Meanwhile, 26,1% later… (40)
Autors: Mortens Hansens
Publicēts: 2010. gada 28. marts 20:26
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Since GDP reached its zenith here, in Q4 2007, the cumulative decline has been 26.1%.

It is a huge decline by any standards. GDP is back to the levels f Q1 2004 i.e. you might argue that the whole post-EU accession boom has been erased.

Was this avoidable? Not really, at least not after the 2006 – 2007, which increasingly deserve to be dubbed the “crazy years” – the years when the Latvian economy just went out of whack.

The graph below displays growth of GDP (looking modest in the graph, but remember that the growth rates for 2005-07 of 8-11% were the highest in the EU) and growth of private consumption. The two follow each other pretty well until the end of 2005, but in 2006 and 2007 consumption growth simply explodes, reaching 30% y-o-y. This is, of course, a reflection of the Mother of All Credit Booms that hit the country and which came to a spectacular bust by 2008.

gdpGiven an intertemporal budget constraint (i.e. loans have to be repaid…) consumption growth had to decline eventually – and sharply – adding negative momentum to the economy.

Since consumption accounts for some two thirds of GDP, its development strongly influences the development of GDP . In other words, the bill for the excessive consumption of 2006-07 was due some time, no matter what. No policy or magic wand could have entirely avoided the recession and the surge in unemployment.

What about preventing the 2006-07 bubble? That’s, of course, just the old story of the Mother of All Procyclical Fiscal Policies – as the private sector fuelled the economy the public sector happily joined in and spent the windfall tax revenues thus adding to the boom.

The lack of proper fiscal response in the crazy years should go down as the perhaps most damaging economic policy in Latvia to date.

It helped lead to the need for IMF/EU intervention, it precludes any stimulus to the economy (the coffers are empty) and it is responsible for that whatever resumption of growth there may be, it will be slow as the private sector pays old bills.

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(17 balsotāji )
Komentāri
1.
Pēteris Krišjānis
2010. gada 28. marts, 20:33

“What about preventing the 2006-07 bubble? That’s, of course, just the old story of the Mother of All Procyclical Fiscal Policies – as the private sector fuelled the economy the public sector happily joined in and spent the windfall tax revenues thus adding to the boom.
….
It helped lead to the need for IMF/EU intervention, it precludes any stimulus to the economy (the coffers are empty) and it is responsible for that whatever resumption of growth there may be, it will be slow as the private sector pays old bills.”

You’re saying it? Then what about theories of TP and LPP that there should be help from goverment for enterprises? Do you really dare to imply that they are simply lying? :)

TP and LPP with it’s crazy spending didn’t save money for obvious downfall, period.

Tas grafiks tieši izskatās pēc tādas kraujas (bez rudzu lauka), kas varētu neatvairāmi pievilkt kandžu piesūkušos, un tāpēc neadekvāti bravurīgus traktoristus-pāķus, kuriem bijām ļāvuši ākstīties pie stūres.

That’s a good remark, specially just before elections, since there are enough gees willing to believe politicians that it was just a global crisis and nothing could be done…however I still did not get one thing: can a consumption based economy (especially when it is mostly local consumption) be still called economy?

I can’t disagree with anything in your article Morten.

However, I will add that it’s not just the empty coffers that with mean a snail-paced recovery in the economy. Here’s a quick checklist of factors that might help. Which of these can Latvia tick???:

1/ Good government
2/ Natural resources
3/ A strong work ethic in the general population
4/ A well qualified work force
5/ An experienced and motivated work force
6/ Innovative entrepreneurs
7/ A good reputation internationally
8/ Good infrastructure
9/ Good public institutions
10/ A good environment for investment (the Latvian tax & legal framework)
11/ Transparency
12/ The absence of corruption
13/ A growing & young population

So on and so forth………..

The lack of current public protest in Latvia at the general state of affairs (as compared with Greece for example), seems to suggest that most people here don’t care enough about the situation to work a bit harder, or be a bit more positive.

Baigi stulbi-nesaprotu šito.Varēja autors pacensties un savu darbu iztulkot latviski,lai duraki,kā es,arī saprastu.Te taču tomēr ir Latvija.

7.

Paldies,bet tas nav ērti.

8.

