Download Jekaterina Rojaka

Economic Crossroads:
From Recovery to Sustainable
Growth in the Baltics and EU
Different crisis solutions and
common future challenges for the
Baltic Economies
Jekaterina Rojaka
DNB Chief Economist | Baltics
November 24, 2011
1
Last decade the Baltic economies grew at a solid
pace
GDP per capita, PPS, EU-27 = 100%
Real GDP, 2000 = 100%
190
100
90
Lithuania
180
80
ES-27
170
70
Estonia
160
Latvia
60
150
50
140
40
130
30
2000
2002
Source: Eurostat
2004
2006
2008
20
120
10
110
2010
2000
2002
2004
2006
2008
100
2010
2
The Baltics are again among the EU leaders
according to economic growth rates
Real GDP, annual change, %
8.9
6.2
2011 IH
5.5
4.6
4.2 3.9 3.8
2010
3.4
2.6
2.6
2.2
2.1
2.0
1.9
1.9
1.3
0.8
0.9
0.8
Source: Eurostat
Greece
Portugal
Spain
UK
Italy
Ireland
-7.7
Bulgaria
Hungary
EU-27
France
Netherlands
Belgium
Czech Rep.
Slovakia
Finland
Germany
Poland
Latvia
Sweden
Lithuania
Estonia
-0.8
3
While EU old-timers are out of steam
Real GDP annual change in 2011, %
9.5
8.4
7.9
6.5 6.6
5.9
5.6 5.7
5.0
4.1
4.8
4.4
4.1
3.5
3.4
3.0
2.5 2.4
2.4
1.7
1.6 1.4
I
II
III
Euro area
I
II
III
Germany
I
II
1.4
III
France
I
II
III
Estonia
Source : Eurostat, Latvi’as statistics, Russia’s national statistics
I
II
Latvia
III
I
II
III
Lithuania
I
II
III
Poland
I
II
III
Russia
4
Manufacturing indexes change direction
Manufacturing, volume index of production, sa,
2007.01=100
110
Manufacturing, volume index of production, sa,
2007.01=100
120
Euro area
110
Germany
France
100
100
90
Estonia
90
80
Latvia
Lithuania
70
Šaltinis: Eurostat
5
2011.09
2011.05
2011.01
2010.09
2010.05
2010.01
2009.09
2009.05
2009.01
2008.09
2008.05
2008.01
2007.09
2007.05
60
2007.01
2011.09
2011.05
2011.01
2010.09
2010.05
2010.01
2009.09
2009.05
2009.01
2008.09
2008.05
2008.01
2007.09
2007.05
2007.01
80
Entering an outlook downgrading cycle again…
World bank real GDP growth forecast
European Commission real GDP forecasts, %
8
2009 2010e 2011f 2012f 2013f
Autumn forecast
High income
Euro Area
United States
Developing countries
China
Russia
India
6
Spring forecast
4
-3.4
-4.1
-2.6
1.9
9.1
-7.8
9.1
2.7
1.7
2.8
7.3
10.3
4.0
8.8
2.2
1.7
2.6
6.3
9.3
4.4
8.0
2.7
1.8
2.9
6.2
8.7
4.0
8.4
2
OECD real GDP forecasts, %
-2
GermanyFrance
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
0
Italy Greece Euro LithuaniaLatvia Estonia
area
Spring forecast
3.1
Autumn forecast
2.6
2.0
1.5
1.5
2.0
1.6
-4
0.3
2011
-6
2012
US
Source: European Commission, OECD, World Bank
2011
2012
Euro area
6
2.6
1.9
2.7
6.3
8.8
4.1
8.5
Source: Eurostat
7
2011.11
2011.09
2011.07
