Baltic Crisis Not As Bad As It Seems

One aspect of the previously discussed dramatic current account balance adjustment in Latvia, which has swung from a extremely large deficit to a surplus which is also becoming extremely large is that this tells us that the slump really hasn’t been fully as bad as the GDP numbers would suggest. It’s been bad, but not that bad.

Between the second quarter of 2008 and the second quarter of 2009, the balance went from a deficit of 587 million lats (1 lat is equal to €1.42 or $2) to a surplus of 480 million, a shift from a deficit of about 13-14% of GDP to a surplus about as large relative to GDP (The reason why a smaller number in 2009 is similar in relation to GDP is because GDP has fallen). The goods & services trade balance went from a deficit of about 520 million lats in Q2 2008 to a deficit of just 2 million lats. This limited the decline in GDP by more than ten percentage points, but it is already included in the final number.

The factor income balance changed just as much, from a deficit of 200 million lats in Q2 2008 to a surplus of 319 million lats in Q2 2009. But since changes in factor income is not included in the GDP number, while it nevertheless constitutes a change in net income for Latvians, this means that the decline in national income was about ten percentage points lower.

The story is similar in Estonia, though somewhat less dramatic, where the investment income improved by EEK 3.3 billion between Q2 2008 and Q2 2009, which is roughly 6.5% of GDP.

(Lithuania has experienced similar changes in its current account and factor income balances, but no detailed numbers for the second quarter is yet available).

What this means is not really however that the Baltic crisis hasn’t produced as big losses for the world as a whole as the GDP numbers suggest. It does however mean that the crisis hasn’t hit the people in the Baltic countries as hard as the GDP numbers suggests. Their standard of living has “only” declined about 10% or so, instead of the 15-20% that the GDP numbers suggests. Instead, much of the hit has been taken by foreign companies that operate in the Baltic countries, including and especially the Swedish banks (Mainly Swedbank and SEB) that helped create the problems through their reckless lending.

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Technorati Tags: Account Balance, Baltic Countries, Current Account, Decline, deficit, Estonia, Factor Income, Gdp, income, Investment Income, lats, Latvia, Lithuania, Losses, Net Income, People, Percentage Points, Q2, Second Quarter, Slump, Standard Of Living, Trade Balance, what this means

Related posts:

1. Baltic Disinflation Continues
2. The Latest On The Baltic States And The Swedish Banks Who Operate There
3. European Demographic Economics
4. "Good" News From Latvia
5. Monetary Timelag In The Baltic States

Tags: Account Balance, Baltic Countries, Current Account, Decline, deficit, Estonia, Factor Income, Gdp, income, Investment Income, lats, Latvia, Lithuania, Losses, Net Income, People, Percentage Points, Q2, Second Quarter, Slump, Standard Of Living, Trade Balance, what this means

This entry was posted on Thursday, August 20th, 2009 at 9:00 am and is filed under Austrian Economics. You can follow any responses to this entry through the RSS 2.0 feed.