Thursday, June 28, 2007

German Unemployment Again

Following this yesterday, there is this in the FT today:

Unemployment in Germany dropped sharply in June, providing an additional fillip to the government of Angela Merkel as the chancellor’s popularity ratings reached new highs.

The number of jobseekers in Europe’s largest economy fell by a seasonally adjusted 37,000 in June, almost double the drop economists were expecting and the steepest fall since March.

Figures released by the Federal Labour Agency yesterday put Germany’s unemployment rate at an adjusted 9.1 per cent.

The unbroken downward trend in joblessness underlines the strength and resilience of Germany’s economic recovery. At an un­adjusted 3.69m, the number of jobseekers in the country is now 1.5m below its peak of early 2005.

Data showed that 8,000 jobs had been created in May, the latest month for which employment figures were available. A rise in vacancies by 11,000 in June demonstrated the tightness of the labour market, which economists think could in time lead to inflationary wage increases.

Industry organisations say that between 40,000 and 50,000 engineering positions cannot be filled. The Federal Labour Agency said its data pointed to a figure of 10,000 to 12,000, with acute shortages in several regions.

Workforce shortages have overtaken unemployment as politicians’ chief economic concern, sparking debate in Berlin about the need for better training.

Another idea being considered in the capital is the introduction of a more welcoming immigration policy aimed at the highly qualified.

Volker Kauder, parliamentary head of Ms Merkel’s Christian Democratic Union, said on Thursday that the coalition would address the issue after the summer with a programme that would focus on improving applicants’ qualifications

“I do not want our companies to behave like some of our football clubs by refusing to train people at home and buying the best players abroad,” he said.

The comment was a response to Annette Schavan, the CDU education minister, who had called for higher, more selective, immigration.

The Social Democratic party, junior member in the coalition, has traditionally been the more sceptical party towards boosting immigration.

Immigration is no vote-winner in Germany, but the SPD’s position and its recent efforts to raise its profile as the more socially responsible party in the ruling alliance have yet to show a positive effect on its flagging ratings.

German Employment May 2007

The latest employment data is out at the German Statistical Office.

The following chart shows the general trend:

Here is the press release:

Supported by the favourable short-term economic trend, the job growth continues which has been observed in Germanyfor about a year now. According to preliminary results of the Federal Statistical Office, in May 2007 there were some 39.4 million persons in employment whose place of residence was in Germany. That is 478,000 (+1.2%) persons more than one year earlier in May 2006.

The employment/population ratio, that is the share of persons in employment in the total population aged 15 to 64 years, was 69.9% and thus 1.4 percentage points higher than one year earlier.

In a year-on-year comparison from April to May 2007, the number of persons in employment was up by 136,000 (+0.3%). When seasonally adjusted, that is upon elimination of the typical seasonal fluctuations, that is an increase by 14,000 persons against the previous month, after rises by 30,000 persons in April and 67,000 persons in March 2007. The slowing down of the seasonally adjusted increase was partly due to the favourable employment trend in the winter months owing to the mild weather.

Tightening German Labour Market

In the FT today:

The tightness of Germany’s employment market has been highlighted in a report from the Federal Labour Agency showing a sharp rise in job vacancies.

Vacancies rose to a seasonally adjusted 737,000 in June, more than twice the average number for 2004, when the agency began recording the data.


Actual vacancies are even higher since the agency only records about 60 per cent of the total figure. Officials said the average time required to fill vacancies was also rising and had now reached more than two months, against 50 days on average last year.

Unemployment in Germany, although still relatively high by western standards at 6.6 per cent, has plunged by almost 1m in the past year as the eurozone’s biggest economy has expanded relatively strongly. Many German companies – particularly in engineering, manufacturing and financial services – are now reporting workforce shortages, which economists fear may eventually result in wage increases, possibly fuelling inflation.

The current shortage of workers and Germany’s rapid demographic decline compared with other European economies have sparked a political debate about whether and how to encourage the immigration of highly qualified foreign professionals.

And this from the Independent:

For a nation that invented the term "guest worker" for its immigrant labourers, Germany is facing the sobering fact that record numbers of its own often highly-qualified citizens are fleeing the country to work abroad in the biggest mass exodus for 60 years.

Figures released by Germany's Federal Statistics Office showed that the number of Germans emigrating rose to 155,290 last year - the highest number since the country's reunification in 1990 - which equalled levels last experienced in the 1940s during the chaotic aftermath of the Second World War.

The statistics, which also revealed that the number of immigrants had declined steadily since 2001, were a stark reminder of the extent of the German economy's decline from the heady 1960s when thousands of mainly Turkish workers flocked to find work in the country.

Leading economists and employers say the trend is alarming. They note that many among Germany's new breed of home-grown "guest workers" are highly-educated management consultants, doctors, dentists, scientists and lawyers.

OECD figures show that Germany is near the top of a league of industrial nations experiencing a brain drain which for the first time since the 1950s now exceeds the number of immigrants.

Stephanie Wahl, of the Institute for Economics, based in Bonn, said that those who are leaving Germany are mostly highly motivated and well educated. "Those coming in are mostly poor, untrained and hardly educated," she added.

Fed up with comparatively poor job prospects at home - where unemployment is as high as 17 per cent in some regions - as well as high taxes and bureaucracy, thousands of Germans have upped sticks for Austria and Switzerland, or emigrated to the United States.

Tuesday, June 26, 2007

FDI In Eastern Europe

The Economist this week:

Foreign direct investment into eastern Europe hit a record US$112bn in 2006, putting the region ahead of Latin America and second only to Asia among emerging markets. Privatisation was again a prominent driver, and its near-exhaustion points to a weaker FDI performance in 2007 and beyond, for eastern Europe is failing to rise to Asia’s competitive challenge. Moreover, there is little evidence yet that EU enlargement is sparking a massive relocation of production within Europe, from West to East.