2011.05
2011.03
2011.01
2010.11
2010.09
2010.07
2010.05
2010.03
2010.01
2009.11
1.0
2009.09
2009.07
2009.05
2009.03
2009.01
2008.11
2008.09
2008.07
2008.05
2008.03
2008.01
Stock market faces high volatility
Stock indices (2008.01 = 1)
1.2
Global: MSCI
Europe: Stoxx 600
Russia: RTS
US: S&P 500
0.8
0.6
0.4
0.2
0.0
Source: Eurostat, Bloomberg
8
2011.10
2011.07
2011.04
2011.01
2010.10
2010.07
80
2010.04
2010.01
2009.10
2009.07
2009.04
60
2009.01
Germany
2008.10
Economic sentiments indices
2008.07
110
2008.04
120
2008.01
2011.10
2011.07
2011.04
2011.01
2010.10
2010.07
2010.04
2010.01
2009.10
2009.07
100
2009.04
2009.01
2008.10
2008.07
2008.04
2008.01
Overall confidence drops
Purchasing manager index, industry
65
60
Euro area
55
France
50
90
45
Euro area
40
US
70
35
30
Germany’s confidence is close to 2008 level
ZEW, Indicator of economic sentiment
Indicator of current situation
80
100
80
60
Euro area
60
40
Germany
40
20
20
0
0
-20
-20
-40
Euro area
Germany
-40
-60
-60
Šaltinis: Reuters Ecowin
2011.09
2011.05
2011.01
2010.09
2010.05
2010.01
2009.09
2009.05
2009.01
2008.09
-80
2008.05
2011.10
2011.07
2011.04
2011.01
2010.10
2010.07
2010.04
2010.01
2009.10
2009.07
2009.04
2009.01
2008.10
2008.07
2008.04
2008.01
-100
2008.01
-80
9
Economic sentiments - base for short term
forecasts…
Source: Capital Economics
10
15
120
15
120
10
110
10
110
5
100
5
100
0
90
0
90
-5
80
-5
80
-10
70
-10
70
-15
60
-15
60
-20
50
-20
50
Estonia's real GDP and ESI
Real GDP, annual change, % (lhs)
ESI, 2m FW (rhs)
Source: European Commission, Eurostat, DNB
2006 IQ
2006 2Q
2006 3Q
2006 4Q
2007 IQ
2007 2Q
2007 3Q
2007 4Q
2008 IQ
2008 2Q
2008 3Q
2008 4Q
2009 IQ
2009 2Q
2009 3Q
2009 4Q
2010 IQ
2010 2Q
2010 3Q
2010 4Q
2011 IQ
2011 2Q
2011 3Q
2011 4Q
2006 IQ
2006 2Q
2006 3Q
2006 4Q
2007 IQ
2007 2Q
2007 3Q
2007 4Q
2008 IQ
2008 2Q
2008 3Q
2008 4Q
2009 IQ
2009 2Q
2009 3Q
2009 4Q
2010 IQ
2010 2Q
2010 3Q
2010 4Q
2011 IQ
2011 2Q
2011 3Q
2011 4Q
And prospects are not bright
Lithuania's real GDP and ESI
Real GDP, annual change, % (lhs)
ESI, 2m FW (rhs)
11
Where roots of
pessimism are
coming from?
What to expect?
12
Fiscal prudence in EU deteriorated, Latvia and Lithuania
stand among average performance
10.6
General government deficit, % of GDP
0.2 0.2
-10.6-10.3-10.1 -9.8
-5.1 -4.8 -4.6 -4.4 -4.2 -4.1 -4.3
-5.8
-7.1 -7.0 -6.9 -6.6
-8.3 -7.8 -7.7
-3.1 -2.6 -2.5
2010
2011 F
Source: Eurostat, European Commission
13
Norway
Estonia
Sweden
Finland
Denmark
Bulgaria
Germany
Belgium
Hungary
Austria
Italy
Czech R.
Netherlands
Slovenia
EU-27
Romania
Lithuania
France
