The document summarizes recent economic developments in Russia. It notes that while external factors like rising oil prices and capital inflows have provided some relief, domestic vulnerabilities remain. The economy contracted sharply in 2009 but the rate of contraction slowed in the third quarter. Expansionary fiscal and monetary policies are mitigating the downturn but risks remain from growing deficits, weak corporate balance sheets, unemployment, and an still recovering banking sector. Growth is forecast to recover to 4.3% in 2010 but the medium term outlook is muted without reforms to address financial imbalances and boost productivity and competition. Domestic demand from households and businesses remains weak.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
1) The Latvian economy experienced a temporary slowdown in the first quarter of 2016, with GDP growth of 1.3% year-on-year but a decline of 0.1% quarter-on-quarter, driven by a large drop in construction output.
2) Exports declined in the first quarter, driven by decreases in machinery, electrical equipment, and re-exports, while import volumes also fell.
3) Retail trade growth was supported by rising incomes in 2015 but may slow in 2016 as wage growth moderates and the contribution from lower fuel prices diminishes. Income levels, lending, demographics, and consumer habits are more important determinants of retail trade in the long run than
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Highlights:
Annual inflation stands positive
Manufacturing growth has become stronger
Government debt servicing costs have been reduced
"In Focus":
What are the different effects of oil price developments on Latvia's inflation? autori: Oļegs Tkčevs and Andrejs Bessonovs
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank Analysis: Competitiveness adjustment in LatviaSwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
The document summarizes recent economic developments in Russia. It notes that while external factors like rising oil prices and capital inflows have provided some relief, domestic vulnerabilities remain. The economy contracted sharply in 2009 but the rate of contraction slowed in the third quarter. Expansionary fiscal and monetary policies are mitigating the downturn but risks remain from growing deficits, weak corporate balance sheets, unemployment, and an still recovering banking sector. Growth is forecast to recover to 4.3% in 2010 but the medium term outlook is muted without reforms to address financial imbalances and boost productivity and competition. Domestic demand from households and businesses remains weak.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
1) The Latvian economy experienced a temporary slowdown in the first quarter of 2016, with GDP growth of 1.3% year-on-year but a decline of 0.1% quarter-on-quarter, driven by a large drop in construction output.
2) Exports declined in the first quarter, driven by decreases in machinery, electrical equipment, and re-exports, while import volumes also fell.
3) Retail trade growth was supported by rising incomes in 2015 but may slow in 2016 as wage growth moderates and the contribution from lower fuel prices diminishes. Income levels, lending, demographics, and consumer habits are more important determinants of retail trade in the long run than
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Highlights:
Annual inflation stands positive
Manufacturing growth has become stronger
Government debt servicing costs have been reduced
"In Focus":
What are the different effects of oil price developments on Latvia's inflation? autori: Oļegs Tkčevs and Andrejs Bessonovs
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank Analysis: Competitiveness adjustment in LatviaSwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
- The Baltic Sea region experienced a steep economic decline in 2009, with GDP falling 5.9%. Growth is expected to return in 2010 and 2011 at rates of 2.6% and 3.1% respectively.
- The recovery is dependent on continued growth in emerging markets, which are currently the main drivers of the global economy. Risks to the outlook include turbulence in financial markets and the eurozone sovereign debt crisis potentially slowing demand.
- Structural reforms are still needed across the region to strengthen competitiveness and ensure sustainable long-term growth as countries deal with the effects of the crisis.
Latvijas Bankas "Monthly Newsletter", 10/2016Latvijas Banka
"Highlights":
* Substantial increase in high technology sectors
* Inflation is rising, but to a large extent owing to last year's developments
* External trade in August testifies to the power of Latvian cereal exports
"In Focus":
* #reformasLV or why Latvijas Banka cares about education and healthcare?, autors: Oļegs Krasnopjorovs
Macroeconomic Developments Report. December 2015Latvijas Banka
Based on data from tLatvijas Banka, Central Statistical Bureau of Latvia, Ministry of Finance, and Financial and Capital Market Commission, this publication assesses developments of the external sector and exports, financial market, domestic demand and supply, prices and costs, and balance of payments, and provides forecasts for the economic development and inflation.
"Highlights":
* Energy prices keep annual inflation below zero
* Manufacturing growth regains momentum
* Latvia's exports: a zigzag path maintained
"In Focus":
* Latvia's exports to euro area: developments after joining, autore: Daina Pelēce
Bank lending in Latvia increased in August, with business loans growing 0.8% month-over-month. Total bank loans expanded by 0.2% while decreasing annually by 6.6%. GDP grew by 0.9% quarter-over-quarter and 2.3% year-over-year in Q2, driven by private consumption and increases in investment, exports, and imports. Inflation was 1.0% in September.
Macroeconomic Developments Report. June 2016Latvijas Banka
This document provides a macroeconomic developments report for June 2016. It summarizes key developments in the external sector and exports, monetary policy and financial markets, domestic demand, aggregate supply, costs and prices, and the balance of payments for Latvia. It also includes forecasts for Latvia's GDP growth and inflation for 2016. Some of the main points covered include weaker-than-expected global economic growth in 2015, accommodative monetary policy decisions by the ECB, private consumption as the main driver of GDP growth in Latvia, and a revised downward GDP growth forecast for Latvia of approximately 2.0% in 2016.
Highlights:
In August, annual inflation returns to positive territory
Manufacturing growing fast in July
External complications do not impair Latvia's exports going uphill
Sadaļā In Focus:
Research: Latvia's 2008-2009 wage adjustment stronger than thought before, by Ludmila Fadejeva and Olegs Krasnopjorovs
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Russia - sharp slowdown and protacted recoverySwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Highlights:
* GDP growth at 2.6% in 2015
* Current account posted improvement
* Unemployment continues to decrease, but at a slower pace
In Focus:
Zero-based approach to government budgeting, Baiba Traidase
The document provides an economic outlook and forecasts for the Baltic countries of Estonia, Latvia, and Lithuania in 2009-2010. It finds that while private sector adjustments have been faster than expected, public sector adjustments still lag despite efforts. GDP is forecast to decline substantially in all three countries in 2009, with Latvia facing the steepest drop of around 17%. Deeper budget cuts are still needed in the public sectors of Estonia and Latvia to reduce budget deficits. Overall, a slow recovery is expected to begin in 2010, led initially by stabilizing exports, while domestic demand remains weak.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
1) The document analyzes macroeconomic indicators and forecasts for the Polish economy from 2013-2023. It finds that Poland experienced the second fastest economic growth in the EU from 2004-2018 at an average annual rate of 3.92%.
2) Key indicators like GDP, employment, exports, and consumer spending have grown in recent years, but productivity and wages in agriculture remain low compared to other sectors. Further fiscal consolidation is needed to reduce the budget deficit and debt.
3) The economy is projected to remain strong in the short-term, supported by monetary and fiscal policies as well as EU transfers. However, risks include a potential slowdown in the global economy and challenges in reducing unemployment over the long-run
This year's SITE Energy Day was devoted to discussing the consequences of oil price fluctuations for markets and actors of the economy. The half-day conference engaged policy-oriented scholars and experts from the business community to discuss the impact of oil price fluctuations on macro fundamentals, international trade, strategies of oil cartels, strategic risk management, and opportunities for change in energy systems.
Natalya Volchkova, Policy Director of CEFIR, presented a topic "Oil price fluctuations and international trade".
For more information and research analysis please visit: www.hhs.se/site
This document discusses the economies of the Baltic states - Estonia, Latvia, and Lithuania. It notes that while they share a common history and currency, each country has achieved economic success in different ways. For example, Estonia established a stabilization fund in 1997, Lithuania built the first LNG terminal in the Baltics, and Latvia carried out effective fiscal consolidation. The use of the euro has increased economic integration and positioned the Baltic states as a single region for investors. Going forward, fiscal policy and international trade will be important drivers of sustainable growth and competition among the three countries.
"Highlights":
* Healthy growth, but caution warranted
* Inflation growth decelerating
* Recovery of imports increased current account deficit
"In Focus":
* Does the financing from the EU structural funds improve the competitiveness of Latvian businesses?, autors: Oļegs Krasnopjorovs
Highlights:
- Current account reflects the recovering investment activity
- Annual inflation continues hovering around 3%
- GDP growth exceeds expectations and leads to revised forecasts
In Focus:
- Latvia 2017: Back to growth and structural reforms, by Mārtiņš Grāvītis
Capital Market Days 2008 - Mikael InglanderSwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
- The Baltic Sea region experienced a steep economic decline in 2009, with GDP falling 5.9%. Growth is expected to return in 2010 and 2011 at rates of 2.6% and 3.1% respectively.
- The recovery is dependent on continued growth in emerging markets, which are currently the main drivers of the global economy. Risks to the outlook include turbulence in financial markets and the eurozone sovereign debt crisis potentially slowing demand.
- Structural reforms are still needed across the region to strengthen competitiveness and ensure sustainable long-term growth as countries deal with the effects of the crisis.
Latvijas Bankas "Monthly Newsletter", 10/2016Latvijas Banka
"Highlights":
* Substantial increase in high technology sectors
* Inflation is rising, but to a large extent owing to last year's developments
* External trade in August testifies to the power of Latvian cereal exports
"In Focus":
* #reformasLV or why Latvijas Banka cares about education and healthcare?, autors: Oļegs Krasnopjorovs
Macroeconomic Developments Report. December 2015Latvijas Banka
Based on data from tLatvijas Banka, Central Statistical Bureau of Latvia, Ministry of Finance, and Financial and Capital Market Commission, this publication assesses developments of the external sector and exports, financial market, domestic demand and supply, prices and costs, and balance of payments, and provides forecasts for the economic development and inflation.