According to final official data reported by the region's central banks or statistical authorities (supplemented in a few cases by Economist Intelligence Unit or IMF estimates), FDI inflows into the transition economies reached a record total of US$112bn in 2006, up by 45% on the US$77bn received in 2005. The region thus displaced Latin America and the Caribbean as the second most important emerging-market destination for FDI after Asia. Three economies in the region were among the ten emerging market FDI recipients in 2006--Russia (3rd), Poland (8th) and Romania (10th). The US$112bn total inflows represented almost 5% of the transition region's GDP, the highest ratio achieved thus far. For the Balkans the FDI inflows/GDP ratio exceeded 10% in 2006, and it was almost 8% for the Baltics.

There was a very strong increase in FDI flows into Russia, which more than doubled in 2006 to US$28.7bn. The lure of ample market opportunities and very strong consumer spending growth in Russia more than offset the impact of some deterioration in the business environment--especially as far as investment in natural resources is concerned.

FDI inflows into Poland reached US$13.9bn in 2006, a 45% increase on 2005. Unlike in most other high-FDI recipient countries in the region, Poland’s total owed little to privatisations in 2006. The ongoing real-estate boom underpinned much of the increase in FDI, as did an increase in reinvested earnings, indicating growing confidence in the Polish economy. The large US$10.3bn inflow into Hungary was boosted only to a limited extent by large deals such as the US$1.3bn acquisition of MOL's natural gas storage and wholesale trading businesses by Germany's E.On.

Elsewhere, large privatisation deals accounted for a significant portion of FDI inflows in 2006. Fast-growing Romania attracted inflows of US$11.4bn in 2006. Some US$2.8bn of the total was based on the purchase by Austria's Erste Bank of a stake in the country's largest bank, Banca Comerciala Romana. Slovakia’s FDI inflow of almost US$4bn in 2006 partly reflected privatisation inflows from the sale of the power generator Slovenske elektrarne (SE) to Enel (Italy). Croatia's US$3.5bn FDI inflow was based on the sale of pharmaceuticals giant Pliva to Barr for US$2.5bn, and to a lesser extent, another round of privatisation of oil and gas company INA (for some US$500m). In Lithuania the US$1.8bn inflow in 2006 was boosted by the sale of the government's stake in the oil complex Mazeikiu Nafta to Poland's PKN Orlen for US$852m.

Estonia CA Deficit

From Bloomberg today:

Estonia's current-account deficit swelled last quarter to the widest in at least 14 years as soaring wages and consumer borrowing spurred spending on imported cars and clothes.

The deficit, the broadest measure of trade in goods and services, widened to 17.9 percent of gross domestic product from 16.1 percent a year earlier and a revised 17.2 percent in the previous quarter, the Tallinn-based central bank said on its Web site today. The deficit is the highest since at least the first quarter of 1993, when the bank started giving quarterly figures.

Economic growth of 9.8 percent in the first quarter, the second-fastest pace in the European Union, helped trigger a 20 percent surge in wages in the period while credit growth of about 30 percent underpinned household spending. The widening deficit and faster inflation has raised concern the economy may overheat.

``The Estonian economy is living beyond its means,'' said Neil Shearing, an economist at Capital Economics in London, in an e-mailed comment. ``More needs to be done to slow domestic demand. The fiscal position could be further tightened and measures to curb rapid credit growth are needed.''

Estonia's biggest retailer, AS Tallinna Kaubamaja, more than doubled profit in the first quarter at its department stores and supermarkets. New car sales rose 49 percent, according to the association of car sales and service employers, AMTEL. Private consumption jumped 18 percent, the biggest increase in 14 years.

Deficit Outlook

Andres Saarniit, an adviser to the central bank, said the deficit is expected to ``decline in coming years, but still remain sizeable.'' The central bank revised up the 2006 current account deficit to 15.7 percent of GDP from an earlier estimate of 14.8 percent.

The Finance Ministry said it expects the current-account gap to widen further this year, citing fast growth in domestic demand and worsening competitiveness of industries where growing wages make up a bi part of overall costs. It also expects lower demand from abroad due to lower growth in Estonia's export destinations, the ministry added in an e-mailed statement.

Moody's rating service warned today the economy may slow more than expected if confidence slumps among borrowers and banks, which started tightening credit requirements in the first quarter.

Analysts said the risks to the economy were reduced by strong levels of foreign direct investment, which help cover the current account deficit.

``Some comfort is provided by the fact that the financing of the deficit seems to be okay, as 45 percent of the deficit was covered by FDI,'' said Mika Erkkila, a senior analyst with Nordea Bank in Helsinki, in an e-mailed comment.

Polish Unemployment

From Bloomberg today:

June 26 (Bloomberg) -- Poland's unemployment rate fell in May to 13 percent, close to an eight-year low, as economic growth picked up, the Central Statistics Office said in Warsaw.

The number of unemployed totaled 1.985 million, down 5.6 percent from April and 23.1 percent from May last year, when the rate was 16.5 percent.

Polish companies are boosting hiring after the economy expanded 7.4 percent in the first quarter, the fastest rate in a decade. Gross domestic product is expected to grow 6.5 percent this year, compared with 6.1 percent last year.

Moodys on Estonia

From Bloomberg today:

Estonian economic growth could slow more than expected as banks tighten lending and borrowers become more cautious as they worry about the future, Moody's Investors Service said.

A tighter labor supply prevented firms from expanding production in the first quarter, contributing to a slowdown in growth during the period to 9.8 percent, while the Baltic economy could be further hit by a decline in business and consumer confidence, Moody's said in a report today.