Slovakia
Poland
Latvia
Spain
Portugal
UK
Greece
Ireland
-31.3
General government debt in most of EU swelled in
several years
General government debt, % of GDP
145
2007
85
66
83
65
82
80
64
61
44
25
36
45
55
45
52
44
40 40
39
23
17
Slovenia
Sweden
Norway
Latvia
Poland
Spain
UK
France
Germany
Euro
area
Portugal
Ireland
Italy
Greece
9
38
31
17 16
13
4 7
Estonia
68
2010
Bulgaria
93
Lithuania
95
Romania
118
103
107
General government debt dynamics in the Baltics, % GDP
44.7
38.0
38.6
44.7
36.7
29.4
23.6
19.3
16.8
15.5
12.4
19.8
15.0
9.0
5.1
5.0
3.7
4.5
7.2
6.7
6.4
2000 2004 2007 2008 2009 2010 2011 2000 2004 2007 2008 2009 2010 2011 2000 2004 2007 2008 2009 2010 2011
1H
1H
1H
Lithuania
Source: Eurostat
Latvia
Estonia
14
Financial markets full of fears
CDS's 5 year, bp
1400
1400
1200
Latvia
Lithuania
Estonia
Spain
Portugal
Ireland
Italy
Germany
1200
1000
1000
800
800
600
600
400
400
200
200
Source: Reuters EcoWin
2011-10
2011-08
2011-06
2011-04
2011-02
2010-12
2010-10
2010-08
2010-06
2010-04
2010-02
2009-12
2009-10
2009-08
2009-06
2009-04
2009-02
2008-12
0
2008-10
0
15
0
Source: Eurostat
0.3
16
Estonia
Bulgaria
Sweden
Slovakia
2007
Finland
Latvia
Czech R.
4
Slovenia
1
Romania
2
Lithuania
Netherlands
Spain
Denmark
France
Germany
Austria
Poland
3
EU-27
UK
Portugal
Ireland
Belgium
Hungary
Italy
Greece
Debt service becomes a heavy burden for some
countries
6
Debt service, % of GDP
5
2010
2.7 2.7
1.8
1.4
0.7
0.2
0.1
Possible solutions of the EU crisis
Expansive
monetary
policy
• Possible QE
starting dates
• Inflation
• Redistributing
income
Distributing
debt burden
Fiscal
tightening
• Distributing debt
• Strict fiscal
amongst euro
policy
zone members
• Deflation
• Recession
• Stagnation /
• Deflation
prolonged
• Anemic growth /
recession
stagnation
• Discontent
electorate
Break down of
euro zone
• No political
consensus
• Flight from EZ
• Going bankrupt
• Restoring national
currencies
• Improving
competitiveness
High probability
Low probability
17
Eurobond – panacea, or placebo?
• Timing?
• Scope?
• Effect?
•
•
•
Put all national bonds in one melting pot, i.e. all euro-zone
government debt issued and fully guaranteed by all 17 member
states.
Euro bonds cover up to a debt ceiling (perhaps 60% of GDP), and
national bonds – above that.
National governments offered euro bonds up to a threshold, with
limited guarantee from other euro-zone governments.c
Source: Bloombergm Capital Economics, DNB
18
Solutions of euro crisis to influence economic
development in the Baltics
Scenario 1
Scenario 2
Quantitative easing
Budget cuts
Inflation