Re,cik amizants tulkojums.Pārsmieties var!

Tas ir milzīgs samazināsies par jebkuriem standartiem. IKP ir atpakaļ līmenī f Q1 2004, ti, jūs varētu apgalvot, ka viss pēc pievienošanās ES uzplaukums ir jādzēš.

Bija šī izvairīties? Nav īsti, vismaz ne pēc 2006 – 2007, kas aizvien vairāk ir pelnījuši būt dublēt “traks gads” – gados, kad Latvijas ekonomika tikko izgāja no dauzīt.

Turpmāk rāda IKP pieaugums (graph meklē nelielu grafikā, taču jāatceras, ka izaugsmes temps 2005-07 par 8-11%, bija augstākā Eiropas Savienībā) un privātā patēriņa pieaugumu. Divi viens aiz otra diezgan labi līdz 2005.gada beigām, bet 2006 un 2007 patēriņa pieaugums vienkārši eksplodē, sasniedzot 30% yoy. Tas, protams, par visu kredīta grozi, kas skāra valsti un kura māte pārdomas bija iespaidīgs krūtis līdz 2008.

I wish to see a graph of nominal GDP.

oh wait, i have one, borrowed from the Central Statistics Bureau, depicting GDP from Q1 2007 to Q4 2009. Here it is: http://twitpic.com/18xggi

Somehow, in nominal terms, the GDP currently is at slightly above 2007 levels and not 2004 levels.

Growth in percentage changes is a neat invention for economists, but it has little revelance to life. Neglecting that, it is also a self-fulfilling prophecy to disaster, because long-term growth is unachievable as percentage changes are an exponential function that inevitably at some point will require too large nominal increases for achieving the same amount of percentage changes.

Morten! A masterly revue. Perhaps you could put this all into a comparative frame. How is the situation in EE and LT or, indeed, compare with your birthpace Sweden.

11.

This economistical say on nothing economical rising in Latvija – our situation has good worht and not 2004 falling. Prime Minister Skele and Party of People have good specialists to fix on this.

A really great visual.

So we have lost more than one-quarter of our economy – we need to be holding politicians to account for this. But the depressing truth is that we will probably not do this.

ps Is Professor Hansen really Swedish? I think i remember him coming from Oslo?

13.

A, kāpēc šis te zviedrs neraksta Latviski?

14.
Lauris to Morten
2010. gada 29. marts, 12:18

Morten, I think you should end all this speculation about where you come from immediately!

You’re the lead singer of A-Ha right?

>>>Lauris

Actually, Morten bears more than a passing resemblance to the blonde lead singer of Roxette – a fellow Swede.

I have it on good information that Morten is half-Estonian half-Swedish, one reason he is always praising the Estonians and their budget cutting. That partly explains why sometimes he writes his first name Marten, which is how he is known among his Estonian family.

I have it on good information that Morten is half-Russian on his mother’s cousin’s thrice removed side. That partly explained why he writes his blog in English.

I think we should focus on the issues and not Mortens’ Swedish ethnicity.

Funny how the issue of Morten’s nationality surfaces again and again. One thing puzzles me – why is there always somebody who suggests he’s Swedish? Morten – for fun’s sake, you should start and end every article with “I’m danish”.

20.
Big Hans to Attis
2010. gada 29. marts, 18:49

Why would a Swede claim to be a Dane? That’s as ridiculous as an American claiming to be Canadian.

Sorry, could resist a temptation to point the folowing:
1. Calling this wiping out of the whole post-accession growth as unavoidable is quite a stretch. A substantial part of investment of real estate was probably misguided, but it’s hard to believe there had been no productivity gains since Q1 2004. Thus, a fall of this proportion has been a bit ‘over the top’, wasn’t it?

2. I loved this sentence: “No policy or magic wand could have entirely avoided the recession and the surge in unemployment.”

Sounds like a strong statement – unless you think hard what this “entirely” word is doing there. The statement is true with “entirely” in there, but it is patently false without the “entirely” in it, isn’t it? We know there were policies that could have avoided surge in unemployment, even though not “entirely”. The question is: why write something that seems like a strong statement but really isn’t?

>>> A Former student

Clearly, a disgruntled former student who received a bad grade – although the “logic” of your argument indicates that anything above a pass was too high.