"Highlights":
* Energy prices keep annual inflation below zero
* Manufacturing growth regains momentum
* Latvia's exports: a zigzag path maintained
"In Focus":
* Latvia's exports to euro area: developments after joining, autore: Daina Pelēce
Bank lending in Latvia increased in August, with business loans growing 0.8% month-over-month. Total bank loans expanded by 0.2% while decreasing annually by 6.6%. GDP grew by 0.9% quarter-over-quarter and 2.3% year-over-year in Q2, driven by private consumption and increases in investment, exports, and imports. Inflation was 1.0% in September.
Macroeconomic Developments Report. June 2016Latvijas Banka
This document provides a macroeconomic developments report for June 2016. It summarizes key developments in the external sector and exports, monetary policy and financial markets, domestic demand, aggregate supply, costs and prices, and the balance of payments for Latvia. It also includes forecasts for Latvia's GDP growth and inflation for 2016. Some of the main points covered include weaker-than-expected global economic growth in 2015, accommodative monetary policy decisions by the ECB, private consumption as the main driver of GDP growth in Latvia, and a revised downward GDP growth forecast for Latvia of approximately 2.0% in 2016.
Highlights:
In August, annual inflation returns to positive territory
Manufacturing growing fast in July
External complications do not impair Latvia's exports going uphill
Sadaļā In Focus:
Research: Latvia's 2008-2009 wage adjustment stronger than thought before, by Ludmila Fadejeva and Olegs Krasnopjorovs
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Russia - sharp slowdown and protacted recoverySwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Highlights:
* GDP growth at 2.6% in 2015
* Current account posted improvement
* Unemployment continues to decrease, but at a slower pace
In Focus:
Zero-based approach to government budgeting, Baiba Traidase
The document provides an economic outlook and forecasts for the Baltic countries of Estonia, Latvia, and Lithuania in 2009-2010. It finds that while private sector adjustments have been faster than expected, public sector adjustments still lag despite efforts. GDP is forecast to decline substantially in all three countries in 2009, with Latvia facing the steepest drop of around 17%. Deeper budget cuts are still needed in the public sectors of Estonia and Latvia to reduce budget deficits. Overall, a slow recovery is expected to begin in 2010, led initially by stabilizing exports, while domestic demand remains weak.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
1) The document analyzes macroeconomic indicators and forecasts for the Polish economy from 2013-2023. It finds that Poland experienced the second fastest economic growth in the EU from 2004-2018 at an average annual rate of 3.92%.
2) Key indicators like GDP, employment, exports, and consumer spending have grown in recent years, but productivity and wages in agriculture remain low compared to other sectors. Further fiscal consolidation is needed to reduce the budget deficit and debt.
3) The economy is projected to remain strong in the short-term, supported by monetary and fiscal policies as well as EU transfers. However, risks include a potential slowdown in the global economy and challenges in reducing unemployment over the long-run
This year's SITE Energy Day was devoted to discussing the consequences of oil price fluctuations for markets and actors of the economy. The half-day conference engaged policy-oriented scholars and experts from the business community to discuss the impact of oil price fluctuations on macro fundamentals, international trade, strategies of oil cartels, strategic risk management, and opportunities for change in energy systems.
Natalya Volchkova, Policy Director of CEFIR, presented a topic "Oil price fluctuations and international trade".
For more information and research analysis please visit: www.hhs.se/site
This document discusses the economies of the Baltic states - Estonia, Latvia, and Lithuania. It notes that while they share a common history and currency, each country has achieved economic success in different ways. For example, Estonia established a stabilization fund in 1997, Lithuania built the first LNG terminal in the Baltics, and Latvia carried out effective fiscal consolidation. The use of the euro has increased economic integration and positioned the Baltic states as a single region for investors. Going forward, fiscal policy and international trade will be important drivers of sustainable growth and competition among the three countries.
"Highlights":
* Healthy growth, but caution warranted
* Inflation growth decelerating
* Recovery of imports increased current account deficit
"In Focus":
* Does the financing from the EU structural funds improve the competitiveness of Latvian businesses?, autors: Oļegs Krasnopjorovs
Highlights:
- Current account reflects the recovering investment activity
- Annual inflation continues hovering around 3%
- GDP growth exceeds expectations and leads to revised forecasts
In Focus:
- Latvia 2017: Back to growth and structural reforms, by Mārtiņš Grāvītis
Capital Market Days 2008 - Mikael InglanderSwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
SEB Enskilda Nordic Banks Seminar, May 2010Swedbank
- Swedbank's financial results improved significantly in Q1 2010 compared to Q4 2009, with a profit of SEK 547 million versus a loss of SEK 1.788 billion previously.
- Non-performing loans increased slightly by SEK 1.5 billion excluding foreign exchange effects, though asset quality continues to strengthen overall as property prices stabilize in CEE markets.
- The bank's resilience has greatly increased through measures like reducing CEE lending, establishing restructuring units, and strengthening liquidity and capital positions. However, some risks remain from central bank exit strategies and fiscal consolidations.
Swedbank reported third quarter 2010 results with continued financial improvement. Net profit increased to SEK 2.6 billion driven by improved net interest income and stable commission income. Asset quality indicators improved with declining impaired loans and credit impairments. Liquidity remained solid with ongoing wholesale funding activity and long-term funding of SEK 190 billion year-to-date.
Roadshow, Öhman Baltic Banking Day, Priit PerensSwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank Economic Outlook 29 September 2009Swedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
After reporting very high growth rates as well as being seen as examples of successful economic transition, the “Baltic tigers” (Lithuania, Latvia and Estonia) are now among the worst victims of the global economic crisis. All three have reported large declines in GDP, income and employment, which threaten the significant development progress made since the mid‐1990s.
Authored by: Michaela Pospisilova, Ben Slay
Published in 2009
Economic environment, fundamentals and challengesNikola Mitic
Zoran Petrovic, Deputy Chairman of the Managing Board, Raiffeisen banka a.d.
He is currently responsible for Treasury and Investment Banking, Asset Management
and Leasing.
In 2011, the Belarusian ruble lost nearly 2/3 of its value. In December, the inflation rate approached 110% yoy. At the same time, the economy grew by 5.3% that year and continued with 3.6% yoy growth in January 2012. Is this a sign of economic recovery? Will it turn into sustainable growth? Or has the country exited from the crisis at all? To address these questions, CASE Fellow and Director of the IPM Research Centre in Minsk Alexander Chubrik looks at the roots of the 2011 crisis and compares them with the features of the long-lasting period of economic growth in Belarus.
Authored by: Alexander Chubrik
Published in 2012
As a result of the financial crisis and global recession public debt burdens have risen to critical levels in a number of Western European countries. Emergency loans from the EU and IMF have eased funding pressures, but have only bought the region time; painful fiscal adjustment and an improvement in competitiveness is required if the region is to enjoy a sustainable recovery.
Eastern Europe, while rebounding through exports and industrial output, will underperform its emerging-market peers in 2010. Business and consumer sentiment in the region is fragile, and its currency and bond markets are vulnerable to contagion from problems in the euro zone or a rise in risk aversion more broadly.
This presentation takes a look at the economic outlook for both Western and Eastern Europe.
The document summarizes key findings from the 2011 Transition Report on the impact of the global financial crisis in transition economies. It finds that:
1) While most transition economies returned to growth in 2011, the recovery is fragile and unemployment remains high. The crisis negatively impacted many people's individual situations and lowered support for democracy and markets in some countries.
2) Households in transition economies were hit much harder by the crisis than those in Western Europe, often having to cut consumption of necessities like food. Formal social safety nets were less effective, and pre-crisis borrowing left some vulnerable.
3) The crisis reduced support for markets and democracy in new EU countries but increased it in CIS countries by turning
Bank deposits rose 1.2% month-on-month and 4.9% year-on-year in February as both businesses and households increased savings despite economic slowdown. Manufacturing output grew slightly by 0.7% month-on-month and 1.8% year-on-year in February, led by wood, metals, and furniture industries. Inflation rose to 0.4% in March due to both global commodity prices and domestic factors. Conditions are expected to be favorable for lending to improve following new housing loan rules and Eurosystem stimulus measures.
Cecilia Hermansson, Chief Economist at Swedbank, delivered a speech at a conference in Riga celebrating Latvia's completion of its IMF and EU support program. In her speech, she:
1) Praised Latvia's strong economic recovery and commitment to reforms following the deep recession, while noting remaining challenges.
2) Emphasized the need to close productivity gaps, adapt to demographic changes, and strengthen institutions to sustain recovery.
3) Concluded that Latvia and other Baltic states must maintain reform momentum to avoid problems seen in Southern Europe and further improve competitiveness.
Latvia is expected to adopt the euro on January 1, 2014. There are high expectations that adopting the euro will lead to benefits like low inflation, high growth, and rising foreign investment. However, other eurozone countries' experiences show that underlying competitiveness, institutions, politics, and policymaking are more important determinants of success than joining criteria. Slovenia joined the eurozone in 2007 and experienced slowing growth as it struggled with institutional readiness. Slovakia joined in 2009 at an overvalued exchange rate but was able to avoid major negative impacts due to previous economic reforms. Estonia's transition to the euro in 2011 went smoothly.
As the global financial crisis entered its most dramatic phase, in the second half of 2008, the International Monetary Fund (IMF), many governments and several distinguished scholars advocated expansionary fiscal olicy as the second most effective tool (after monetary stimulus) to fight deep recession and deflation. Now, more than a year later, the previous excitement surrounding the supposed power of fiscal stimulus largely disappeared and instead has been replaced by ising concerns over the sustainability of public finances in many countries. Unfortunately, the previous enthusiasts of the active counter‐cyclical fiscal policy have not always realized the causality between the two.