``There is a real risk that both banks and borrowers could become much more cautious as economic growth slows, potentially causing a sharper slowdown than expected over the next 18 months,'' Moody's said. ``Although the resulting economic slump could last several years, Moody's would expect growth to gradually return to the long-term potential rate, given the economy's inherent dynamism.''

Estonia's growth, the second-fastest in the European Union at 11.4 percent in 2006, stoked inflation and widened the current account deficit, increasing worries among foreign investors this year that the $15.1 billion economy may overheat and trigger a sharp decline in the growth rate.

The Estonian central bank said last week that soaring real estate prices and ``tension'' about wage increases were boosting the likelihood of a ``hard landing.'' It had forecast in April the economy will grow 8.4 percent this year, and slow to 6.5 percent in 2008.

Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate. Prime Minister Andrus Ansip said last month in an interview that he expects the country to fulfill the inflation criterion in 2010 and switch to Europe's common currency in 2011.

The credit agency said it believes that adopting the euro in 2011 ``is possible but not likely.'' Such a delay should not ``pose any serious problems or threaten the government's creditworthiness'', it added.

Moody's has an Aa1/P-1 foreign currency ceiling for Estonian bonds and rates government bonds at A1 with a positive outlook.

Latvian Inflation Chart

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Latvia Residents and Citizens

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Latvia Remittances

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Latvian Housing

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Latvian CA Deficit Evolution

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Latvia, Imports and Exports

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Latvian CA Deficits Compared

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Latvian Wage Growth

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Latvian Births and Deaths

Latvian PPI

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Latvian Current Account Deficit

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Irish and Latvian Wages Compared

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Latvia Consumer Price Inflation

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Monday, June 25, 2007

Modigliani on Deflation and Housing

I have this old interview between Roach and Modigliani (from 2002) on my site. The grand old man has one or two things to say about housing:

While it may seem that way right now, I have my doubts. I am suspicious of those studies that find the wealth effect is larger from real estate than equities. Theory tells me it should actually be the opposite. That's because the house in part, produces a consumer good -- housing services, which we consume. When the value of the house I inhabit goes up, its implied rental value increases. But that does not significantly improve my spending power, because my imputed rent has gone up as much. Any wealth effect on individually-owned property must net out the consumption of the service we derive from living in our homes. Those adjustments need not be made for stock portfolios. It is possible that new refinancing instruments, such as home equity loans may have temporarily distorted this relationship. But I would view this as a one-time shift, not as a permanent realignment of the link between wealth and consumption.

Bis Quarterly Review June 2007

The latest issue of the BIS quarterly review is out. The FT covers it here, and the official press release is here.

Quarterly Review, June 2007

The BIS Quarterly Review released today is divided into two parts. The first presents an overview of recent developments in financial markets, before turning in more detail to highlights from the latest BIS data on international banking and financial market activity. The second part presents four special feature articles: one on the bond market term premium; another on the BIS statistics on payments and settlements; a third on recent episodes of credit card distress in Asia; and a fourth on liquidity in the Brazilian domestic government bond market.

The Full Text (PDF) is here.

Economic Growth in Estonia

And this from Bloomberg:

Estonia Revises Down Economic Growth to 9.8 Percent

Estonia, the European Union's second fastest growing economy, revised down its economic growth rate in the first quarter to an annual 9.8 percent as the property market cooled and export growth slowed.

The pace of growth was revised from the preliminary estimate of 9.9 percent released May 15, the Tallinn-based statistics office, Statistikaamet, said on its Web site today. The annual rate was the slowest in two years. The Baltic country's economy grew a revised 10.9 percent for the previous three months.

``Domestic demand weakened mainly due to slowing investment growth, even as the warm winter benefited construction,'' Maris Lauri, the chief economist with Hansabank Markets, said in e- mailed comment. ``The worst hit came from modest export growth and continued strong import rise.''

The $15.1 billion economy is poised for a ``soft landing,'' according to the central bank, after rising house prices and higher interest rates slowed growth in the property market in the first quarter and banks including the Baltic region's biggest lender AS Hansapank set stricter mortgage lending criteria.

Unemployment at a 15-year low and a 20 percent increase in wages during the first quarter are still boosting spending power and pushing up inflation, which stood at 5.7 percent in May and forced the government last month to postpone its target for meeting euro-adoption criteria to 2011.

May Overheat

Estonia's inflation and widening current account deficit, at 14.8 percent of GDP in 2006, increased worries among foreign investors and credit agencies earlier this year that the Baltic economy may overheat, similarly to that of neighboring Latvia, and trigger a sharp decline in the growth rate.

``Strong consumer demand coupled with a slowdown in export growth means the external balance is likely to have worsened this quarter,'' Neil Shearing, an economist at Capital Economics in London, said in e-mailed comment. ``We want to see signs that consumption is starting to ease before signaling the all clear on overheating.''

The Finance Ministry said it expected the economy to slow further in the second quarter because order books in construction are declining, retail and service industries are forecasting lower revenue growth and consumer optimism has ``slightly'' declined. A ``consumption boom'' will still persist ``in the near term,'' the ministry said in an e-mailed comment.


Private consumption jumped 18 percent, the biggest increase in 14 years, according to the ministry. Gross fixed capital formation, which includes investment and stock-building, also increased 18 percent, slowing from previous two quarters. Exports of goods and services grew 5 percent from a year earlier, while imports rose 11 percent.

Exports slowed most in fuel shipments and electronics, the Finance Ministry said. Analysts, including Lauri from Hansabank Markets, have said the decline in electronics trade is due to rising wages which are forcing companies such as Elcoteq SE, a Finnish contract manufacturer with a factory in Tallinn and Estonia's biggest exporter, to move its high-volume production to lower-cost countries.