Tell us – what policies would have avoided a recession or surge in unemployment. If you have the answer to this, you are clearly wasted in your capacity as the assistant french fry chef at McDonalds.

23.
xi -->Morten & A former student
2010. gada 29. marts, 19:57

Thanks Morten. A piece on contercyclical fiscal policy was long due from you. I would argue that your claim about the fall in income relative to 2004 is misleading, because of the fixed (i.e., distorted) exchange rate. One would call the return to 2004 levels as “undoing” of the boom, if the exchange rate was flexible. With fixed exchage rate GDP would have to fall below 2004 levels to undo the “accession boom”. In other words, if you fix the relative price, the quantities (i.e., GDP at fixed exchange rate) will have to do the extra adjustment. This is just a fancy way of saying that in my view income in Latvia still has some way to fall.

TO: A former student
Post 2004 productivity growth should not be taken forgranted. Think of all those gov. employees getting higher salaries. Did their work efforts increase proportionally? Unlikely. They probably worked less and spent more time shopping.

mazliet jau tā kā necieņa pret latviešu lasītāju. nav jau nu tas teksts ne tik garš, ne sarežģīts, lai nevarētu notulkot. varu iedomāties, kas panestos, ja kāds kaut ko šeit nopublicētu krieviski. bet angļu valoda jau mums svētā govs.

bet ja par tēmu, – pie tāda ekonomikā iegāzta kredītu apjoma nekāda fiskāla politika nebūtu palīdzējusi, taisi budžetu kaut vai ar 10% pārpalikumu. Vai tad Igaunijas situācija kaut kā no Latvijas būtiski atšķiras, kaut arī politika nebija tik prociksliska? tāpat bija milzīgs burbulis un pēc tam milzīgs kritums.

Meanwhile, it is worth to look at Morten’s own track record. As long ago as of 05.12.2007.Morten did not subscribe to ‘Doomsday’ scenario of negative growth :
http://www.diena.lv/lat/business/blog/morten_hansen/soft_landing_versus_hard_landing_and_all_that

Now he thinks it was unavoidable. In hindsight, I guess.

Morten is half danish and half mongolian and his real last hame is Gengishansen.

27.
question for Mr Hansen
2010. gada 31. marts, 23:14

Paldies, Juri, for taking the time to look up the “Diena” article.

I, for one, would love to hear Mr Hansen reconcile his late 2007 article in “Diena” with this current one in “Citadiena.” What factors were not taken into account and/or unknown in 2007 that made him so optimistic then? It would greatly increase credibility if he cared to tackle this.

”What factors were not taken into account and/or unknown in 2007 that made him so optimistic then? It would greatly increase credibility if he cared to tackle this.”

actually the link goes to a blog at Diena, not an article. For an article you could look at:
http://www.diena.lv/lat/arhivs/komentari-un-viedokli/vai-atgriezas-lata-devalvacijas-regs

Feb. 2007 where he warned what would happen if the country continued to run high inflation for a long time when it has a fixed exchange rate. Indeed, what would have happened without the IMF-EU loan?

but then if this is not a doomsday scenario in Latvian popular discourse then what is?

To Hansen – we lost the money we never had. That’s all the story.
In this crisis 50% is nothing more than lost hope for free launch, another 50% is damaged economy – like banana republic, based on few industries and few oligarhs controlling resources.

30.
question for Mr Hansen
2010. gada 2. aprīlis, 08:50

“28.
jautajumi
2010. gada 1. aprīlis, 09:11

/…../ For an article you could look at:
http://www.diena.lv/lat/arhivs/komentari-un-viedokli/vai-atgriezas-lata-devalvacijas-regs

Thanks for the effort, but the archived article is only available to paying subscribers of “Diena.” I can’t bring myself to pay for articles now owned by who-knows-who.