Authored by: Marek Dąbrowski
Published in 2009
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
The document discusses monetary unions and the Eurozone. It provides background on monetary unions, describes the stages of economic integration that can lead to a monetary union. It then focuses on the Eurozone, listing the current member countries and those that have not joined. Several charts show unemployment, debt levels, and other economic indicators for various Eurozone countries. The document also examines issues facing the Greek economy like high debt levels, fiscal austerity imposed by international lenders, and Greece's internal devaluation efforts.
Macroeconomic Developments Report. December 2014Latvijas Banka
The document summarizes macroeconomic developments in December 2014. It reports that growth was weak in many of Latvia's major trade partners in late 2014. The IMF lowered GDP growth projections for the Eurozone, Germany, Sweden, Estonia and Lithuania for 2014 and 2015. Latvia's exports to Russia declined in the first nine months of 2014, though exports to other countries increased. The ECB lowered interest rates and implemented new bond purchase programs to stimulate lending and the Eurozone economy. Latvian lending continued a slow downward trend in late 2014 despite ECB actions. Inflation in Latvia remained low at 0.5% in October 2014.
Swedbank Economic Outlook - 2010, September 21Swedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Latvia implemented an internal devaluation strategy in response to the global financial crisis rather than using exchange rate devaluation. This involved pro-cyclical fiscal policies like tax increases and government spending cuts to reduce wages and prices. While Latvia's GDP has grown since 2010, some economists are skeptical this can be sustained due to weak private investment and consumption from high debt levels. Latvia's economic growth remains heavily reliant on net trade exports.
Inflation in Latvia grew slightly to 0.8% in August. Exports and imports increased in July despite geopolitical tensions, growing 7.4% and falling 3.5% respectively. Manufacturing output fell 2.6% annually but some sectors such as food and wood products saw growth. Borrowing costs in Latvia have decreased since adopting the euro in January 2014, with interest rates on loans falling over 1 percentage point for some enterprises. However, credit spreads may only gradually shrink over the coming years.
This paper deals with the question of how consumption taxes, especially the value-added tax, affect consumption prices. The analyses are based on data from EU countries for the period 1970–2004. The starting point is a conventional supply-demand analysis of the tax incidence problem. This problem is solved using some simple price mark-up equations, Phillips curves and inflation forecast error equations. All these equations are estimated from panel data from EU countries using different estimators and variable specifications. In addition, an analysis is carried out with Finnish excise taxes using commodity/outlet level micro data for the period 1997–2004. A general result of all analyses is that about two thirds of a tax increase shifts to consumer prices. By contrast, there is less evidence on shifts to producer prices.
Swedbank corporate presentation April 25 2017Swedbank
This document provides an overview of Swedbank, a bank operating in Sweden, Estonia, Latvia, and Lithuania. It details that Swedbank has over 16 million inhabitants, 7.3 million private customers, and 651,000 corporate customers across its four home markets. Key figures on branches, employees and lending are also provided for each country. The document discusses Swedbank's history, vision, values, purpose and engagement in society. It outlines challenges from new customer needs, competitors, regulations and economic developments, and how Swedbank is adapting. Services provided to private and corporate customers are also summarized.
The interim report summarizes Swedbank's financial results for the first quarter of 2017. Net interest income and lending volumes increased compared to the previous quarter, while net commission income decreased due to seasonal effects. Overall profits increased 25% compared to the first year, strengthened by a capital gain from the sale of Hemnet. Credit quality remained strong across all business segments, though additional provisions were made for oil-related sectors. The report provides an overview of each business segment and notes that economic indicators have strengthened in Sweden and the Baltic countries in recent months.
Swedbank reported its year-end results for 2016. In Q4 2016, net interest income increased 3% compared to Q3 2016 supported by increased lending volumes. Net commission income benefited from positive stock market development. Higher volumes of covered bond repurchases weighed down Treasury's result. Costs were in line with expectations and credit quality remained solid despite increased provisions in oil related sectors. For the full year 2016, total income increased 11% while total expenses increased only 1%, leading to an 18% rise in operating profit. Return on equity was 15.8% and the proposed dividend per share was SEK 13.20, up from SEK 10.70 the previous year.
Swedbank corporate presentation, February 2 2017Swedbank
Swedbank is a major banking group in Sweden, Estonia, Latvia, and Lithuania, serving over 16 million inhabitants and 7.3 million private customers. It has 389 branches and over 13,700 employees across its four home markets. The document provides an overview of Swedbank's operations and presence in each of its home markets, its financial figures, strategic focus areas, engagement in society, and the services it provides to both private and corporate customers.
Swedbank Corporate Presentation, October 25 2016Swedbank
Swedbank is a major bank operating in Sweden, Estonia, Latvia, and Lithuania with over 14,000 employees. It has a presence in several other Nordic and Baltic countries as well as in China, South Africa, Luxembourg, and the US. The bank provides a variety of financial services to over 7 million private customers and 640,000 corporate customers. Swedbank is adapting to changes in customer needs, regulations, competitors and the macroeconomic environment to remain a strong, relevant bank.
Swedbank Corporate Presentation, June 30 2016Swedbank
Swedbank is a Swedish bank that provides banking services to individuals and businesses. It has over 2.4 trillion SEK in total assets and 7.3 billion SEK in operating profits. It operates primarily in Sweden, Estonia, Latvia, and Lithuania, serving over 4 million private customers and over 500,000 corporate customers. Swedbank aims to be accessible to customers through its branches, phone, and digital channels and to promote financial well-being for households and enterprises.
Swedbank is a bank based in Sweden with operations also in Estonia, Latvia, Lithuania and other markets. As of March 31, 2016 it had total assets of SEK 2,404 billion and an operating profit of SEK 5,275 million. It aims to promote sound financial situations for households and enterprises through offering banking services such as savings, loans, investments and insurance. The presentation provides an overview of Swedbank's home markets, history, values of being simple, open and caring, and private and corporate banking services.
The presentation outlines Swedbank's purpose, history, values, products and services for private and corporate customers, and emphasizes its commitment to being accessible and providing a positive experience for customers.
This document provides Swedbank's year-end report for 2015. It summarizes that Swedbank's profit for the fourth quarter was stable at SEK 3.8 billion despite challenges from lower interest rates and economic uncertainty. Total income was SEK 9.5 billion for the quarter. For the full year, profit was SEK 15.7 billion, down 4% from 2014, as lower interest rates reduced net interest income despite increased mortgage and deposit volumes. The CEO commented that priorities in 2015 were improving customer value, increasing efficiency, and integrating Sparbanken Öresund.
Swedbank Corporate Presentation, September 2015Swedbank
The bank aims to promote sound financial management for households and enterprises through products like loans, savings, investments, and insurance that are accessible via branches, phone, and online banking designed to be simple, open, and caring.
1. Swedbank Analysis June 14, 2011
Hazy inflation trends in the Baltic countries:
it’s time to get lucid
• Consumer price inflation in the Baltic countries during
2004-2009 was driven both by fundamental factors
(e.g., price and productivity convergence with the ad-
vanced EU countries) and a mix of supply and de-
mand factors at different stages of the business cycle.
• Recent price developments in 2010-2011 are mainly
driven by global commodity prices. As of local factors,
there are hints that insufficient competition may also
be playing a role, especially for food price inflation.
• Inflation in the Baltic countries is expected to deceler-
ate next year, mainly due to stabilising global com-
modity prices. But causes for concern are shortage of
skilled labour (despite still high overall unemployment)
and rising inflation expectations, which might exert
upward pressure on wages.
• Timely policy actions are appropriate and necessary.
Structural reforms, especially in the labour market, to
improve overall flexibility, cost efficiency and produc-
tivity, higher price transparency and stronger competi-
tion are some of the actions that can help to curb infla-
tion in a sustainable way. Fiscal prudency, as well as
stable and predictable tax policy are crucial too.
This paper focuses on recent consumer price inflation developments in
the Baltic countries, comparing them with those in the European Union
(EU). In May 2011, annual consumer price inflation reached 5.4% in Es-
tonia, and 5% in Latvia and Lithuania. It is clear that global commodity
price growth has been the main factor behind the recent rise in inflation.
However, it is crucial to understand what other factors affect price growth
in order to forecast inflation and to know what local authorities can and
should do to curb inflation.
Economic Research Department.
Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720
2. There are four main reasons why inflation developments are so important
to analyse. First, growth in costs of businesses and overall price level can
have a direct effect on competitiveness, which is particularly important for
the Baltic countries, since their economic recoveries are export driven.
Second, since consumer price growth diminishes the purchasing power
of households and, very often, that of poorer ones relatively more, social
cohesion issues come to the fore. Third, rising inflation may serve as an
early sign of a build-up of domestic imbalances in the economy. Fourth,
the exit strategy from the recent crisis for Latvia and Lithuania is the in-
troduction of the euro in 2014. This implies the necessity to comply with
Maastricht criteria, including the one on inflation.
1. Economic background
The accession of the Baltic countries to the EU in May 2004 was followed 2004-2007: boom years
by large inflows of foreign capital and a very fast and excessive leverag-
ing up of the private sector, resulting in a real estate boom-bust scenario.
This process was driven by excessive optimism on future incomes,
banks’ competition for market shares, and globally high risk appetite. The
credit-to-GDP ratio grew to levels comparable to those in advanced
economies – loans to resident households and nonfinancial corporations
in Estonia went up from 41% of GDP in 2004 to 94% in 2008, in Latvia
from 44% to 82%, and in Lithuania from 26% to 59%. In Latvia – and, to a
somewhat lesser extent in Lithuania – an expansive fiscal policy has also
played a role.
Excessive credit growth and optimism in all three Baltic countries resulted
in an unsustainable domestic demand expansion, mainly fuelled by pri-
vate consumption. Wages grew faster than productivity, thereby worsen-
ing external competitiveness (see Section 3 for more details). Ease in
getting credit and excessive optimism about future incomes boosted de-
mand for real estate, thus causing housing prices to rise dramatically
(supported also by an insufficient housing supply).