Latvia's economy grew a revised 11.2 percent in the first quarter, the fastest pace in the European Union. Lithuania's economy grew 8.3 percent.


The following from Bloomberg.

Estonia Central Bank Says Wages, Prices Threaten GDP

The Estonian central bank said soaring real estate prices and ``tension'' about wage increases risk destabilizing the economy and fast inflation may keep the Baltic state from adopting the euro before 2011.

The bank forecast in April the $15.1 billion economy will grow 8.4 percent this year, following last year's 11.4 percent expansion, and slow to 6.5 percent in 2008. The central bank today said there was a risk of an even ``sharper'' slowdown in growth.

``Estonia's economic growth'' will ``slow gradually as projected in the forecast,'' the Tallinn-based central bank said in its quarterly economic policy statement. ``However, the risk of a somewhat more abrupt adjustment in the future has increased.''

Estonia's inflation and a widening current-account deficit, at 14.8 percent of gross domestic product in 2006, has raised concern among foreign investors and credit agencies earlier this year that the $15.1 billion economy may overheat, triggering a sudden decline in growth. Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate.

Prime Minister Andrus Ansip said last month in an interview that he expects the country to slow inflation enough by 2010 to switch to Europe's common currency in 2011.

Wage Risk

The central bank also said that the inflation rate, at 5.7 percent in May, is still too high and the risk of a slowdown in wage growth has increased after a 20 percent increase in average wages in the first quarter. It expects consumer prices to rise 5.1 percent this year, well above euro entry criteria, after 4.4 percent in 2006.

``The `soft landing' is still a much more probable scenario than a `hard landing,' '' Deputy Governor Andres Sutt said in an interview today.

He said that a ``soft landing'' would require wage growth to fall into line with productivity increases and credit market growth to become more sustainable.

``We will know by the autumn whether the adjustment of the economy has become permanent,'' he said.

The central bank said labor costs grew ``considerably faster'' than the economy in the first quarter of 2007, which ``refers to decreasing competitiveness and possible stronger inflationary pressures.''

Real Estate Risk

The real estate market was most at risk because of high indebtedness, while developers may have overestimated the strength of demand during the period of rapid growth, it added.

House prices in Estonia's capital, Tallinn, jumped 24.5 percent in the first quarter from a year earlier, the second- fastest growth globally after neighboring Latvia, according to data published last month by Knight Frank residential research in London.

The central bank also said that the government's budget strategy is too ``lax.''

Last month, the cabinet approved a four-year spending plan last week, cutting budget surplus targets in 2008-2011 from 1.5 percent of GDP, announced during a visit by the International Monetary Fund's mission, to 0.5 percent of GDP.

Romanian Rate Cuts

Bloomberg this morning:

Romania's central bank will probably cut its benchmark interest rate for a fourth time this year to slow appreciation of the leu and help narrow the current-account deficit, a survey of economists showed.

The bank will lower the monetary policy rate to 7 percent from 7.25 percent, according to all seven economists in a Bloomberg survey. An announcement is expected late this afternoon in Bucharest.

The leu has appreciated 2.5 percent against the dollar and 4 percent against the euro since the last reduction on May 2. The annual inflation rate has hovered near post-communist lows while the current account gap is expected to widen in 2007 to 12 percent of gross domestic product from 10 percent last year.

The bank has cut its key rate three times this year from 8.75 percent at the end of last year as the annual inflation rate slowed to 3.8 percent in May from 4.9 percent in December. The central bank targets a year-end annual inflation rate of 4 percent, plus or minus 1 percentage point, this year.

So far this year, the leu has gained 7.5 percent against the dollar and 5.8 percent against the euro, making it the world's 10th-best performing currency. The gains helped widen the current- account deficit to 4.5 billion euros ($6 billion) in the first four months of this year from 2.5 billion euros a year earlier.

Another cut would run contrary to advice from the International Monetary Fund, which said in a report at the end of May that the reductions this year were ``premature.''

The IMF predicted much of the inflationary pressure will come from the government's plans to increase spending, widening its budget deficit to 2.8 percent of GDP this year. It says it needs to boost spending on infrastructure and social programs to help catch up with standards in other EU nations.

Sunday, June 24, 2007

Latvians Asked To Kindly Stop Spending

Now here's some timely advice from a politician if ever I saw it:

RIGA - Prime Minister Aigars Kalvitis, speaking in a radio interview over the weekend, appealed to Latvians to do their part in bringing down inflation and stop spending so much money.

Kalvitis asked Latvians to be more thoughtful about borrowing money to buy big-ticket items, warning them that the future generation may be forced to foot the bill.

The prime minister, who is under pressure to cool down the overheating economy, reminded Latvians that inflation is triggered by, among other things, exuberant domestic demand.
His words, however, are likely to fall on deaf ears, as Latvians continue to enjoy the benefits of cheap money and access to property, cars and consumer durables.
The labor market is definitely working against the government after it was announced on May 31 that the average net monthly salary in the first quarter in Latvia rose 33.4 percent year-on-year to 257.35 lats (366.1 euros).
Gross monthly pay in Latvia grew 23 percent in the first quarter to 357.39 lats,
In the public sector, the monthly average net pay increased year-on-year by 35 percent, reaching 291.2 lats, while in the private sector it advanced 33.4 percent to 241.1 lats.

In Riga, the gross monthly pay in the first quarter was 407 lats, a 31.7 percent increase year-on-year.

