

M04

2009

M07

2009

M10

2010

M01

2010

M04


Export volumes are growing in all three countries

• Entrepreneurs who closed down their factories in 2008 are returning

• Crises left production capacities idle - it is easy to increase production

• Time is good for new FDIs• Some Scandinavian

companies could move their produciton to the Baltics due to relatively lower labour costs

00,20,40,60,8

11,21,41,6

Jan.

200

0Ju

n. 2

000

Nov

. 200

0A

pr. 2

001

Sep.

200

1Fe

b. 2

002

Jul.

2002

Dec

. 200

2M

ay. 2

003

Oct

. 200

3M

ar. 2

004

Aug

. 200

4Ja

n. 2

005

Jun.

200

5N

ov. 2

005

Apr

. 200

6Se

p. 2

006

Feb.

200

7Ju

l. 20

07D

ec. 2

007

May

. 200

8O

ct. 2

008

Mar

. 200

9A

ug. 2

009

Jan.

201

0

ESTONIA LITHUANIA LATVIA

Exports of goods, value, index 2007=1

Growth of exports is positive in all three countries

Exports (goods and services), volume, yoy growth

External balance (current account + capital account)

-30%-25%-20%-15%-10%

-5%0%5%

10%15%20%

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


LABOUR MARKET AND COMPETITIVENESS

HICP

-10%

-5%

0%

5%

10%

15%

20%

2001

M01

2001

M06

2001

M11

2002

M04

2002

M09

2003

M02

2003

M07

2003

M12

2004

M05

2004

M10

2005

M03

2005

M08

2006

M01

2006

M06

2006

M11

2007

M04

2007

M09

2008

M02

2008

M07

2008

M12

2009

M05

2009

M10

2010

M03


60708090

100110120130140150

2000

M01

2000

M07

2001

M01

2001

M07

2002

M01

2002

M07

2003

M01

2003

M07

2004

M01

2004

M07

2005

M01

2005

M07

2006

M01

2006

M07

2007

M01

2007

M07

2008

M01

2008

M07

2009

M01

2009

M07

2010

M01


• Prices grew at tremendous pace before the crises

• We saw that deflation is possible in 2009

• What is happening now?

Price growth at the moment

• Price growth is dependant on external factors energy and food

• Lack of internal pressures should keep price growth low in the coming years– high unemployment - weak pressures for wage

growth– idle production capacities - production potential is

higher than demand for products

Export deflator

8090

100110120130140150160170

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


• Fast growth of prices means loss of competitiveness for producers

Flexibility in labour markets - contributions to compensation of employees

-30%

-20%

-10%

0%

10%

20%

30%

40%

Hours Employment Other Total

-40%-30%-20%-10%

0%10%20%30%40%50%


-30%

-20%

-10%

0%

10%

20%

30%


Estonia

Latvia

Lithuania

Unemployment will remain high in the coming years

0

5

10

15

20

25


Youth unemployment could harm future potential

05

1015202530354045


One of several explanations for fast growth of unemployment

• Unemployment depends on flows to and from employment

• During the crises the number of people leaving a job did not increase substantially

• The number of people getting a new job decreased• If there aren’t many vacancies, people won’t leave

voluntarily and some firms start to fire• Loosing rigidities that hamper hiring, decreases firing• Idea from: Gilles Saint-Paul, The High Unemployment

Trap, 1995

Although it is hard to find a job people seem to have hope as activity rates remain high

54555657585960616263


WHAT WAS DONE DIFFERENTLY BEFORE THE CRISES?

Estonian fiscal policy has been much different than in Latvia and Lithuania

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Budget surplus as % of GDP

Government debt as % of GDP

Government expenditures 2005=1

0

0,5

1

1,5

2

2,5

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


Government expenditures yoy growth

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1


Two opposing views on government expenditure

• Keynsian: • we can’t earn more

than we spend; • aggregate supply

depends on aggregate demand;

• therefore cutting expenditures will lead to lower demand and production

• Barro-Ricardo equivalence theorem:

• it does not matter whether a government finances its spending with debt or a tax increase;

• to pay back loans taken today, it has to raise taxes tomorrow

Concluding remarks• Crises was at least partly a result of the boom– low level of savings– fast growth of prices, possibly loss of competitiveness

• Economies fell around 15% in 2009• Unemployment was around 20% in 2010Q1– not likely to decrease fast

• Budgets are still in deficit• Government debt is growing fast in Latvia and

Lithuania

Future?

• What should be done to avoid future crises?• What should be done to avoid future booms?

Thank You!

estonia, latvia, lithuania - who has done the best?! kaspar oja

Documents

growth of exports

yoy growth domestic

price growth low

good growth estonia

moment price growth

future crises

domestic demand recovery

lower demand