Economists have difficulties to admit that ‘yes, it was the private sector that screw it up’. And Morten, as an expatriate, has difficulties to admit that those were the totally incompetent lunatics in Sweden + Morten’s former students here in banks (I know, I know he is Danish) that did it all. That is the simple truth. The main reason for the Latvian crisis was the speed and size of the inflows + global optimism (and some say the interest rates in the US). Parliamentary democracy simply cannot react so fast. First, if we look at the graph above we see that yes there were clear signs of overheating, observable somewhere from the middle of 2006. Unluckily, that coincided with elections. So, realistically ‘the lost time to react’ was from October 2006 to mid 2007. After that it was already too late… How much of surplus we could gather then? One should also remember that it was impossible to build a real horror scenario/any hard landing without assuming a major global catastrophe. And I cannot remember any of the fancy int’l institutions doing that….
That said, of course, we could have done better fiscally. No doubt about it. Look at any country to the North of us. Also all emerging economies were pursuing a more reasonable policy than us. If countries should be ranged according to ‘reasonable policies’ then we do land among the idiots: somewhere between Portugal, Greece and a range of countries in Africa and well below most of Asian, Latin American or other Eastern European countries… Would that matter? A little. Perhaps we would not have to do the 500 consolidation this year. Perhaps the overall drop would be something like 18 %…Not more than that.

Oh. I mean 18% from the annual peak (not from the quarterly).

G.D. if its all the private sector that did it then where was the local regulation? What responsibility did the govt have for regulating the lending market?

Indeed, pre March 2007, there was no proof of income required to take loan, no common loan book, no downpayment. Given that it was the same Swedish banks in Estonia and Latvia, then how would you explain the difference in npls? In Latvia loans late by 90 days are close to 18% of the total, in Estonia its about 6%. If thats not the government’s responsibility then whose is it? the banks? and if its all the bank’s problems then why is there such a huge difference in npls between Estonia and Latvia if it was the same banks.

as to fiscal policy, if an economy is growing 10% a year it doesnt take much to build surpluses, expenditure should not be increased at that speed, nor wages. And if the govt increases wages on average of 30% a year for 3 years, private sector wage increases usually follow public sector increases, then again how can the fault be only on the private sector?

“G.D. if its all the private sector that did it then where was the local regulation? What responsibility did the govt have for regulating the lending market?”

Very little. It is absurd to blame a policeman for a crime. Remember, in those years there was actually no reason to regulate anything because ‘markets knew better’. All through 2006 we had A- grade, the first S&P downgrade came in May 2007. A bit too late, eh? So anyone trying to implement some significant measures would actually say that ‘rating agencies, IMF, WB, OECD and the rest of those people and their global projections are idiots’. On the other hand, all of those institutions admitted that it looks like overheating, therefore, a stricter fiscal policy is warranted… As I said, a lot of things could have been done better. But what I am saying – that would not matter too much, as global projections saw no catastrophe ahead. Therefore, what we could do was something along the lines of the Estonian policy, or Slovak…
About wages: it is pretty difficult to discern a‘convergence’ from a ‘bubble’. Not to say impossible.
About NPLs: there is a diference in output drop between EST and LVA and I am not quite sure about the Estonian accounting. And as far as I see NPLs are not government’s responsibility.

GD

i dont buy your argument sorry. The govt imposed rules in March 2007, they could have done it earlier and that would have stopped some of the worst of the lending boom. There are now some cases where a single person has borrowed at more than 10 banks because no common loan book existed. So yes it was the govt’s responsibility and they in March 2007 took that responsibility and did something. Outside of trying to belittle Estonian accounting you cant say anything about the basic fact that the npls are very very different in Latvia and Estonia and the same banks, the difference in output drop is not big enough to explain it.

As to converagence, its a joke to assume that a 30% pay increase in the public sector is not convergence vs. a bubble. Why is the govt in any country, in particular one with a fixed exchange rate, raising wages 30% a year for 3 years? Of course thats not sustainable, of course that will create a similar momentum in the private sector and will create a consumption boom which is exactly what happened. This is not a debate about bubbles vs. convergence.

“Economists have difficulties to admit that ‘yes, it was the private sector that screw it up’. ”

I’m ain’t an economist, but my mama told me when “the private sector screws it up” the government must step in. And if the government fails to do so it becomes a government screw up.

Latvian Central bank failed to use the basic tool:increase the basic interest rate during the boom and sharply decrease it as soon as it smells of recession.

to boiler, and if 90% of lending takes place in Euros, what would raising the rate to even 50% interest rates have done? probably very little.

I heard that it’s all Alan Greenspan’s fault :)

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