The steepest – or 44.4 percent – year-on-year rise in average monthly gross salaries was in the electricity, gas and water supply industry, rising from 370.9 lats to 535.8 lats. The rise was due to irregular payments (regular gross pay increase is 29 percent), the statistics office said.
Given the sharp rise in salaries and high domestic consumption, the government on June 1 reiterated that it did not plan to decrease the personal income tax for now.

“With such high domestic consumption, the cutting the personal income tax is out of question,” said Kalvitis.

Finance Minister Oskars Spurdzins told the Baltic News Service earlier that the government could return to the question of reducing income tax no sooner than 2008.

The government decided in principle last year to reduce the income tax gradually within the next few years from the existing rate of 25 percent to 15 percent.

Saturday, June 23, 2007

Estonia's Inflation Problem

The situation in Latvia described in this post is to some extent paralleled in Estonia:

The Estonian central bank said soaring real estate prices and ``tension'' about wage increases risk destabilizing the economy and fast inflation may keep the Baltic state from adopting the euro before 2011.

The bank forecast in April the $15.1 billion economy will grow 8.4 percent this year, following last year's 11.4 percent expansion, and slow to 6.5 percent in 2008. The central bank today said there was a risk of an even ``sharper'' slowdown in growth.

Estonia's inflation and a widening current-account deficit, at 14.8 percent of gross domestic product in 2006, has raised concern among foreign investors and credit agencies earlier this year that the $15.1 billion economy may overheat, triggering a sudden decline in growth. Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate.

The central bank also said that the inflation rate, at 5.7 percent in May, is still too high and the risk of a slowdown in wage growth has increased after a 20 percent increase in average wages in the first quarter. It expects consumer prices to rise 5.1 percent this year, well above euro entry criteria, after 4.4 percent in 2006.

House prices in Estonia's capital, Tallinn, jumped 24.5 percent in the first quarter from a year earlier, the second- fastest growth globally after neighboring Latvia, according to data published last month by Knight Frank residential research in London.

Last month, the cabinet approved a four-year spending plan last week, cutting budget surplus targets in 2008-2011 from 1.5 percent of GDP, announced during a visit by the International Monetary Fund's mission, to 0.5 percent of GDP.

Urmas Paet, Minister of Foreign Affairs of the Republic of Estonia made the follwing points in a speech in May:

Before joining the European Union, there was much talk in Estonia about a large number of employees moving abroad after accession. According to a poll conducted at the time, 42% of the working age population was interested in working abroad, although, only 3% had any serious intentions of actually doing so. The majority of them were interested in working abroad either temporarily, or from time to time.

Actually, the number of those eventually going abroad proved to be quite manageable – it is estimated that about 20,000 Estonians presently work abroad, which is about 3.3% of the working population. Although this number may increase, it must also be kept in mind that many Estonians have already returned home.

It can be assumed, that the main emigration destinations for Estonians will, for the near future, remain: Finland and Sweden due to their cultural and geographical proximity; and the United Kingdom and Ireland due to their language and fair and comprehensible administrative requirements as well as established networks. While many lower skilled workers go abroad for short periods, then in the case of highly qualified workers, it can be assumed that they remain abroad on a more permanent basis, although this is no rule.

The number of foreigners currently employed in Estonia is considerably smaller. It is estimated, that at least 5,000 foreigners are working in our country. The majority of them are from Finland or Ukraine, 35% work in various managerial positions, and 17% are in shipbuilding. When studying their gross wages, it can be said that our fairly strict policy has ensured, at least until now, that the immigration of labour is in most cases limited to qualified and well paid workers. But, at the same time, the question has been raised quite audibly, whether the bureaucracy involved in bringing highly qualified specialists into the country is perhaps too burdensome and time consuming for businesses.

Thus, the main problems with the shortage of workers are associated not with emigration, but more so with the decreasing and ageing of the population, the lack of required qualifications, as well as the fast development of certain sectors, such as the metal industry, manufacturing, electronics and optical equipment. During the last five years, thanks to the improved family support system, the birth rate in Estonia has increased considerably. But unfortunately, the ratio still remains negative – in 2005 the population decreased by 2,966 people. In the long term, the best means for ensuring the longevity of the population is a sound family policy that promotes a higher birth rate.

It has been predicted that, in the next few years, an average of 11.2 thousand people will irreversibly leave our labour market due to various above mentioned factors. At the same time, for rapid economic development, it is necessary to create about 3,800 new jobs a year. The majority of them are being created in the service and industrial sectors, while the number of workers in agriculture is continuing to diminish. Thus, we will require for about 14.5 thousand additional workers every year, primarily technicians, qualified specialists, and specialised managers.

Thursday, June 21, 2007

Skilled labour In Russia

Bloomberg today had this:

Russia's annual inflation rate rose in May to the highest in four months, as a new law on foreign workers boosted prices of fruits and vegetables.

The inflation rate jumped to 7.8 percent from 7.6 percent in April, the Moscow-based Federal Statistics Service said in an e- mailed statement today.

Russia, the world's 10th biggest economy, passed new restrictions this year for foreign employees working in the country's booming retail industry. The government limited the number of trading places given to non-Russians, which boosted food prices and created inflationary pressures, economists said.

Foreign workers could only hold 40 percent of all jobs in the nation's markets beginning Jan. 1 and the blanket ban took effect April 1. The ban on foreign workers was authorized by a government resolution on Dec. 15, after race riots erupted in the northern town of Kondopoga after Chechens killed two Slavic men in a street fight.