Excessive growth in leverage resulted in rising current account deficits –
which peaked at 22.3% of GDP in 2007 in Latvia, 14.5% in Lithuania, and
17.2% in Estonia – ballooning foreign debt, and increasing vulnerability to
volatility in access to foreign financing.
The correction of built-in imbalances started in 2008-2009 (real estate 2008-2009: recession
prices had started to retreat in 2007). The collapse of demand in domes-
tic and foreign markets led to a dramatic fall in economic activity. The
cumulative fall in GDP was 25% in Latvia, 20% in Estonia, and 17% in
Lithuania. This led to an increase in unemployment and reduction in
wages. In the first quarter of 2010, the unemployment rate peaked at
20.4% in Latvia and 19.8% in Estonia, while in Lithuania it reached its
maximum in the second quarter of 2010 at 18.3%. Gross average
monthly wages declined in 2009 by 4.6% in Estonia, by 4.1% in Latvia,
and by 4.4% in Lithuania.
With diminished purchasing power and increased uncertainty about future
incomes, households’ willingness to spend decreased – domestic de-
mand fell and savings rates increased. The household gross savings
2 Swedbank Analysis • June 14, 2011
3. rate 1 rose most in Estonia – from 3.4% in 2008 to 13.3% in 2009; in Lat-
via, over the same period, it increased from 5.0% to 9.4%, while in
Lithuania it soared from -2.3% to 6.6% (the savings rate was negative in
all three countries in 2007). Credit overdues rose, as households lost
their incomes or incomes were significantly below those in the boom
years.
The economic recovery of 2010-2011 has been export driven in all three 2010-2011: recovery
countries. From the trough in the second half of 2009 to the first quarter
of 2011, GDP rose by 10.4% in Estonia, 8.2% in Lithuania, and 3.8% in
Latvia. Domestic demand has remained weak, as labour markets natu-
rally show signs of revival later than GDP. The structures of economies
have become more balanced, and economic restructuring is set to con-
tinue (the longest path is for Latvia, where imbalances were the biggest).
2. Fundamental factors that cause more rapid
inflation in the Baltic countries than in the euro
area
During 2004-2008, consumer prices 2 rose by 45% in Latvia, 29% in Esto-
nia, and 26% in Lithuania. During the same period, prices in the euro
area increased by only 10%. What are the reasons behind this differ-
ence? Longer-term and cyclical factors are both at work. In this section,
we will look at fundamental longer-term issues and turn to cyclical factors
in the next section.
Index of consumer prices, 2005=100
150
140
EU27
130 EA
120 EE
LV
110
LT
100 HU
PL
90
80
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
Convergence and the Balassa-Samuelson effect
The more rapid inflation in the Baltic countries can be partly explained by As an economy improves
the Balassa-Samuelson effect. This effect describes the mechanism of its productivity, price
the catching-up process, when faster growth in relative productivity in
levels rise …
tradable sectors causes quicker wage increases, which are later transmit-
ted into the nontradable sectors. This causes higher inflation in the catch-
ing-up countries. The Balassa-Samuelson effect in Central and Eastern
Europe (CEE) has been widely analysed and by and large confirmed, see
Lojschová (2003), Coudert (2004), Mihaljek and Klau (2009), and others.
However, there is controversial evidence on the relative size of this effect,
1
The gross savings rate of households is defined as gross savings divided by gross dis-
posable income. Gross savings is the part of the gross disposable income that is not spent
as final consumption expenditure (thus savings include also repayment of loans).
2
Here, as well as later in the text and in the graphs, the harmonised index of consumer
prices (HICP) is used (Eurostat data).
Swedbank Analysis • June 14, 2011 3
4. because of questions about data reliability, e.g., the empirical split be-
tween tradable and nontradable sectors.
Another part of the convergence process is an increase in prices, as pro-
ducers shift to foreign markets, where prices are higher, and thus (given
their constrained capacity), raise prices of their output also in local mar-
kets. There is nothing wrong in inflation and price convergence per se,
but it becomes more dangerous if prices and wages increase faster than
productivity, thereby worsening external competitiveness. Unfortunately,
this was exactly the case in all three Baltic countries.
The largest excesses were visible in Latvia, where the ratio of the com- … but price convergence
parative price level to GDP per employed peaked at 134% in 2008 (being in the Baltics was swifter
at par with the EU27 average would place the value of this ratio at 100%). than productivity con-
This means that prices in Latvia had converged much faster than produc-
vergence in 2004-2008.
tivity and GDP per capita in the years following EU accession. In Estonia
and Lithuania, the excesses were smaller, but since 2004 they have both
lost competitiveness as well, as price levels have increased faster than
productivity. The ratio of the comparative price level to productivity
peaked in Estonia in 2008 at 111% and in Lithuania at 106% in 2009.
Relative price level, % of productivity level*, 2000-2009
140
120
100
80
60
40
20
0
EA EE LV LT HU PL
* Comparativ e price lev el (% of EU27) /
GDP per employ ed (PPP, % of EU27) Source: Eurostat, Swedbank estimations
In 2009, Estonia and Latvia managed to reduce this ratio – it declined to Some of the imbalances
106% in Estonia and 127% in Latvia, as both countries moved towards a corrected in 2009
more balanced situation. Most of the rebalancing was achieved through
deflation. It is very likely that the situation in these countries continued to
improve in 2010 (no data available so far), mostly via productivity gains.
Comparative price level indices, EU27=100
80
70 EE
LV
60 LT
HU
PL
50
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Eurostat
4 Swedbank Analysis • June 14, 2011
5. During the recession, a bigger contraction in domestic demand caused a
deeper deflation in Latvia – relative price levels declined from 69.2% of
the EU27 average in 2008 to 67.3% in 2009. The adjustment in Estonia
was also deep – from 71.2% to 69.5%. In Lithuania, however, relative
prices remained at a broadly similar level – in 2008 and 2009, they were,
respectively, 60.5% and 60.7% of the EU27 average.
Compared with the Baltic countries, such CEE countries as Poland and
Hungary had more significant corrections of relative price levels in 2009.
But this was achieved via depreciation of the zloty and forint. The Baltic
countries chose to hold on to their fixed exchange rate regimes vis-à-vis
the euro and achieved lower relative price levels via deflation.
Comparative price level indices for main product groups, EU27=100 (2009)
120
100
EE
80
LV
60
LT
40
HU
20
PL
0
Housing Food and Transport Household Clothing and
non- furnishings footw ear
alcoholic
beverages Source: Eurostat
In 2009, the average price level was still below the EU average in the Average price levels in
three Baltics: by around 30% in Estonia and Latvia, and 40% in Lithuania. the Baltics are still below
However, clothing and footwear in the Baltic countries was more expen- EU average.
sive. One possible reason is that the Baltic markets are relatively small –
because producers, wholesalers, and retailers cannot benefit from
economies of scale, they may be introducing higher markups than their
counterparts in Western Europe. Furthermore, lower turnover also nega-
tively affects retailers’ bargaining power and their ability to obtain the
lowest wholesale prices. Another reason is the popularity of market-
places, where a lot of trade is unaccounted for and not taxed and thus
cheaper – further reducing the ability of retailers to achieve economies of
scale. Since cheaper clothes traded in the markets are at least partly un-
accounted for, their prices are not reflected in official statistics and thus
inflate the average clothing price level in the country. The recent reces-
sion has also increased the popularity of second-hand clothing retail.
There are unexpectedly large housing cost differences in the Baltic coun-
tries. Lithuania’s price level is at 43.8% of the EU average, whereas Lat-
via’s housing costs are at 60.6% and Estonia’s at 71.4% of the EU aver-
age. One reason why housing costs are much lower in Lithuania than in
the other Baltic countries is the widespread government scheme of hous-
ing expense discounts for poor households in the former, which signifi-
cantly cuts the average price paid for utilities. Furthermore, Lithuania and
Latvia, unlike Estonia, apply a reduced value-added tax (VAT) on heating
services.
Consumer basket is skewed towards necessities
Unfortunately, current global developments have a stronger impact on
inflation in the Baltic countries than in the euro area. In the former, food,
Stronger impact from
energy, housing, and transport make up 50-55% of the average house- global price growth
hold consumer basket, which is above the EU average (47%), especially
Swedbank Analysis • June 14, 2011 5
6. for food. Furthermore, poorer households spend an even bigger fraction
of their income on these products. 3 This means that current inflation hits
poorer households the hardest.
Weights of main product groups in consumer basket, 2011 (%)
30
25
20
EE
15
LV
10
LT
5 EA
0
Household Clothing & Transport Housing Adm. reg. Food &
equipm. footw ear prices non-
alcoholic
beverages Source: Eurostat
Food and nonalcoholic beverages make up 25.9% of the average Lithua-
nian’s consumer basket, and 24.6% and 23.3% of the respective baskets
in Latvia and Estonia. Except for Romania, no other EU country is as
highly dependent on food prices as the Baltic countries.
Not surprisingly, housing expenses in Lithuania have a lower weight in
the consumer basket than in other Baltic or European countries’ baskets.
This is directly related to housing costs – as we mentioned above, hous-
ing prices are relatively lower in Lithuania, as is correspondingly the
weight of these expenditures in the consumer basket. It is interesting that
Lithuania has not only a somewhat lower weight for heating expenses,
but also the lowest weight for water supply expenditures (4% vs. 7-8% in
Estonia, Latvia, and the euro area). One of the possible explanations is
the distribution of population between urban and rural areas – house-
holds in urban areas more often have self-sustained houses, without cen-
tral heating and water. For example, in Lithuanian urban areas, only 6%
were living without baths or showers in 2009, whereas there were 36%
such households in rural areas. Currently, 66.9% of Lithuanians, 67.5%
of Latvians, and 69.4% of Estonians live in urban areas; however, this
statistics is slightly distorted, as not all within the country migrants declare
the change in their living place.
