Inflation risk in the Baltics

January 2, 2008 at 10:07 pm Leave a comment

GrowthI would like to present you with an article writen by Mr Vadimas Titarenko on the status of the Baltic economies.  Mr Titarenko works for the NROD/DnB bank.Most of Lithuania’s statistical indicators for 2007 seem in pretty good shape. Annual GDP growth accounted for 9 percent in the first three quarters of 2007, leaving year-end growth at a forecast 8.3 percent. Average earnings rose by almost 20 percent in the same period. Unemployment is very low at 4 percent and the fiscal indicators are looking good. Which leaves inflation…

International financial experts all too often see the three Baltic countries as a unified region. A lot of criticism has been directed at Latvia – justifiably, since the macro indicators there are quite poor – but unfortunately what happens in Latvia also reflects badly on Lithuania where the indicators are in fact quite healthy. What the experts tend to criticize is that the bulk of the growth so far seen in the Baltic countries is based on household consumption.

Household expenditure is indeed growing very fast – the gap between consumption growth and GDP growth is getting wider. There is an even bigger disproportion between the pace of expansion in the domestic trade sector and the income growth of the population, which means that today households are living on future consumption.

It looks as though consumers here want to rapidly catch up on those in Western Europe – at the cost of living on loans.The dynamics on loan portfolio growth do indeed show that consumers are still taking loans. In the last nine months, Lithuania has been the leader in the Baltic states in terms of consumer loan growth.

The fast growth in consumption has inevitably had an impact on the economy. Over the last couple of months alone inflation has accelerated very much. In 2005, annual CPI growth was 2.7 percent. By June 2007, it had risen to 4.8 percent. In November 2007, it was 7.8 percent – inflation’s highest level since 1997.

The worrisome part is that inflationary expectations are created. To diminish them is a difficult process, especially since a great deal of the inflationary pressures are caused by external factors.On a global scale, poor crop yields and increasing biofuel production have led to 15.4 percent annual growth in the price of food products in Lithuania.

There are also increases in energy prices to contend with. Energy prices in Lithuania are still lower than they are in Germany and other Western European countries, but that is about to change.Gazprom is raising natural gas prices from January 1, 2008, and the Lithuanian authorities have already announced that prices for households are going to increase by 70 percent. 

Read rest of the article on www.alfa.lt 

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Entry filed under: Azerbaijan, Baltic States, Economics, Energy, Estonia, EU, Latvia, Lithuania, Northern Europe, Oil, Politics.

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