Output, exports


Gross capital formation


Business confidence


Loan portfolio

Not to increase or 
General gov. debt

Unchanged or to increase
Interest expense on debt

Relative increase
Gradual decrease
To remain high
Real income
, Savings to melt
Unchanged
GDP growth
Stronger than EU’s
average
Stagnation or recession
Impact on the Baltics
Unemployment rate
19
Significant correlation between the Baltic and EU
exports
Exports of goods and services, volumes, 2005 = 100
200
180
Lithuania
160
Estonia
140
Estonia
EU-27
120
100
80
60
40
20
0
2000
2001
Source: Eurostat
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
20
Global foreign trade growth has been put on halt
World export volumes, goods, USD mn
1600000
1600000
World
China
EU
1400000
1400000
1200000
1200000
1000000
1000000
800000
800000
600000
600000
400000
400000
200000
200000
Source: WTO
2011-07
2011-01
2010-07
2010-01
2009-07
2009-01
2008-07
2008-01
2007-07
2007-01
2006-07
0
2006-01
0
21
In Lithuania and Latvia current transfers are
substantial
Currents transfers (balance) 2010, % of GDP
6
4.8
5
4.3
3.6
4
Government
2.8
Other sectors
Total
3
1.8
2
1.3
0.8
1
0.5 0.4 0.3
0.2 0.1
0
-0.2
-1
-0.6 -0.7 -0.7 -0.8
-0.9 -1.0
-2
-1.4 -1.4 -1.4 -1.5
-1.7 -1.8
-1.9 -1.9
Source: Eurostat
22
Denmark
Netherlands
Belgium
Luxembourg
Germany
UK
France
Sweden
Italy
Finland
Ireland
Austria
Spain
Slovakia
Cyprus
Greece
Czech R.
Slovenia
Hungary
Malta
Poland
Portugal
Estonia
Romania
Latvia
Bulgaria
Lithuania
-3
Lithuania’s and Latvia’s FDI indicators still petty
FDI per capita, 2010-end, EUR
29671
27517
9179
*Gyventojų skaičius 2010 m. sausio 1 d.
Šaltinis: Eurostat
3924
3636
3174
2463
Romania*
4784
Lithuania
Slovenia
Hungary
Slovakia
Estonia
Czech Rep.
Cyprus*
Malta
5254
Latvia
6712
Poland
6924
Bulgaria
9227
23
Unemployment melts down, while still high
Unemployment rate, sa, eop, %
40.8
Unemployment rate
Youth unemployment
34.2
32.6
30.9
31.7
32.7
29.7
25.9
21.8
EU-27
Source: Eurostat
Estonia
Latvia
8.2
2011 Q3
4.4
15.5 14.8
2011P1
5.5
17.3
2010
9.0
2009
2011 Q3
2011P1
2010
2009
2008
2007
2011P1
2010
2009
2008
2007
4.1
8.3 10.2
2007
7.3 8.0
16.0
14.4
2011 Q3
10.9
2011P1
7.0 7.5
12.8
2010
9.5 9.6 9.5
14.6
2009
16.2
18.3
17.0 16.1
2008
17.0
2007
15.2
19.6 20.1
17.6
2008
21.1 21.0 21.1
Lithuania
24
WARNING: Emigration emergency
Crude rate of net migration plus statistical adjustment*
2009
15.1
13.2
2010
8.2
6.7
5.6
5.35.2 5.3 5.45.9
3.3
2.7 3.1
2.63.32.62.83.02.5
2.32.02.7
1.8
1.8
1.6
1.5
1.5
1.4 0.8 1.11.21.7
1.21.11.3
0.0
-0.10.00.0-0.1
0.0 0.4 0.6
-0.1
2.3
-0.3
-0.4
-2.1 -2.1
-3.2
-4.1 -3.5
-4.6
*The ratio of the net migration during the year to the average population in that year. The crude rate of net migration is equal to the
difference between the crude rate of change and the crude rate of natural change
Source: Eurostat
25
Luxembourg
Belgium
Malta
Sweden
Italy
Austria
Denmark
UK
Finland
Netherlands
EU-27
Germany
Greece
Czech Rep.
Spain
France
Slovakia
Portugal
Romania
Estonia
Poland
Slovenia
Bulgaria
Latvia
Cyprus
Ireland
Lithuania
-23.7
Hungary
-6.2
-7.5
Latvia and Estonia still highly leveraged
Loans to private sector in 2010, % of GDP
Cyprus
Luxembourg
Denmark
Spain
Ireland
Portugal
Malta
Sweden
Netherlands
UK
Greece
Euro area
Austria
Estonia
France
Italy
Latvia
Germany
Finland
Slovenia
Bulgaria
Belgium
Hungary
Lithuania
Poland
Czech R.
Slovakia
Romania
132
138
79
140
133
61
84
85
82
87
67
69
61
86
55
59
33
81
70
81
59
56
49
50
52
38
45
57
58
26
27
31
32
29
34
28
24
20
52
51
56
46
43
56
49
36
32
59
45
32
28
31
15
21
23
20
Šaltinis: Europos Centrinis Bankas, Eurostat
Households
Non-financial entities
26
Switzerland
Singapore
Sweden
Finland
U.S.
Germany
Netherlands
Denmark
Japan
UK
Hong Kong
Canada
Taiwan
Catar
Belgium
Norway
Saudi Arabia
France
Austria
Australia
Malaysia
Israel
Luxembourg
Korea
New Zealand
China
UAE
Brunei
Ireland
Iceland
Chile
Oman
Estonia
Kuwait
Puerto Rico
Spain
Bahrain
Czech R.
Thailand
Tunisia
Poland
Barbdosas
Italy
Lithuania
Portugal
Indonesia
Cyprus
Hungary
Panama
South Africa
Malta
Sri Lanka
Brazil
Mauritius
Azerbaijan
India
Slovenia
Mexico
Turkey
Montenegro
Costa Rica
Iran
Uruguay
Latvia
Vietnam
There are still room for improvement in business
climate and competitiveness ratings
Global competitivness index
64
2011-2012
2010-2011
44
33
Source: WEF, 2011-2012
27
Rising competitiveness and flexibility – key
preconditions for sustainable long term growth in
the Baltics
• Fostering competitiveness and innovation in production,
work organization, production processes, marketing the key to success.
• Currently, both business and governments should avoid
overly ambitious projects with long term repayment
• Actively search for new markets.
28
Thank you for your attention!
DNB bank research products are available:
www.dnb.lt/publications
29