4
Products with administered prices make up 16% of the consumer basket Larger share of adminis-
in Lithuania, and 14% in Latvia – well above Estonia and the euro area tered prices in Latvia
average (about 11%). The list of administratively regulated prices differs and Lithuania…
somewhat among the countries. For instance, Estonia is less dependent
on natural gas than Latvia and Lithuania, as heating production in Estonia
is mainly oil shale based (which is locally produced), while in Latvia and
Lithuania mainly natural gas is used.
3
For instance, for pensioners in Lithuania, the share of these products in the consumer
basket is about 67%; in Latvia, about 62%.
4
Administrated (administratively regulated) prices are those that are set/ approved/ moni-
tored by the local or state authorities, mostly in sectors with natural monopolies, e.g.,
prices of energy, public transportation, health and education, post, railways, etc. An inde-
pendent state institution in each country is responsible for regulation of these prices. In
Latvia, these are energy (gas, electricity, and heating), telecommunications, water supply,
post, and railway. In Lithuania, institutions regulate energy, water, and public transporta-
tion, and, in Estonia, energy, water, railways, and electronic and postal communications.
6 Swedbank Analysis • June 14, 2011
7. On the one hand, the larger share of administratively regulated prices in
Lithuania and Latvia means higher level of state intervention; on the other … implies larger influ-
hand, price regulation must ensure higher consumer protection, at least ence of local authorities
in theory. This also means that Lithuania should have more levers than on inflation.
Latvia or Estonia to control inflation, at least in the short term. But in prac-
tice it does not always guarantee lowest prices. For instance, the sole
natural gas supplier to Baltic countries Gazprom kept the delivery price
for Lithuania unchanged in 2011 (arguably because of a conflict due to
Lithuania’s recent plans to liberalise its gas market in line with EU energy
policy), whereas for Latvia and Estonia it was reduced by 15%.
3. Cyclical factors affecting inflation
The development of general economic situation and the stage of a busi-
ness cycle definitely influence price trends as well. During the three
stages of economic development in 2004-2011 (as outlined in Section 1),
inflation was supported by a combination of different factors. In the boom
years (2004-2007), inflation was mainly demand driven. Rising global
commodity prices in 2008 added to consumer price inflation in the Baltics
(supply factors). The following recession and demand contraction caused
prices to fall in 2009-2010. Currently, domestic demand is still weak and
inflation is largely driven by supply factors (see the next section).
Demand factors
Rising private consumption definitely supported consumer price growth in
Rising consumption dur-
2004-2007. As already outlined in Section 1, cheap and easily receivable
ing 2004-2007…
credit, together with excessive optimism about future incomes of house-
holds, was one of the factors that stimulated consumer demand and
made it easier for companies to increase their margins, which, in turn, af-
fected the overall price level.
Annual growth of credit stock and private consumption, %
75
50 Consumpt., EE
Consumpt., LV
Consumpt., LT
25
Credit, EE
Credit, LV
0
Credit, LT
-25
2004 2005 2006 2007 2008 2009 2010 Source: Reuters
The overheated labour market due to the booming local economies and
the opening up of labour markets after the Baltic countries joined the EU
in 2004 (i.e., emigration to the old member states) resulted in labour de-
mand sharply exceeding quality labour supply. In competition for labour,
companies were outbidding each other, pushing wages above productiv-
ity, which increased overall wage expectations. Households’ ability to
spend improved, which put additional pressure on inflation. For instance,
in 2004-2008, real gross average wages grew by 57% (while average la-
Swedbank Analysis • June 14, 2011 7
8. bour productivity by just 17%) in Latvia, 46% (23%) in Lithuania, and 39%
(13%) in Estonia. 5
With the collapse of economic activity in 2008-2009, unemployment rock- … a dramatic fall in de-
eted, wages declined, and consumer pessimism replaced the previous mand in 2008-2009
optimism; meanwhile, households needed to repay their loans. House-
hold purchasing power decreased dramatically, putting downward pres-
sure on wages – with a lack of demand, firms tend to lower prices to keep
those few consumers who are still willing to spend. In Estonia, prices
were decreasing in annual terms from June 2009 until February 2010. In
Latvia, the period of deflation was from October 2009 until August 2010,
while the shortest period of deflation was in Lithuania – only three months
at the beginning of 2010.
Nominal gross wage annual growth, %
40
30
20 Estonia
Latvia
10
Lithuania
0
-10
-20
2004 2005 2006 2007 2008 2009 2010 2011 Source: Reuters
Supply factors
Wage growth during the boom years affected firms’ production costs – Increase in labour costs
given the widespread optimism engendered by productivity and wage was transferred to con-
convergence with the old member states and booming consumption, ris- sumer prices in boom
ing labour costs were easily passed onto consumers. However, such a years.
swift and sustained increase in costs eroded the external competitiveness
of local producers – see, e.g., Benkovskis et al (2009). In Latvia, the
wage increase in 2005-2007 was higher than in the other two countries,
indicating that this increase might have put more pressure on consumer
prices in Latvia than in Estonia and in Lithuania (thus explaining higher
inflation rates and then deeper deflation in Latvia; see the next section).
5
It should be taken into account that average labour productivity had already started to
fall in 2008 in Estonia and Latvia due to the decline in economic activity (in Lithuania,
the fall began in 2009).
8 Swedbank Analysis • June 14, 2011
9. Difference between real gross wage and real average labour productivity annual
growth rates, pp
20
10
Estonia
Latvia
0
Lithuania
-10
-20
2004 2005 2006 2007 2008 2009 2010 2011 Source: Reuters
All three Baltic countries are small and open economies, with fixed ex-
Some of the inflation has
change rates; this makes them extremely open to developments in for-
eign markets. If a global shock occurs (e.g., in commodity prices), it will been imported.
feed through import prices into local consumer prices. For instance, the
substantial increase in global commodity prices (especially oil) in 2008
affected import prices in all three countries and, through that, consumer
prices. 6 Higher global commodity prices have not only direct effects, like
an increase in prices of fuel, but also indirect effects, e.g., a rise in hous-
ing tariffs (e.g., gas and heating), which are usually linked to oil price de-
velopments. Benkovskis et al (2009) show that the largest changes in
administrated prices indeed accrue from changes in energy prices.
Global commodity prices, 2005=100
300 150
Total
250 120
Food
200 90 Non-food
agriculture*
Metals
150 60
Crude oil (Brent),
100 30 USD (rs)
* cotton, timber, w ool,
50 0 rubber, oils, hides
2005 2006 2007 2008 2009 2010 2011 Source: Reuters Ecowin
In 2004-2008, inflation was also supported by tax harmonisation with the Tax harmonisation with
EU (e.g., gradual increases in excise tax rates on tobacco, alcoholic bev- the EU added to inflation
erages, and fuels). Tax hikes were also transferred by wholesalers and in the Baltics.
retailers to consumer prices.
6
Lithuania differs a bit from Estonia and Latvia, as it has the Mažeikiu Nafta oil refinery
plant. Therefore, the share of oil products in Lithuania’s import prices is larger, which
means that its import prices are more vulnerable to changes in oil prices in the world mar-
ket. However, the effect of this on the HICP is very small.
Swedbank Analysis • June 14, 2011 9
10. During the crisis years, wages were reduced (see Section 1), and enter- During recession, pro-
prises tried to raise effectiveness and productivity. The decrease in la-
duction costs were re-
bour costs allowed many firms to decrease prices as well. Global com-
duced, and profit mar-
modity prices also fell, thus diminishing prices of imported inputs. The
price decrease would have been much deeper, but the governments de-
gins squeezed.
cided to increase their melting revenues by raising taxes (VAT, excise,
income tax, etc). These were at least partially transferred into consumer
prices – as the domestic demand was very weak and households ex-
tremely sensitive towards the price increases (especially of necessities),
7
the companies were forced to squeeze their profit margins as well.
4. Current inflation trends: is there a cause for
concern?
Despite the ongoing deleveraging and still high unemployment rates,
which undermine consumer spending and thus put downward pressure Demand factors are still
on prices, inflation rates are again rising in all three Baltic countries. In very weak.
April 2011, annual inflation reached 5.4% in Estonia, 4.4% in Latvia, and
4.3% in Lithuania. 8 Inflation in Estonia accelerated well before it did in the
other Baltic countries; this can partly be explained as an attempt by busi-
nesses and households to pre-empt the euro effect. 9 Accession to EMU
increased household expectations and consumption, which could have
caused some demand-driven inflation. Furthermore, facing somewhat
stronger demand in the second half of 2010, producers and retailers in
Estonia may have been expecting scrutiny after January 1, 2011 and
raised some prices in advance.
Annual growth of consumer prices, %
20
16
EA
12
EE
8 LV
4 LT
HU
0
PL
-4
-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
One of the (supply) factors behind price growth in all three countries is
Part of inflation is im-
developments in world commodity markets; for instance, global food
prices have already exceeded their previous peak in 2008. Still, compar-
ported.
ing HICP developments across Europe, it can be seen that price growth
is somewhat higher in the Baltics and CEE countries than in the euro
area.
7
It is hard to say, though, how big the pass-through was – while in 2009 and early 2010,
consumer prices might have risen less than taxes increased, in late 2010-early 2011 the
opposite might have been the case (most likely owing to higher inflation expectations).
8
In May 2011, annual growth of national consumer prices reached 5.4% in Estonia, and
5% in Latvia and Lithuania (harmonised consumer price indices are not available yet).
9
Estonia joined the euro zone on 1 January 2011. The official decision on this was made
by the EU authorities in July 2010.
