Economic Adjustment in the Baltic countries                      Ardo Hansson                         Eesti Pank   CEEI 20...
TopicsA. Comparison with adjustment in other countries   before/during previous recessionsB. Comparison with other small e...
A. Comparison of the adjustment in the Baltic countries   with the adjustment in other countries   before/during previous ...
A. The adjustment in the Baltic countries in   international comparison:   methodology and dataA cyclical peak is defined ...
A. A comparison of the 2007-2009 recessionin the Baltic countries with previous cycles inother countries: real GDPA. GDP d...
A. A comparison of the 2007-2009   recession in the Baltic countries with   previous cycles in other countries: net   fore...
A. A comparison of the 2007-2009 recessionin the Baltic countries with previous cyclesin other countries: real interest ra...
A. A comparison of the 2007-2009 recessionin the Baltic countries with previous cycles inother countries: price competitiv...
A. The adjustment in the Baltic countries ininternational comparison: summaryRecent cyclical developments in the Baltic co...
B. Comparison of the adjustment in the Baltic countries   with the adjustment in Greece, Ireland and Portugal             ...
B. Changes in GDP since 2007 amongselected EU countries                     Change in GDP from      Change in GDP from cyc...
B. Real GDP:Baltic countries vs Greece, Ireland and Portugal GDP (quarterly) dynamics and forecast after the cyclical peak...
B. Private consumption:Baltic countries vs Greece, Ireland and Portugal  Private consumption (quarterly) dynamics after th...
B. Unemployment:Baltic countries vs Greece, Ireland and Portugal   Unemployment (quarterly) dynamics and forecast after th...
B. ULC-based REER:Baltic countries vs Greece, Ireland and Portugal   ULC-based REER (quarterly) dynamics after the cyclica...
B. Current account balance:Baltic countries vs Greece, Ireland and Portugal Current account balance dynamics and forecast ...
B. Fiscal balance:Baltic countries vs Greece, Ireland and Portugal Fiscal balance dynamics and forecast in 2007-14 (% of G...
B. Public and private indebtedness:Baltic countries vs Greece, Ireland and Portugal: A. Public debt in 2007 and 2011 (% of...
B. A comparison of the adjustment in theBaltic countries vs Greece, Ireland andPortugal: summary1. Relatively fast adjustm...
C. The advantages/disadvantages of sharpversus gradual adjustmentDisadvantages of sharp adjustment:  - due to overreaction...
C. Why were sharp adjustments possible inthe Baltic countries?Sharp adjustment was to a large extent inevitable:- A sudden...
C. Stable growth ahead for the Balticcountries?Adjustment has provided a more solid foundation:- External and financial vu...
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Ardo Hansson. Economic Adjustment in the Baltic countries

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CEEI 2012 – Conference on European Economic Integration
26-27 November 2012

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Ardo Hansson. Economic Adjustment in the Baltic countries

  1. 1. Economic Adjustment in the Baltic countries Ardo Hansson Eesti Pank CEEI 2012 – Conference on European Economic Integration 26-27 November 2012
  2. 2. TopicsA. Comparison with adjustment in other countries before/during previous recessionsB. Comparison with other small euro-area countries (Ireland, Greece and Portugal)C. The advantages/disadvantages of sharp versus gradual adjustment
  3. 3. A. Comparison of the adjustment in the Baltic countries with the adjustment in other countries before/during previous recessions
  4. 4. A. The adjustment in the Baltic countries in international comparison: methodology and dataA cyclical peak is defined when the quarterly GDP is higher than in the two preceding quarters and higher than during the next two quarters.A cyclical trough is defined when the quarterly GDP is lower than in the two preceding quarters and lower than during the next two quarters.Sample: 23 advanced economies and 18 emerging market economiesData: 1960 Q1 – 2012 Q2, seasonally adjusted, constant prices.Source: IMF IFS databaseVariables: (1) GDP; (2) net foreign capital inflows; (3) real interest rates; (4) CPI-based REER,Altogether 188 episodes of recessionWe concentrate on developments four years before and three years after the peak in output level.