Russia needs migrants to boost its labor force, John Litwack, the World Bank's chief economist in Moscow, said last month. Here is part of one of John Litwack's reports:


Considering relatively high wage costs in Russia compared to most other emerging markets, economic growth and competitiveness depend critically on a sufficient supply of highly-skilled and productive workers. In this regard, Russia faces serious problems in both demography and adequate training. In the absence of an acceleration of external migration to Russia, the working age population is due to decline over the medium term (See RER 11). This fact, combined with remaining inefficiencies in the territorial allocation of domestic labor, imply that both external and internal migration will become increasingly critical to Russia’s economic prospects. Results from the ICA survey confirm that many Russian enterprises are already experiencing shortages of skilled labor. Among investment climate constraints, larger Russian manufacturing enterprises rank the importance of “lack of skilled and qualified workforce” only behind taxation (which firms in almost every country rank as a primary constraint). In the survey, twice as many enterprises (27 percent) complained about being understaffed, as opposed to overstaffed (13 percent). Of the firms reporting understaffing, 72 percent complained in particular about a lack of workers with needed skills in the local labor market. Many complaints were also made about wage competition (41 percent), high labor turnover (30 percent), and competition from high labor demand on local markets (23 percent). The overall picture is consistent with one of a significant shortage of qualified labor.

The full report can be found here.

This section in the first Chapter is also interesting:

RER 11 emphasized Russia’s growing needs in both external and internal migration for sustaining rapid growth over the medium and longer term. For external migration, it recommended measures to liberalize and simplify the formal regime in order to bring a large part of the current massive informal migration into the legal sphere. The government has proposed a package of measures for 2007 that is broadly consistent with this overall goal. The liberalization of the migration regime, together with better legal protection of the rights of registered migrants, is a planned part of this package. In its current form, however, new regulations may very well have a net negative effect on migration flows. New measures promise to introduce quotas on migrants that, if enforced, would greatly decrease the number of migrant workers in Russia, as well as regulations that forbid non-citizens to work in open markets. More frequent crackdowns on illegally employed migrants and deportations have become more common. A more hostile and restrictive environment for migrants could have negative consequences for labor supply in Russia. Western European countries face similar conflicting problems of a need for migrant workers and social tensions surrounded mass migration into the country. It should be noted that Russia’s needs in migration are even greater than those of Western Europe.

and this chapter in RER11

Both external immigration and internal migration are crucial for economic growth and welfare in Russia. The country is in the middle of a severe demographic crisis. Ageing and depopulation will most likely continue for decades. In the near future, Russia will also face a particular shortage of working age population. To compensate for this, Russia would need an annual inflow of 1 million immigrants, which is three times as the average official annual flowover the last 15 years, and five times the official flowin recent years. Fortunately, there is a huge potential migrant pool of millions of skilled Russian-speaking residents in former Soviet countries. A legacy of the Soviet period is an irrational geographic allocation of labor and a shortage of larger cities that could be the focal point for diversified growth and development. Social welfare and economic development in Russia depend on fluid and substantial internal migration flows. Policies related to international and internal migration deserve serious attention.

While the population in Russia has been gradually falling since 1992, the decline
in working age population will be especially severe after 2007, especially in central regions, as a long-termconsequence of birth rate behavior in 1980s.10 In order to fully compensate for this drop, there would need to be an annual inflow of about 1 million working age migrants, a number which is three times the average net inflow in the years between the Censuses of 1989 and 2002.

Although Russia’s demographic problems are more serious than those in the European Union, there has been no consistent policy to attract foreign labor, especially high-skilled workers. Instead, the regulatory framework in recent years has become increasingly restrictive towards immigrants. As these regulations are not perfectly enforced and there is no visa regime within the FSU, immigration flows have nevertheless been quite substantial, especially migration from Central Asia (Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan, and Kyrgyzstan) and the Slavic CIS countries (Belarus, Ukraine, and Moldova). The returns to migration fromthese countries remain large. Although undocumented labor flows are not directly observable, data on remittances can be used as s a proxy. Even though the balanceof- payments-based IMF data most likely underestimate the magnitude of remittances, they are still very large, especially for the poorest former Soviet countries (Figure 13). The pattern in Figure 3.1 is consistent with the view that CIS-Russia migration is driven primarily by huge income differentials.

As for the case of international migration, official data underestimate the extent of internal migration flows in Russia. But a numbers of studies have examined the question of internal migration that use a combination of official data, census data, and survey data. On the one hand, internal migration flows in Russia do appear rational in their response to differences in economic conditions. The main trend has been a substantial flow of migrants from colder and more isolated regions to cities in warmer regions. The latest Census revealed that a number of warmer European regions experienced population growth of over 10 percent during 1999-2002, while quite a few Northern and Eastern regions experienced population declines of the same magnitude or greater.17 Economic factors such as real incomes, unemployment, and public goods provision appear to affect migration in an intuitive way. On the other hand, interregional migration flows appear to be rather slow by international standards, and have apparently not picked up in recent years in response to greater regional differences in wages and standard of living.

Immigrants Benefit US by $30bn

The contents of this article (below) are hardly new, but it is interesting to see them gaining currency.

The following point (which is evident):

It also recognises that unskilled immigrants may impose a very small fiscal cost on the government and that more immigration will not solve the problem of financing Social Security and Medicare.

is dealt with in this post. The key point is that it is obvious that more immigration will not SOLVE the financing issue, but it can HELP. Why do people find it so difficult to apply simple reasoning and quantifiers? I think many people are still struggling to understand the difference between *all* and *some*.


Native-born American workers benefit from immigration by more than $30bn (€22bn) a year, President George W. Bush’s leading economic team claimed on Wednesday.

The report by the Council of Economic Advisers cites research showing immigrants on average also have a “slightly positive” impact on government finances. But it concedes unskilled immigrants may put downward pressure on the position of unskilled native workers.

It also recognises that unskilled immigrants may impose a very small fiscal cost on the government and that more immigration will not solve the problem of financing Social Security and Medicare.

