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« Lost in Translation at the ECB? | Main | The Global Economy ... The Topics Which Matter »

The End of the Road In Lithuania?

I am sorry for the rather dramatic headline deployed above but I really don't think that any of this should be taken lightly. I will begin with this short yet very telling note from Bloomberg which informs us that unemployment in Lithuania dropped to a staggering 2.7% in June. This of course signifies an extremely tight labour market and quite simply this cannot go on for much longer. The clear evidence of this is first and foremost to be found in the quarterly y-o-y GDP figures which demonstrate Lithunia's sizzling growth rates much alike the other Baltic countries. As such, Q1 2007 saw an annual growth rate of 8.3% and on average the last five quarters saw a growth rate of GDP of 7.8%. This is of course putting strains of capacity in Lithunia and like in the rest of the Baltic countries the short term cyclical indicators point to very brisk growth in labour costs. Data on Lithuania shows an average increase of a whopping 21.8% in the last four quarters. However, it is the labour force we need to look at I think where Lithuania just can't keep on running up a near vertical hill; and indeed, when the hill turns into a wall the fall might be very far I fear. As such, it might serve us to go back a bit to a post here on AS about the general tendency in net migration in the Baltics. As you can see, outward net migration is particularly pronounced in Lithuania which of course only serves to exacerbate the general sittuation. Below, I field three seperate graphs (two on the labour market and one on net migration) and it should not require much mathematical skill to see how fast this is going in Lithuania and thus how unsustainable it is with the current growth rate. To put the numbers in  perspective note that the total population in Lithuania is 3.384.700, that fertility (TFR) has been below 1.5 in more than a decade and that the population (and to some extent also the labour force) is diminishing by means of natural decline. Note especially the figure for unemployed persons which I have expanded with the data from the small Bloomberg piece linked above which notes that the number of unemployed stood at 63.343 in May down to 58.396 in June. In short; this is progressing very quickly indeed, especially if we take into account that the net migration most likely primarily takes its toll from the labour force. 

As can readily be seen this is not sustainable much longer with the current growth rates and wage inflation. For a general economic perspective on the Baltic the FT has a nice piece this morning as well as of course Edward's recent note on the Latvian economy (linked above) is a must read. Note in particular how the tug-of-war with the rating agencies as well as Swedish banks supporting the credit boom has begun. People are increasingly beginning to smell a hard landing ahead which is of course prompting market participants to position themselves accordingly. In terms of the general dynamics we might be looking at, this I think is a good quote ...

Nevertheless, the danger facing all three states comes not so much from a collapse of foreign confidence – there is not much speculation in Baltic currencies and the banking sectors and public finances remain solid – as from the impact of any sudden change in consumer behaviour as expectations of continued future growth are dashed. This could lead to a collapse in house prices and a steep economic slowdown.

Such a “hard landing” could stop the three EU newcomers in their tracks as they struggle to catch up with western Europe. Even Estonia, the richest, is still only two-thirds of the EU average gross domestic product (GDP) per capita.

Of course, speculation in Baltic currencies could easily become the flavor of the day if rumours mounted that these countries might have to de-peg from the Euro in order to restore competitiveness. In the end, my advice will be to watch the labour market since the continuous tigtening, not only in Lithuania, at some point will put a ceiling on the current spurt after which the correction will come. Solutions are of course available in terms of bying these economies some time but time, as it were, is indeed running out. Yet, it still seems prudent to advice that inward migration is strongly stimulated and in Lithuania's case where labour force participation rates have been steadily declining for a decade it seems to be a trend which quite simply needs to be reversed although this will be difficult in the immediate short term context.

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    Kol Europa ginčijasi kas tikresnis kapitalistas - anglosaksų liberalas ar pragmatinis kapitalistas (n-toji socialisto versija), amerikiečiai vis dar bando atsikratyti savo rizikingų paskolų aruodų. Blogos paskolos pasiekė tokį mąstą, kad reitingų agentūros dar kartą peržiūri obligacijų vertinimus ir netgi dėsto ką bendrovės turėtų daryti ir ko - ne. Panašu, kad į diskusiją apie pasaulio ekonomikos būklę jau įsitraukė visi - bankai, politikai, reitingų agentūros.
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    I have been reading Economist since my first year in the university. It is also the only magazine where i look through all the articles in every issue. Although i really like the analysis and reporting there, i've started to wonder whether relying on one information source for most of my understanding on world affairs leaves me a bit narrow minded.
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Reader Comments (7)

I wonder how these Baltic countries would view immigration from countries in the western hemisphere such as the US or Canada. My sense, based on limited knowledge of Baltic public opinion, would be that there wouldn't be much opposition. What do you think?

A theme that I have been thinking about lately is the idea that young college graduates from North America might be attracted to European cities such as the Baltic capitals as places where they could apply their skills and knowledge at relatively low risk. The appeal of living in a historic foreign city undergoing dramatic change I think would be strong. The cost of living compared to New York, London, or Berlin would make the Baltics attractive as well.

As you note, a policy of encouraging immigration seems very advisable for the Baltics, and I think that a program to raise awareness in the US, particularly at colleges and universities, regarding themselves would serve these countries well.
July 9, 2007 | Unregistered CommenterRavenor
Ravenor, the idea is more than charming, but please bear in mind that minimum monthly salary in Lithuania is 174 Euro a month, average (before taxes, there's a flat 27 percent income tax) - 503 Euro a month. Of course the cost of living would be much cheaper than in NYC or London, but I doubt your idea would be welcomed by the students given the previous figures.
Besides, Lithuania is still struggling to become a tolerant society - colored people are rare and Lithuania is quite known for homophobia. The narrowmindedness of the people is another factor that drives natives to leave Lithuania. This factor is quite overlooked by some foreign journalists who mostly seem to notice economic data, not social factors. IT is not only the statistic that build up the country, it is the people first of all.
You are welcome to drop in to my blog on emigration and express your views.
July 13, 2007 | Unregistered CommenterLina Zigelyte
Then again, the starting salary for an economics/IT undergraduate would be around 12 000 EUR/year and it is quite realistic to earn around 25 000 EUR/year in 3 years from starting. Plus many opportunities for starting up your own business using business models that are tested in US, but not yet used here. As Ravenor notes, it might be a very beneficial experience for a young person. Great idea indeed.

Raiko from Tallinn
July 14, 2007 | Unregistered Commenter*uri
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May 22, 2009 | Unregistered CommenterCapsfusyCyday and I don't think so.
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