  5. 5. A. A comparison of the 2007-2009 recessionin the Baltic countries with previous cycles inother countries: real GDPA. GDP dynamics during four years B. GDP dynamics during three yearsbefore the cyclical peaks (t-15=100) after the cyclical peaks (t0=100) 5
  6. 6. A. A comparison of the 2007-2009 recession in the Baltic countries with previous cycles in other countries: net foreign capital inflowsA. Net foreign capital inflows during B. Net foreign capital inflows during threefour years before the cyclical peaks years after the cyclical peaks(% of GDP) (% of GDP) 6
  7. 7. A. A comparison of the 2007-2009 recessionin the Baltic countries with previous cyclesin other countries: real interest ratesA. Real interest rates during four years B. Real interest rates during threebefore the cyclical peaks (%) years after the cyclical peaks (%) 7
  8. 8. A. A comparison of the 2007-2009 recessionin the Baltic countries with previous cycles inother countries: price competitivenessA. Real effective exchange rate dynamics B. Real effective exchange rate dynamicsfour years before the cyclical peaks three years after the cyclical peaks(t-15=100) (t0=100) 8
  9. 9. A. The adjustment in the Baltic countries ininternational comparison: summaryRecent cyclical developments in the Baltic countries are similar to the general pattern of economic cycles seen in emerging markets.The business cycles of emerging market economies are characterised by:(1) high volatility of macroeconomic variables;(2) sudden stops in capital inflows;(3) consumption volatility exceeding output volatility;(4) countercyclical trade balance;(5) countercyclical real interest rates.Similar developments were seen in the Baltic countries.In comparison with previous recessions, the Baltic countries stand out in terms of:1) unusually high degree of volatility in most of the economic variables;2) large changes in domestic demand and high external and financial vulnerabilities.However, fiscal and competitiveness variables did not exhibit a high degree of volatility. 9
  10. 10. B. Comparison of the adjustment in the Baltic countries with the adjustment in Greece, Ireland and Portugal 10
  11. 11. B. Changes in GDP since 2007 amongselected EU countries Change in GDP from Change in GDP from cyclical cyclical peak to trough peak in 2007/08 to current GDP level in 2012Q2 during 2007-09 crisis GDP level (2012 Q2) (2000=100)Latvia -24,6% -15,1% 156,9Estonia -19,5% -6,3% 157,5Lithuania -15,9% -6,4% 166,9Ireland -10,7% -8,4% 132,3Portugal -4,1% -6,4% 102Greece … -18,3% 110,9Spain -4,9% -5,3% 121,6Italy -7,1% -6,9% 101,9Cyprus -3,0% -2,3% 130,2EU-27 average -8,4% -3,6% 130,2 Source: Eurostat. 11
  12. 12. B. Real GDP:Baltic countries vs Greece, Ireland and Portugal GDP (quarterly) dynamics and forecast after the cyclical peaks in 2007-08 (t0=100) 105 100 95 90 85 80 75 10 12 14 16 18 20 22 24 26 0 2 4 6 8 t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ Ba l tic countri es Ba l tic countri es (IMF foreca s t 2012Q3 - 2014Q4) EA-3 EA-3 (IMF foreca s t 2012Q3 - 2014Q4) Note: E-3 – Ireland, Greece and Portugal Source: Eurostat, IMF WEO October 2012 database. 12
  13. 13. B. Private consumption:Baltic countries vs Greece, Ireland and Portugal Private consumption (quarterly) dynamics after the cyclical peaks in 2007- 08 (t0=100) 105 100 95 90 85 80 75 70 t_0 t_1 t_2 t_3 t_4 t_5 t_6 t_7 t_8 t_9 t_10 t_11 t_12 t_13 t_14 t_15 t_16 Baltic countries EA-3 Source: Eurostat. 13
  14. 14. B. Unemployment:Baltic countries vs Greece, Ireland and Portugal Unemployment (quarterly) dynamics and forecast after the cyclical peaks in 2007-08 (%) 20 18 16 14 12 10 8 6 4 10 12 14 16 18 20 22 24 26 0 2 4 6 8 t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ Ba l tic countri es Ba l tic countri es (IMF foreca s t 2012Q3 - 2014Q4) EA-3 EA-3(IMF foreca s t 2012Q3 - 2014Q4) Source: Eurostat, IMF WEO October 2012 database. 14