The report comes as Mr Bush and other supporters of immigration reforms – designed to offer a path to US citizenship for illegal migrants and create a new guest-worker programme while beefing up border security – are struggling to keep bipartisan legislation on the issue alive.

The report says immigration changes the relative supply of factors such as unskilled labour, skilled labour and capital in the economy.

“US natives tend to benefit from immigration precisely because immigrants are not exactly like natives in terms of their productive characteristics and factor endowments,” it argues.

Because natives tend to be disproportionately low skilled or highly skilled, they complement, rather than substitute for, the typical American worker.

The CEA also argues that “sharply reducing immigration would be a poorly targeted and inefficient way to assist low-income Americans”.

In addition the report observes that immigrants tend to be more entre­preneurial than native-born Americans, and have lower crime rates.

It finds the fiscal gains from skilled immigration greatly exceed those from unskilled migration, citing a study that estimates skilled immigrants and their descendants contribute a net $198,000 on average to public finances, while those with only a high school diploma cost a net $13,000.

Wednesday, June 20, 2007

External Debta and Net Foreign Liabilities Eastern Europe

Ageing in Eastern Europe and Central Asia

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Changes in Population Age Groups 2006 - 2025

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Eastern Europe Convergence

Polish Wages Rise

According to this Bloomberg article:

Average gross wages grew an annual 8.9 percent in May, after rising 8.4 percent in April, and exceeded the 8.2 percent forecast in a Bloomberg News survey. Expectations central bank policy makers may lift rates as soon as July to curb inflation last week pushed Polish five-year bond yields to levels not seen since September.

Poland's main interest rate is currently 4.25 percent after a quarter-point increase in April, the first in almost three years. Forward-rate agreements show investors expect the central bank to boost borrowing costs by around 50 basis points this year.

And according to this Bloomberg article:

Polish nurses and midwives demonstrated in Warsaw today for higher wages along with striking doctors, who walked off their jobs almost four weeks ago for similar reasons.

According to police figures, about 4,500 protesters took part in the demonstration. Organizers said some 20,000 participated, private broadcaster TVN24 reported.

The starting gross monthly salary for Polish nurses can be as low as 1,100 zloty ($388), said Dorota Gardias, the head of the Polish Nurses and Midwives' Union, in a telephone interview, compared with an average monthly wage of $981 in May. In addition, wages are not regulated nationwide and vary from hospital to hospital, a situation that must also change, Gardias said.

More than 5 percent of Poland's 120,000 doctors and dentists have left to work elsewhere in the European Union since the country became a member in 2004, according to the Supreme Chamber of Medical Doctors in Warsaw.

Finance Minister Zyta Gilowska said this month that raising doctors' wages is out of the question because it will increase public debt too much. Kaczynski said today he would ``not allow'' a situation that will endanger plans to develop Poland and spur faster economic growth.

Kaczynski has said the state budget can't afford the wage increases sought by various groups, including teachers and railway workers. Poland is struggling to reduce its budget deficit to within EU limits in order to qualify for euro- adoption, a requirement of its accession to the bloc.

China Factory Investment

According to this Bloomberg article:

China's factory and property investment surged, fueling speculation that an interest-rate increase is imminent after exports, industrial production and inflation accelerated. Fixed-asset investment in urban areas rose 25.9 percent in the first five months from a year earlier to 3.2 trillion yuan ($420 billion), the statistics bureau said in Beijing today. The increase was 25.5 percent in the first four months. The final indicator for May underscores the government's failure to cool an economy that grew 11.1 percent in the first quarter.

China raised borrowing costs and deposit rates on May 18, pushing the benchmark one-year lending rate to 6.57 percent and the deposit rate to 3.06 percent, still less than the inflation rate. The central bank has also ordered lenders to set aside more reserves five times this year.

nflation accelerated to 3.4 percent in May, the highest rate since February 2005. Industrial production jumped 18.1 percent. Exports surged 28.7 percent and the trade surplus swelled 73 percent to $22.5 billion, pumping the financial system full of cash.

The number of new investment projects in the first five months was 74,701, an increase of 7,282 from a year earlier, the statistics bureau said. Investment grew 30.3 percent in the first five months of last year and 24.5 percent in all of 2006.

Spending by industries producing non-ferrous metals jumped 40.7 percent in the first five months from a year earlier, while real estate investment climbed 27.5 percent.

Azerbaijan Economy

According to this Bloomberg article:

Azerbaijan's economy, the world's fastest growing, will probably expand more than 35 percent this year as oil exports accelerate, Economic Development Minister Heydar Babayev said.

Growth in the $21 billion economy accelerated to 41.7 percent in the first three months of the year from 39.5 percent in the same period a year ago, more than triple the rate in China and Latvia, which has the European Union's fastest expanding economy. Non-oil gross domestic product makes up 12 percent of growth, helped by industrial output.

Azerbaijan, a former Soviet republic located on the Caspian Sea with 0.6 percent of the world's proven oil reserves, shipped 50 percent more oil last year than in 2005.

Natural gas production in 2008 will rise by a third to 8 billion cubic meters.

Growth in the country of 8.1 million has brought ``many problems,'' the 50-year-old Babayev said, speaking during a meeting of leaders from Georgia, Ukraine, Azerbaijan, Poland, Lithuania and Moldova. Inflation accelerated to 16.7 percent in the first quarter, compared with 5.4 percent in the same period a year ago, according to Bloomberg data.

The national currency, the manat, will strengthen as much as 7 percent against the U.S. dollar this year which may help the government to slow inflation, Babayev said. The manat traded at 0.8563 against the dollar today in Baku, compared with 0.897 almost a year ago, according to Azerbaijan's central bank.