10 Swedbank Analysis • June 14, 2011
11. It should also be considered that the tax changes in 2010 and early 2011
also influenced current annual price growth. A closer look at annual Part is due to tax hikes.
growth in prices at constant tax rates (i.e., disregarding the impact of tax
changes on consumer prices) 10 indicates that inflation in Latvia is much
lower (just 2.8% vs. 4.1% in March). This is due to the January 2011
changes in VAT and excise tax rates. As there were no major changes in
consumption taxes this year in Lithuania and Estonia, their inflation net of
taxes is almost the same as the usual HICP inflation (in Estonia, only the
excise for tobacco was raised, first in early 2010 and again in 2011).
Annual growth of consumer prices (constant tax rates), %
20
16
EA
12 EE
LV
8
LT
4 HU
PL
0
-4
-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
A closer look at the main product groups of the consumer basket reveals
that, currently, consumer price inflation is mainly driven by food, housing,
and transport prices (especially in Latvia and Lithuania). Although there
are differences in the growth rates of prices for transport and housing be-
tween the Baltic countries and the euro area, these differences are not
unusually big. For instance, the annual growth of fuel prices in April 2011
was 17.6% in Latvia (partly explainable by excise tax hikes), 11 15.6% in
Lithuania, 14.6% in the euro area, and 10.5% in Estonia (due to an earlier
more rapid rise in the first half of 2010). The annual growth of housing re-
lated prices was 7.3% in Latvia (partly explained by VAT changes for
electricity, gas, and heating), 6.3% in Lithuania, 5% in the euro area, and
4.1% in Estonia. However, the largest differences in inflation rates are
observed for food prices, which is a topic of the next section.
Contribution to annual inflation in the first quarter of 2011, pp
LT
LV Food
Housing
EE
Transport
Other
EA
EU27
Source: Eurostat,
-1 0 1 2 3 4 5 6 Swedbank calculation
10
This indicator reflects the theoretical influence of a change in the VAT and excise tax
rates (i.e., assuming a full pass-through on prices and no second round effects).
11
Unfortunately, Eurostat does not provide data on HICP at constant tax rates for particu-
lar product groups.
Swedbank Analysis • June 14, 2011 11
12. 5. Current inflation trends: food inflation is
disquieting
In April 2011, food prices in Estonia were 12.2% higher than a year ago; Higher food inflation in
in Latvia and Lithuania, 9.9% and 10.3% higher, respectively. These in- the Baltics than in
creases are much higher than in the euro area (2%), albeit similar to such EU27…
Central and Eastern European countries as Hungary and Poland.
Annual growth of consumer prices (food and non-alcoholic beverages), %
24
20
EA
16
EE
12 LV
8 LT
HU
4
PL
0
-4
-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
Demand remains weak in all three Baltic countries due to the still-high … mostly due to supply
unemployment and slow rise in wages; for instance, annual growth of re-
factors
tail trade turnover of food items is still negative in Latvia and just about
1% in Estonia and Lithuania (at constant prices). Emigration flows also
undermine private consumption since a shrinking population demands
less. This implies that supply factors are leading to food price growth. As
was shown above, global commodity price growth certainly plays a role;
however, the extent it influences consumer price inflation differs across
countries. Moreover, price developments differ for various food items. To
understand what is behind the more rapid growth of food prices in the
Baltic countries vs. that in the euro area, it is important to examine micro
factors (i.e. characteristics of particular industries) that might affect con-
sumer prices.
Annual growth of retail trade turnover – food, beverages, and tobacco
(constant prices), s.a. %
30
20
10 EA
EE
0
LV
-10 LT
-20
-30
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
Annual price growth for meat products is much lower than for food on av- Price of meat products
erage, both in the Baltics and in the euro area (although somewhat more still lower than two years
rapid in Estonia). Meat product prices in Estonia, Latvia, and Lithuania
ago; growth rates are
are still lower than two years ago (i.e., the peak). This can be explained
partly by the fact that it is a more expensive good, which can be given up similar to euro area.
12 Swedbank Analysis • June 14, 2011
13. if incomes are under pressure. Meat also has shorter due dates and can-
not be kept for long. Its price mainly depends on the price of grains,
which are the main source of nutrition for livestock, and labour costs.
While grain prices surely were rising, producers were also cutting their
labour costs. Another issue is regional competition – for local consump-
tion, pork (which is the most popular meat) is often imported, Meanwhile,
local producers mainly export their meat to Russia, as they find it difficult
to compete with cheaper imported products at home.
Annual growth of consumer prices (meat), %
24
20
16 EA
EE
12
LV
8
LT
4 HU
0
-4
-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
Prices of bread and cereals, on the other hand, have already surpassed Prices of bread and ce-
previous peaks, particularly in Estonia and Lithuania. Annual inflation in
reals already exceed pre-
this sector in April 2011 was much more rapid in the Baltics than in the
euro area (2%):14.3% in Estonia, 7.1% in Latvia, and 12% in Lithuania. vious peaks; growth rates
Prices of bread and cereals in the Baltics follow quite closely global grain are higher than in euro
price developments. However, grains and wheat are not the largest cost area.
position for bread producers – the share of labour, energy, and logistics
costs is bigger. Still, the fact that Baltic producers seem to be much more
affected by global grain price developments than European producers on
average is a bit puzzling. It may be the case that, while retailers in the
Baltics transfer the increase in producer prices straight to consumers,
European retailers take part of the price increase on themselves. Another
possibility is differences in contract setting between farmers, producers,
wholesalers, and retailers – how flexible/rigid are the terms with respect
to changes in input prices as well as the length of contracts. These issues
require additional micro-level research, which is out of this paper’s scope.
Annual growth of consumer prices (bread and cereals), %
35
30
25 EA
20 EE
15 LV
10 LT
5 HU
0
-5
-10
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
Swedbank Analysis • June 14, 2011 13
14. Grain prices in Europe, EUR/t
600
500
400
Rapeseed
300
200 Milling w heat
100
0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: FOB W-Europe
Dairy product inflation poses the biggest conundrum. In April, prices of
milk, cheese, and eggs in Lithuania exceeded those of a year earlier by The most rapid price
14.6%. Corresponding prices in Estonia rose by 15%, and in Latvia by a growth for dairy prod-
staggering 21%. These rates by far exceed the annual inflation of these ucts, exceeding previous
products in the euro area (2.3%). No other country in the EU has double- peaks in Latvia and
digit inflation of dairy products; the next biggest inflation is in Bulgaria, Lithuania, after swift de-
where prices are 9.4% higher than a year ago. Of course, it should be clines of 2009
taken into consideration that this rapid growth in dairy prices in the Baltics
follows a period of swift price declines. However, dairy prices in Latvia
and Lithuania have already exceeded their peaks of early 2008, and in
Estonia have nearly reached it.
Annual growth of consumer prices (milk, cheese, and eggs), %
40
30
EA
20 EE
LV
10
LT
0 HU
-10
-20
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat
At the same time, the dynamics of raw milk price developments are much Raw milk prices still be-
more similar across Europe. In addition, the peak price levels of early
low previous peaks
2008 have still not been reached. Of course, price levels differ across
countries, as they depend on the size and concentration of dairy markets
and regional competition, as well as purchasing power. In the Baltics, Es-
tonian and Latvian farmers enjoy somewhat stronger pricing power than
those in Lithuania, as there is a bigger share of larger farms in these two
countries. Another factor that significantly influences raw milk prices in
Latvia is the strategy of Lithuanian dairy producers, who buy a large
share of available Latvian raw milk (by offering more attractive prices
than Latvian dairy producers), process it in Lithuania, and then sell part of
the final production back to Latvia at lower prices than Latvian producers
can afford.
14 Swedbank Analysis • June 14, 2011
15. Raw milk price, EUR/100kg
45
40
35 Italy
30 Germany
Lithuania
25
Estonia
20 Latvia
15
10
2005 2006 2007 2008 2009 2010 2011 Source: CLAL
One of the reasons why Lithuanian producers are able to do this is that Consumer dairy prices
they enjoy larger economies of scale and have greater market power. depend on producers…
Lithuania is definitely a leader in the Baltics, based on the turnover of
dairy processing companies. There is also the largest concentration in
Lithuania – the top four dairy producers constitute about 80% of the mar-
ket. The market is most fragmented in Latvia, where the top four dairy
producers form just about 60% of the market; meanwhile, in Estonia, this
group accounts for about 64%. 12 Furthermore, in Latvia, capacity utilisa-
tion is lower than in Estonia and Lithuania, 13 implying inefficiencies in
production. In Estonia, an additional factor that drives prices up is the
ability of dairy producers to charge higher prices in the local market (as
imports constitute a small share of consumption) – the recent pickup in
demand from Russia has allowed Estonian dairy producers to increase
prices for exports and also motivated them to ask for higher prices in their
local market.
Food prices depend not only on the pricing strategy and power of manu-
facturers, but also on those of retailers. The retail market is quite concen- … and retailers
trated in Latvia and Lithuania, but less so in Estonia. In Lithuania, the two
largest retail chains (Maxima and Palink) account for close to 60% of the
market; in Latvia, about 55% (Rimi Latvia and Maxima Latvia); and in Es-
tonia, about 43% (ETK and Rimi). 14 In Latvia and Lithuania, the two larg-
est retail chains gained market shares during the last years, thus enhanc-
ing their dominating position, while in Estonia the two largest lost ground
somewhat. In Latvia, all other players are very small (market shares of
less than 5% each).
In the case of Latvia, recent discussions in the media and a review by the There are indications
Latvian Competition Council 15 suggest that retail chains is the most im- that retailers might be
portant and often the only possibility to distribute locally produced prod-
exploiting their dominant
ucts; retailers thus exploit their bargaining power and impose discounts
on producer prices, which producers have to accept as they lack an al-
position in the market,
ternative way to sell their production in the local market. The Competition especially in Latvia.