  15. 15. B. ULC-based REER:Baltic countries vs Greece, Ireland and Portugal ULC-based REER (quarterly) dynamics after the cyclical peaks in 2007-08 (t0=100) 110 105 100 95 90 85 10 11 12 13 14 15 16 0 1 2 3 4 5 6 7 8 9 t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ t_ Baltic countries EA-3 Source: Eurostat. 15
  16. 16. B. Current account balance:Baltic countries vs Greece, Ireland and Portugal Current account balance dynamics and forecast in 2007-14 (% of GDP) 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 -5 -10 -15 -20 Ba l tic countri es Ba l tic countri es (IMF foreca s t 2012 - 2014) EA-3 EA-3 (IMF foreca s t 2012 - 2014) Source: Eurostat, IMF WEO October 2012 database. 16
  17. 17. B. Fiscal balance:Baltic countries vs Greece, Ireland and Portugal Fiscal balance dynamics and forecast in 2007-14 (% of GDP) 2 0 -2 2007 2008 2009 2010 2011 2012 2013 2014 -4 -6 -8 -10 -12 -14 Ba l tic countri es Ba l tic countri es (IMF foreca s t 2012 - 2014) EA-3 EA-3 (IMF foreca s t 2012 - 2014) Source: Eurostat, IMF WEO October 2012 database. 17
  18. 18. B. Public and private indebtedness:Baltic countries vs Greece, Ireland and Portugal: A. Public debt in 2007 and 2011 (% of B. Private debt in 2007 and 2011 (% of GDP) GDP) 140 250 120 200 100 80 150 60 100 40 20 50 0 0 2007 2011 2007 2011 Baltic countries EA-3 Baltic countries EA-3 Source: Eurostat. 18
  19. 19. B. A comparison of the adjustment in theBaltic countries vs Greece, Ireland andPortugal: summary1. Relatively fast adjustment in the Baltics versus slower adjustment in Greece, Ireland and Portugal.2. Sudden stop in capital inflows in the Baltics versus gradual adjustment in Greece, Ireland and Portugal (central bank liquidity and official financing replacing private capital inflows).3. Steep rise in public debt in Greece, Ireland and Portugal versus moderate increase in public debt in the Baltics.4. Significant increase in private debt in Greece, Ireland and Portugal versus decline in private sector indebtedness in the Baltic countries.5. Similar developments in cost competitiveness (ULC-based REER). 19
  20. 20. C. The advantages/disadvantages of sharpversus gradual adjustmentDisadvantages of sharp adjustment: - due to overreaction ‘viable’ firms might be forced out of business leading to losses in physical and human capital; - politically difficult if electorate not informed/reluctant; - the high speed of the adjustment might lead to mistakes in economic policy.Advantages of sharp adjustment: - a shorter period of high uncertainty weighing on economic activity (especially on investment decisions); - faster closure of ‘non-viable’ firms (elimination of unsustainable businesses/activities) - avoid reform fatigue; - avoid excessive accumulation of public and private debt. 20
  21. 21. C. Why were sharp adjustments possible inthe Baltic countries?Sharp adjustment was to a large extent inevitable:- A sudden stop and subsequent outflow of private capital on a very large scale;- Negative trade shock (stronger than in most of the EU countries);- The absence of effective countercyclical policies or policy space.The Baltic economies were resilient:- Banking sectors largely owned by strong foreign banks with good access to central bank’s liquidity assistance (e.g. Swedish banks);- Strong growth potential;- Banks in the Baltics were overall well capitalised;- Labour markets relatively flexible;- Large tradable sectors.Relatively high popular acceptance of adjustment:- An acceptance that a significant part of the growth (especially in real estate sector/construction) was unsustainable;- “Good times” in years before the crisis;- Emigration “valve”. 21
  22. 22. C. Stable growth ahead for the Balticcountries?Adjustment has provided a more solid foundation:- External and financial vulnerabilities greatly reduced;- Significant sectoral reorientation achieved;- Elimination of unsustainable activities/businesses.But cyclical shocks still a challenge:- Need to step in earlier/more aggressively to avoid the creation of vulnerabilities;- A more active use of fiscal and macro-prudential measures;- The resilience of the economies has to be maintained. 22

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