Well, the best thing that can be said about this is that it wasn’t as bad as the 18% contraction recorded in Latvia.

Estonia’s economy contracted the most in at least 15 years in the first quarter, making it the second-worst performance in the European Union. Behind the number lay a sharp fall in consumer spending and a plunge in industrial output. GDP was down by an annual 15.6 percent, the sharpest drop since at least the first quarter of 1994, according to the flash estimate from the statistics office. The fall follows a 9.7 percent drop in the last three months of last year.

The 15.6% year on year was significantly above the consensus forecast for a drop of 12.8 % and even above more “realistic” forecasts like the Danskebank 14.6% guesstimate, and will obviously have implications for all sorts of things, but in particular for the government budget deficit forecast.

The latest round of GDP numbers from all three Baltic states – Lithuanian contracted by 12.6% and Latvian by 18% – all indicate extreme weakness in the respective economies.

Today’s number obviously lends support to the idea that Estonia’s economy might decline by more than 15% in 2009. A lot depends on what the next quarter looks like. If the slowdown accelerates the final annual number might be even worse.

According to the statistics office release, output was broadly down for the majority of economic activities, but the steepest decreases were in manufacturing, construction and the retail trade. Weak external demand added to lack of internal price competitiveness meant exports were a further drag on manufacturing performance. Industrial output fell by more 25% year on year in each of the first three months and retail sales have now been falling for 11 consecutive months. Exports plunged 29 percent in January and 25 percent in February.

The weakness of the GDP number means the budget situation will inevitably have deteriorated further, which means that if the deficit target of 3% of GDP is to be maintained the Estonian government will need to respond with even more painful cuts in spending. In general, the performance does not change the outlook for Estonia to fulfil the Maastricht criteria this year, but it does mean that sticking to the criteria is getting to be a harder task with every passing day.

This is all so tragic, and so foreseeable (viz, my original post here, for example).

Krguman on me:

“Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts.”

Krugman on himself:

“In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)”

The Latvian Financial and Capital Markets Commission yesterday with numbers on domestic loans currently in arrears.

By the end of Q1 2009, loans in arrears in Latvia amounted to 20.5% of the aggregate loan portfolio of Latvian banks (up 5.5 percentage points from the end of 2008). The aggregate loan portfolio of the Latvian banks was worth LVL 16.4bn (approx. EUR 23bn) at the end of March 2009. Of the bank loans issued to households in Latvia, 22.1% were in arrears at the end of March 2009. Furthermore no less than 21% of mortgage loans were in arrears by March.

Danskebank on the Commission report:

We are quite concerned about the speed at which the non-performing loans are rising. Considering the gloomy outlook for the rest of 2009 NPLs are probably set to increase even more. We highlight that there is not a 1:1 relationship between NPLs and loan losses, but nevertheless these data cause us to believe that bank loan losses will go much higher than current levels – particularly in Latvia but also in the other countries.

And finally Krugman, who can speak for both of us here:

“This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.”

Amen to that!

The title to this post poses an interesting question I think, since the answer you give to it would seem to depend more on the meaning you attribute to the word “really” than on any consensually agreed objective fact. This is especially the case since Spain itself has at least two “official” unemployment numbers, so the backround to (and reason for my asking) the question is the apparent divergence between these two numbers (one from the national statistics office, and one from the employment office INEM), both of which were given extensive international press coverage recently, with the ensuing “spread” between one reading and the other causing general confusion and even leading some to question the very validity of the whole Spanish “headcount” process.

As we shall see, what we have here is not necessarily a simple “fudging” of numbers, but rather a conflict between two different ways of measuring unemployment, since the two data sets are compiled using different methodologies. That being said, I am not putting the question on the table to offer any definitive opinion of my own, since I think in a country with an informal economy which amounts to over 20% of the total it is impossible to “really” know how many people are actually working and how many aren’t. What I would like to do is try and clarify a bit better what is actually happening to employment is Spain, highlight just how serious the situation is, and sketch out a bit more of the reality which lies behind the headline data.

But before we get into all that, the really important point to get hold of is that in the sort of economic conditions Spain is experiencing it not the actual headline catching base number that matters (4 million, 3.6 million, or whatever), but rather how quickly the numbers are rising. This detail is important, since it is the rate of increase in unemployment that ultimately determines the rate of increase of two of the other important indicators for the Spanish economy – the volume of non-performing loans and the size of the government fiscal deficit. Continue reading →