Council also concludes that retailers might actually gain additional profits
by passing through the increase in commodity and producer prices fully
to consumers, since retailers’ markup is usually defined in percentage
terms. In Lithuania and Estonia the situation may be better since there
are more local retail chains; however, a similar cost pass-through issue
exists.
12
Data from annual reports of companies and national statistics.
13
Industry analysts’ estimates suggest that capacity utilisation of milk manufacturers is
about 50-60% in Latvia, while close to 80-90% in Estonia and Lithuania.
14
Data from annual reports of companies and national statistics.
15
Latvian Competition Council (2011).
Swedbank Analysis • June 14, 2011 15
16. A recent study by the Bank of Estonia shows that the increase in dairy There are cases when re-
prices for consumers in Estonia was larger than explained by input price tailer prices are raised
developments. 16 Also, the Lithuanian Competition Council in autumn more than justified by in-
2010 concluded that increase in prices of raw materials did not alone ac- put price growth.
count for the rise in certain food products. The Latvian Competition
Council claims that, although, in the majority of cases, dairy and bread
price increases of producers and retailers are symmetric, there were
cases when retailers were increasing final prices to a larger extent than
producers. 17 When domestic demand is weak (as it currently is) and if
competition is high, one would expect that prices of producers and retail-
ers should absorb part of the input price increases, and that final prices
should not rise to the same extent.
Overall, in these areas, we have more questions than answers. More mi-
cro level data are necessary, which we do not have access to, in order to
draw conclusions. However, there are hints that regional competition as-
pects, as well as possibly inadequate domestic competition, have played
a role in food price developments.
5. Room for improvement in product market
competition
Research supports the relationship between product market competition
(usually proxied by markups) and inflation, although there are different
Stronger product market
opinions on whether this relationship is long-term or short-term. There are competition curbs infla-
studies showing that stronger product market competition leads to a per- tion pressures…
manently lower inflation rate, see, e.g., Cavelaars (2002), Przybyla and
Roma (2005), but also some concluding that the intensification of compe-
tition is a temporary means of curbing price increases and competition
loses its explanatory power for inflation rates when longer time spans are
considered, e.g., Janger and Schmidt-Dengler (2010).
The economic literature also points to the importance of competition in … and eases labour mar-
product markets for easing labour market pressures. Namely, the less ket imbalances.
competitive are product markets, the more depressing is the effect on la-
bour reallocation because of less dynamic firm entry and exit (OECD,
2010). Taking into account sizeable structural unemployment in the Bal-
tics, labour reallocation is one of the crucial factors that might help to
ease potential imbalances building up in the labour market that may oth-
erwise spill over into excessive wage growth and then into inflation. 18
As it was shown above, there are some indications that competition prob-
lems in food processing and retailing might be one of the factors behind
the more rapid price growth in the Baltic countries. These indications cer-
tainly call for more detailed research. For instance, the Global Competi-
tiveness Report by the World Economic Forum suggests that domestic
competition in all three Baltic countries has worsened recently relative to
other countries. Estonia scores better that Latvia and Lithuania.
16
Lindpere et al (2011).
17
Latvian Competition Council (2011).
18
See our Swedbank Analysis (2010), “High unemployment in Latvia – is it here to
stay?” for more details.
16 Swedbank Analysis • June 14, 2011
17. Extent of domestic competition, rank out of 139 countries
(1 is the best-performing country)
120 -13 change in rank
-17 -16
-13 2009 -2010
100
-17 -5 -15
80 -13
EE
60 -11
-9 5
40 -5 LV
20 LT
0
competition
dominance
competition,
Intensity of
Effectiveness
Extent of
Domestic
market
monopoly
of that
local
of anti-
policy
Source: Global
Competitiv eness
Report, 2010-2011
Competition authorities have become more active recently in monitoring
product markets (especially in Latvia and Lithuania) and inviting produc- Competition authorities
ers to complain if they face unfair terms and conditions in their contracts in the Baltics have be-
with retailers. In Lithuania, a web portal was created where consumers come more active.
can see maximum, minimum, and average prices for the most important
food items in the retail network (updated each week). There have been
cases in Latvia recently in which the Competition Council imposed fines
on the two biggest retail chains for abusing their dominant position (e.g.,
one in late 2010 regarding the dairy industry and another in January 2011
regarding the bakery industry).
Profit margins 19 of retailers and manufacturers have widened over the
last year. 20 In Estonia and Lithuania, these groups managed to retain
Profit margins have wid-
positive profitability throughout the recession. Of course, an increase in ened.
profit margins does not necessarily imply a reduction in competition or an
increase in prices of final production – companies need to regain profit-
ability after a crisis when the profit margins were in most cases squeezed
below sustainable levels. Still, profit margins in manufacturing have al-
ready approached the levels of 2006-2008 in Latvia and Lithuania (data
for 2010 for Estonia are not available).
Profit margins, %
10
EE LV LT
8
6
4 Manufacturing
2 Domestic trade
0
-2
-4
9M 2010
9M 2010
2006-07
average
2008
2009
2006-07
average
2008
2009
2006-07
average
2008
2009
Source: ESA, Bank of
Latv ia, LDS
19
Calculated as a profit before tax divided by a turnover.
20
It should be taken into account that a large part of manufacturing output goes to export
markets, where the margins could be higher and the average margin in manufacturing is
likely to exceed that in domestic market.
Swedbank Analysis • June 14, 2011 17
18. 6. Inflation outlook
One of the forward-looking measures (or leading indicators) that might
help to forecast inflation is inflation expectations. The idea behind this is
as follows: if households believe that prices will grow faster in the near
future, they might cut back their future consumption and increase current
consumption. When households believe that prices will rise, they are
more ready to accept higher prices; this makes it easier for businesses to
increase their final prices.
21
According to a consumer confidence survey, the share of consumers
Inflation expectations
who think that prices will continue to rise in the next 12 months has risen
have risen.
in all three countries. Inhabitants see that prices are increasing and tend
to believe that they will rise in the future as well (i.e., adaptive expecta-
tions).
Price expectations over next 12 months, points (balance of answers)
100
80
60
Estonia
40
Latvia
20
Lithuania
0
Euro area
-20
-40
-60
2004 2005 2006 2007 2008 2009 2010 2011 Source: DG ECFIN
Our recent analysis using Granger tests 22 show mixed results on the link-
ages between inflation expectations and actual inflation. In the case of
Estonia, the test shows that actual inflation is the explaining factor of in-
flation expectations (a similar result is presented in Benkovskis et al
(2009)), which might, in turn, mean that expectations in Estonia are
mostly a backward-looking phenomenon. In the case of Latvia, the results
show no clear direction of causality – both variables include information
about the other. In the case of Lithuania, expected inflation describes the
movements of actual inflation. Therefore, one may conclude that the rela-
tionship between inflation expectations and inflation differs across coun-
tries. Inflation expectations certainly cannot be used as the sole leading
indicator to forecast inflation; other cyclical and fundamental factors, de-
scribed above, should also be taken into consideration. However, rapidly
growing inflation expectations (similar to the pre-crisis years) should defi-
nitely be taken seriously.
21
Data from DG ECFIN.
22
See Swedbank discussion paper, to be published in June 2011. Granger causality tests
examine whether information in one variable helps to predict the other (i.e., they may not
indicate a strong one-way relationship or the direction of the influence). Monthly data
from 1997 till 2011 are used. Test results are available upon request.
18 Swedbank Analysis • June 14, 2011
19. We expect prices and productivity to continue to converge in all three Bal- Inflation rates to peak
tic countries with that in the advanced EU economies, and a mix of sup- this year
ply and demand factors to drive inflation in the nearest future. We are of
the opinion that annual inflation in all three Baltic countries will peak this
year. It should be emphasized that we do not see a risk of uncontrolled,
runaway inflation; however, we do see certain risks that might cause a
more rapid inflation than our base scenario assumes.
The influence of demand-side factors is still very weak, although eco- Demand-side factors will
nomic recovery is on the way in all countries. In the first quarter of 2011, become more important
Estonia’s GDP was 8.5% higher than a year ago, Lithuania’s GDP rose in the near future...
by 6.9%, and Latvia’s by 3.5%. Labour markets are slowly improving, as
are consumer expectations (wage expectations are rising, and fear of un-
employment decreasing), and consumer spending is expected to grow
slowly. At the same time, deleveraging and growing consumer prices are
hindering households’ willingness to spend. Banks have become more
conservative in issuing loans than in the boom years but willingness to
lend is gradually improving. The outlook for the next two years has im-
proved, and the impact of demand-side factors will gradually grow as all
three economies continue recovering (a bit slower in Latvia than in Esto-
nia and in Lithuania).
Supply-side factors will also play a significant role. The main one is global … but supply-side factors
prices of commodities and energy, especially as food, transport, and will still play a role.
housing constitute a large share of consumer expenditures. We expect oil
and food prices to grow much more slowly next year, partly owing to the
slowdown in emerging economies; 23 however, the uncertainty with regard
to this forecast is high. Labour costs will also grow, thereby increasing
production costs, but this growth, at least for now, is expected to be slow.
We anticipate inflation rates to fall somewhat in 2012: in Estonia, from
3.8% this year to 3.2% next year; in Latvia, from 4.2% to 2.6%; and, in Inflation rates to fall next
Lithuania, from 3.2% to 2.5%. These are April 2011 forecasts, and it is year, but there are risks
likely that we will revise our 2011 forecast upwards somewhat in August. to this forecast.