The International Monetary Fund in February predicted growth would be 29 percent this year, down from 31 percent in 2006 while average annual inflation would accelerate to 21.1 percent from 8.4 percent last year. It suggested the central bank and government work together to allow the currency to appreciate further while also curbing government spending to slow inflation.

Bulgarian Growth

According to this Bloomberg article:

Bulgaria's economy accelerated in the first quarter, driven by consumer spending and investment during the first three months of European Union membership.

The Balkan country's $31.5 billion economy grew an annual 6.2 percent, compared with 5.7 percent in the previous three-month period, the statistics office said in an e-mailed statement from Sofia today. The result beat the median estimate of 6 percent by five economists surveyed by Bloomberg. The economy grew 5.5 percent in first quarter of 2006.

Bulgaria sold its Jan. 1 EU entry on promises that membership will drive up wages and investment and help the economy catch up with the rest of the EU. Gross domestic product in the 13-nation euro zone, where 65 percent of Bulgarian goods are sold, expanded 3 percent in the first quarter.

The nation of 7.8 million people has per-capita GDP that is one-third of the EU average, the lowest in the bloc, and relies on growth to raise living standards.

Growth in 2006 slowed to 6.1 percent from a revised 6.2 percent in 2005. Bulgaria's growth rate trails other EU countries, including Lithuania and Latvia, which grew an annual 16.6 percent and 11.2 percent, respectively.

Gross fixed capital formation grew 36 percent in the third quarter after increasing 23.8 percent in the fourth quarter on imports of equipment and new cars, while end-user consumption rose 7 percent, after 6.1 percent growth in the fourth quarter, the statistics office said.

Exports rose 2.2 percent and accounted for 60.1 percent of GDP from 55 percent in the fourth quarter. Imports rose 13.2 percent comprising 88.8 percent of GDP from 83 percent in the previous quarter.

Gross value added by industry rose 7.6 percent and accounted for 27.4 percent of GDP, the office said. Services' GVA rose 8.1 percent, comprising 50.5 percent of GDP. Agriculture's gross value added rose 2.5 percent, while its share of GDP shrank to 3.8 percent from 5.4 percent in the fourth quarter.

Foreign investment reached 4 billion euros ($5.3 billion) in 2006, a 17-year record. January-April investment was 1.15 billion euros.


Of course, all this growth is producing a pretty dramatic decline in unemployment:

As can be seen from this Eurostat chart, wages costs in Bulgaria rose by some 15.9% y-o-y in Q1 2007. So given the dramatic rate at which unemployment is declining the capacity issue is likely to arise pretty quickly. In fact the unemployment rate in Bulgaria in May 2007 is set to decrease to nearly 8.0% compared to 8.38% in April, according to Labour and Social Policy Minister Emilia Maslarova.

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According to this Bloomberg article:

Austrian Financial Stability Reports

The Austrian National Bank has a series of Financial Stability Reports here.

Common Characteristics of Foreign Currency Loans

Based on the Austrian Experience

A foreign currency loan is a loan denominated in a currency other than that of the borrowers home country that must be repaid also in this currency. The majority of foreign currency loans are granted with a maturity of up to 25 years, but are rolled over every three or six months; the interest rate is linked to the London Interbank Offered Rate (LIBOR) of the relevant currency. The bank charges an additional 1.5% to 2%, depending on the size of the loan, the nature of customer relations, the collateral provided, etc.2) Interest (and principal) payments are due retroactively upon maturity and have to be made in the currency in which the loan is denominated. In many cases, the borrower may repay the loan before it is due or switch to another currency (including euro) at the rollover dates.

Loans denominated in a foreign currency are usually bullet loans combined with funding plans, which may differ from bank to bank. This means that until maturity, the borrower makes only interest payments. In addition, the borrower pays into a repayment vehicle during this period, for instance a life insurance policy or a mutual fund, which is to cover the principal to be repaid at maturity. Foreign currency loans at fixed interest rates are granted very rarely. The minimum amount required for currency swaps involving Japanese yen, for instance, would be too high; such arrangements may only be made in Swiss francs by large Austrian banks which are active in the Swiss market. In this case, however, borrowers do not have the option to cancel the foreign currency loan before maturity.

Austrian Foreign Currency Lending

1995, approximately, marked the beginning of a broadly based boom in foreign currency lending to both businesses and households; the preferred currencies were the Swiss franc and, more recently and increasingly, the Japanese yen. Foreign currency-denominated loans accounted for more than half of the increase in Austrian banks lending to businesses and almost two thirds of the increase in lending to households between the end of 1995 and mid-2002. In this period, the amount of foreign currency loans outstanding rose more than fivefold, which equals an average annual growth rate of 29%.1) In several quarters, the foreign currency share of the net change in bank lending came to more than 100%, i.e. in these periods, on balance, schilling- or euro-denominated loans were converted into foreign currency loans. By mid-2002, 19.4% of banks loans to businesses and 24.1% of loans to households were denominated in a foreign currency, compared to 7.8% and 1.5%, respectively, at the end of 1995 (including the euro legacy currencies).

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Early in the boom, the bulk of foreign currency loans was taken out in Swiss francs; from about 1999 on, the Japanese yen gained in popularity, accounting for 42% of the total amount of foreign currency loans at mid-2002. Up to end-1998, lending in Deutsche mark also played a major role. Given the close trade links between Austria and Germany, it can be assumed that loans in Deutsche mark were extended primarily to enterprises, which also seem to have been virtually the sole borrowers of U.S. dollar-denominated funds in Austria. A comparison with currency shares in foreign trade shows that, by contrast, the bulk of Swiss franc- and Japanese yen-denominated loans is not used for external transactions.)