The return of an unpleasant issue • IR.lv

The return of an unpleasant issue

35
Foto: Ģirts Ozoliņš, F64
Morten Hansen

 

Inflation in Latvia continues to be very low; it hasn’t been above 1% since November 2013, not above 2% since May 2012 and since 2013 it has been in deflationary territory for altogether eight months, see Figure 1.

Nevertheless there is reason for some concern.

Figure 1: Latvian inflation rate, 2010-I – 2015-III


Source: Central Statistical Bureau

Wages are growing briskly (Figure 2) and have done so since late 2010 and at more than 5% annually since November 2013, signaling that the labour market should be quite tight. Not ultra-tight a la 2007 but tight enough that it should make policy makers forget everything about expansionary fiscal policies for the moment. But so what if wage growth isn’t spilling into prices?

Figure 2: Wage growth, annually, monthly data, 2010-I – 2014-XII


Source: Central Statistical Bureau

Two problems: Firstly, productivity isn’t increasing 5%, like wages, which means rising cost of production (increasing unit labour costs; it costs on average more to produce goods and services). With not much in terms of changes in prices, some firms should see their profits squeezed and may be forced to raise prices eventually, which we will see as inflation creeping up. Secondly, low inflation isn’t what it used to be – it is a fact in very many countries at the moment so even very subdued inflation may mean that a country’s prices rise faster than they do in other countries (or don’t fall as fast as elsewhere), leading to a loss of competitiveness. And this is, seemingly what is happening again in Latvia. 

Figure 3 shows the Real Effective Exchange Rate, a measure of competitiveness, for a range of countries, and this measure is increasing substantially faster in Latvia than in a series of important trading partner countries, indicating that costs of production are rising faster here than in those countries and that Latvian competitiveness is once again being eroded.

Figure 3: Real Effective Exchange Rate based on unit labour costs, 2010 = 100

Source: Eurostat and own calculations

Last time this happened was in 2004 – 2007, which led to the need for the painful ‘internal devaluation’ to restore competitiveness.

Admittedly, the development of 2011 – 2015 pales next to 2004 – 2007 but this time around it would be nice for everyone if this issue is given some concern at a much earlier stage than it was then.

Lots of agony can be avoided this way.

Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and member of the Fiscal Discipline Council of Latvia

 

Komentāri (35)

Andris 05.05.2015. 13.42

1) Latvia is a small market and integrated in neighbouring markets, like Estonia, Lithuania and the rest of EU. Therefore statistics of LV should be analyzed hand in hand with several other countries around LV.

2) As country “Latvia” lacks clear statistics on how many of it’s citizens are working abroad and sending money back home (anything between 100’000 and 300’000 people and rising weekly), it is not safe to rely on available statistics. Wages “abroad” for the same positions are higher and compete with Latvian market and those who leave Latvia, make availability of needed specialists in Latvia lower, which also make salaries higher… Close the borders or count people leaving and then do wise statistics analysis.

3) P.S.there is no “Figure Nr.3” published.

+3
0
Atbildēt

1

    Yan LEE > Andris 21.05.2015. 08.00

    My sister works aborad and does not send any money to LV. We all are supposed to live with what we earn or move away as she has done. Some of my relatives work abroad and also don’t send any money back because all the closest family members are abroad too. My guess is that people these days don’t sent money back anymore, instead the relatives in need are helped to move abroad.

    0
    0
    Atbildēt

    0

Yan LEE 21.05.2015. 08.10

If companies are forced to pay more for their labour, they simply need to make the labour work more productive to stay competetive. They’ve done it during the global financial crisis and surprised the world. They can do it again. Goverment can watch it, but it can’t do this job for them, in free market economies companies care for productivity, not goverments.

0
0
Atbildēt

0

MZGD 06.05.2015. 02.36

Donde esta la figura numero tres?

0
0
Atbildēt

0

@

Komentāri nav iespējoti šim rakstam

Saņem svarīgākās ziņas katru darba dienas rītu