This is our base scenario, which is, however, prone to several risks (es-
pecially on the supply side):
• There is a concern that imbalances might build up again in the
labour markets. For instance, wages were already growing in line
with productivity in Estonia and Latvia in the first quarter of this
year (see the graph on page 9). In an environment of free labour
mobility (and wages in the advanced EU countries that are sig-
nificantly higher than those in the Baltics), growing economies
(which will need larger labour forces), and poor labour supply
(due to emigration, structural unemployment, aging populations,
and lack of immigration policies), there is a risk that labour de-
mand in the Baltics will significantly exceed the labour supply,
and, consequently, that wage growth will exceed that of produc-
tivity. Especially taking into account that it will be impossible to
hold up such swift productivity growth rates as in the beginning of
recovery period – it can be seen that productivity growth is al-
ready slowing. Of course, given the recent experience, both fiscal
policy and bank lending in the foreseeable future will be more
conservative and will not support a buildup of such imbalances as
in 2005–2007; nevertheless, it seems that the labour market may
still be vulnerable to the same old ills that spurred inflation previ-
ously.
23
See Swedbank’s latest Energy and Commodities: May 16, 2011, April 15, 2011, as well
as Swedbank Economic Outlook, April 2011
Swedbank Analysis • June 14, 2011 19
20. • There is a very high uncertainty with regard to global commodity
price developments. It is hard to predict how the political situation
in the Middle East and North Africa will evolve, or what will hap-
pen with agricultural production (weather conditions, protection-
ism risks, etc.). A more rapid global price growth would result in
more expensive imports in the Baltics and, thus, higher consumer
prices.
• Domestic competition might become a more serious problem.
There is a risk that, given the opportunity to raise prices (which,
with the rising inflation expectations, is likely), retailers may aim
to return to profit margins seen in the boom years more quickly
than economic fundamentals would justify.
It can be seen that, for Latvia and Lithuania, the 2012 inflation forecasts
24
are already on the margin of not fulfilling the Maastricht criterion, imply- Policy action is needed
ing that close monitoring of price developments is necessary and that the to curb inflation.
authorities should step in to ensure that the countries actually introduce
the euro in 2014. This stepping in should not be seen as a one-off ma-
nipulation, as this would not be perceived as sustainable and would not
help to fulfil the Maastricht criterion. In Estonia, the more topical issues
related to the relatively high inflation rates are external competitiveness
and social cohesion. The next, and concluding, section thus makes policy
suggestions to local authorities for reducing inflation rates.
7. Policy options: what to do and not to do to curb
inflation
Undoubtedly, the recent rise in inflation in Estonia, Latvia, and Lithuania
to a large extent has been driven by commodity price growth in the world
markets, which local authorities, businesses, and households cannot
influence. However, there are also domestic issues that can and should
be addressed – by doing so it is possible to reduce price pressures.
There are three policy areas in which action can be taken to address the
inflation problem: monetary, fiscal, and structural policies. By altering
bank reserve requirements, adjusting interest rates, and raising public
awareness of the issue, a central bank can affect inflation and its
expectations. However, given the existing exchange rate regimes,
monetary policy is largely exogenous in the Baltic countries, having only
a very remote and indirect impact on inflation dynamics. Fiscal policy,
especially in Latvia and Lithuania, is constrained by the necessity to carry
on with budget consolidation – its main avenue to curb inflation is via the
deflationary effects of expenditure cuts and the clear communication of
future actions so as to reduce uncertainty and inflation expectations.
Thus, the most versatile and influential – but, unfortunately, also the most
complex and time-consuming – policy area is structural policy, which
extends over a wide range of fields: competition, corruption, labour
market, etc. To have a strong and lasting result on inflation, all three
policy areas must be explored concurrently.
One of the major issues is competition policy and the transparency of a DO: strengthen competi-
price formation mechanism. Strengthening competition, especially
tion and improve price
between retailers, would weaken their ability to raise profit margins and
pass cost increases on to consumers. Measures include strengthening transparency
24
12-month average inflation should not exceed the result of the three best-performing
EU countries (i.e., those with the lowest inflation) by more than 1.5 percentage points.
According to the autumn 2010 forecasts of the European Commission, this criterion could
be about 2.4% in 2012.
20 Swedbank Analysis • June 14, 2011
21. Competition Councils’ capacity to monitor the market’s micro structure in
order to identify abuses of the dominant position, easing entry of new
market players, and making it easier for consumers to compare prices
across shops (e.g., online weekly monitor of average, maximum, and
minimum prices of the main food items has been introduced in Lithuania).
Bringing competition into the public sector service provision (e.g., by
privatisation and/ or introduction of “money follows” schemes, like
students’ vouchers in Lithuania) is yet another solution.
The source of the problem should not be misunderstood, though. For
instance, in Lithuania, an outright regulation of mark-ups has been
proposed several times (especially when elections approach). Although
the setting markups is a must in administratively regulated sectors, it
would by and large be a mistake to try to enforce similar regulations in
the private sector – a well-designed and strong competition policy would
provide a more efficient, transparent and sustainable solution.
Another area where improvements can be made is by raising productivity DO: raise productivity
and cost efficiency. Whatever permits to cut costs will lower prices if and cost efficiency
competition is fierce. This certainly is in the companies’ competence, but
authorities can support and speed up this process by lifting administrative
barriers and encouraging a more effective and targeted acquisition of EU
funds. Given that energy costs have been particularly volatile and directly
(e.g., heating) and/ or indirectly (e.g., as food producers’ costs) form a
key part of HICP, improving energy efficiency in order to reduce energy
dependency should be one of the key objectives (especially since EU
funds support this objective). It also includes strengthening the capacity
25
of the regulatory authorities that oversee monopolies and the provision
of public services to set the lowest possible tariffs by being able to
carefully vet their cost structures.
The factor that has definitely added to inflation during the last two years is
tax hikes. Further government budget consolidation attempts in Latvia DO NOT: increase tax
and Lithuania must exclude tax burden increases (especially that of VAT burden
and excises) and centre on expenditure cuts and the eradication of the
shadow economy. Unfortunately, the shadow economy has expanded in
all three countries. This, however, does not preclude a rebalancing of the
overall tax burden by, for instance, reducing labour taxes to foster job
creation and compensating for this reduction by raising the real estate
tax. For instance, a decrease in labour taxes is planned in 2013 in
Estonia. A clear and timely communication of tax changes (or none of
them) is crucial to diminish consumers’ inflation expectations.
One of the measures recently discussed in the Latvian media to curb DO NOT: freeze wages
inflation is a wage freeze in the public sector (and possible agreements
with social partners to do the same in the private sector). We are of the
opinion that such a measure would clearly be counterproductive and
misplaced – inflation is driven predominately by supply-side factors, while
private consumption remains very weak. Furthermore, when wage growth
is justified by productivity gains (which is currently the case in the Baltics,
especially in the exporting sectors), wage growth controls in the private
sector with free labour market mobility would simply boost emigration and
push wages even higher, due to the lack of labour. It should be noted that
the current slow income growth is largely “eaten up” by inflation, and
households’ purchasing power is thus improving only marginally.
Yet, keeping a close track of labour market developments is important DO: improve labour
and should not be underestimated. To reduce the labour market risks market efficiency and
described in the previous section, reforms in labour markets must
sustainability
25
The Public Utilities Commission in Latvia, Regulatory Division of Competition Au-
thority in Estonia, and National Control Commission for Price and Energy in Lithuania.
Swedbank Analysis • June 14, 2011 21
22. deepen. To mention just a few of the major avenues for economic policy
action: cut structural unemployment by improving skills of job seekers
and support labour reallocation between sectors and regions (inside the
countries), discuss and design skills based immigration policies, and
promote the alignment of wage growth with that of the underlying labour
productivity.
Lija Strašuna
Mārtiņš Kazāks
Nerijus Mačiulis
Annika Paabut
22 Swedbank Analysis • June 14, 2011
23. Abbreviations
CEE – Central and Eastern Europe
DG ECFIN – European Commission's Directorate-General for Economic
EA – Euro area
EE – Estonia
EMU – European Monetary Union
ESA – Statistics Estonia
EU – European Union
HICP – Harmonized index of consumer prices
HU – Hungary
LDS – Lithuanian Department of Statistics
LT – Lithuania
LV – Latvia
PL – Poland
References
Benkovskis, K., Kulikov, D., Paula, D., Ruud, L. ”Inflatsioon Balti riikides”
[”Inflation in Baltic States”], Kroon ja Majandus 2/2009, Bank of Estonia
Cavelaars, Paul (2002), “Does competition enhancement have perma-
nent inflation effects?”, De Nederlandsche Bank Research report
Coudert, V. (2004). Measuring the Balassa-Samuelson effect for the
countries of Central and Eastern Europe? Banque de France Bulletin Di-
gest.
Ed. Lindpere, M. (co-authors Soosaar, O., Pungas, K., Lambing, M.)
“Kuidas Eesti toiduaineteturg turuosalisi teenib? Valik mõttearendusi”
[“How food market serves the market participants? Selection of lines of
reasoning”] May 2011, Bank of Estonia
Janger, Jürgen, Philipp Schmidt-Dengler (2010), ”The relationship be-
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Latvian Competition Council (2011). “Secinājumi par piena produktu un
maizes tirgu” (Conclusions about dairy and bakery markets),
http://www.kp.gov.lv/uploaded_files/KPPP085PienaSecinajumi.pdf (in
Latvian)
Lojschová, A. (2003). Estimating the Impact of Balassa-Samuelson Effect
in Transition Economies.
Mihaljek, D. and Klau, M. (2009). Catching Up and Inflation in the Baltics
and Southeastern Europe: the Role of Ballasa-Samuelson effect.
OECD (2010), “Moving beyond the jobs crisis,” OECD Employment Out-
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Paper No. 453, European Central Bank
Swedbank Analysis • June 14, 2011 23
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