Swedbank Analysis - June 14, 2011

Swedbank Analysis June 14, 2011

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000

E-mail: [email protected] www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720

Hazy inflation trends in the Baltic countries: it’s time to get lucid

• Consumer price inflation in the Baltic countries during 2004-2009 was driven both by fundamental factors (e.g., price and productivity convergence with the ad-vanced EU countries) and a mix of supply and de-mand factors at different stages of the business cycle.

• Recent price developments in 2010-2011 are mainly driven by global commodity prices. As of local factors, there are hints that insufficient competition may also be playing a role, especially for food price inflation.

• Inflation in the Baltic countries is expected to deceler-ate next year, mainly due to stabilising global com-modity prices. But causes for concern are shortage of skilled labour (despite still high overall unemployment) and rising inflation expectations, which might exert upward pressure on wages.

• Timely policy actions are appropriate and necessary. Structural reforms, especially in the labour market, to improve overall flexibility, cost efficiency and produc-tivity, higher price transparency and stronger competi-tion are some of the actions that can help to curb infla-tion in a sustainable way. Fiscal prudency, as well as stable and predictable tax policy are crucial too.

This paper focuses on recent consumer price inflation developments in the Baltic countries, comparing them with those in the European Union (EU). In May 2011, annual consumer price inflation reached 5.4% in Es-tonia, and 5% in Latvia and Lithuania. It is clear that global commodity price growth has been the main factor behind the recent rise in inflation. However, it is crucial to understand what other factors affect price growth in order to forecast inflation and to know what local authorities can and should do to curb inflation.

There are four main reasons why inflation developments are so important to analyse. First, growth in costs of businesses and overall price level can have a direct effect on competitiveness, which is particularly important for the Baltic countries, since their economic recoveries are export driven. Second, since consumer price growth diminishes the purchasing power of households and, very often, that of poorer ones relatively more, social cohesion issues come to the fore. Third, rising inflation may serve as an early sign of a build-up of domestic imbalances in the economy. Fourth, the exit strategy from the recent crisis for Latvia and Lithuania is the in-troduction of the euro in 2014. This implies the necessity to comply with Maastricht criteria, including the one on inflation.

1. Economic background

2004-2007: boom years The accession of the Baltic countries to the EU in May 2004 was followed by large inflows of foreign capital and a very fast and excessive leverag-ing up of the private sector, resulting in a real estate boom-bust scenario. This process was driven by excessive optimism on future incomes, banks’ competition for market shares, and globally high risk appetite. The credit-to-GDP ratio grew to levels comparable to those in advanced economies – loans to resident households and nonfinancial corporations in Estonia went up from 41% of GDP in 2004 to 94% in 2008, in Latvia from 44% to 82%, and in Lithuania from 26% to 59%. In Latvia – and, to a somewhat lesser extent in Lithuania – an expansive fiscal policy has also played a role. Excessive credit growth and optimism in all three Baltic countries resulted in an unsustainable domestic demand expansion, mainly fuelled by pri-vate consumption. Wages grew faster than productivity, thereby worsen-ing external competitiveness (see Section 3 for more details). Ease in getting credit and excessive optimism about future incomes boosted de-mand for real estate, thus causing housing prices to rise dramatically (supported also by an insufficient housing supply). Excessive growth in leverage resulted in rising current account deficits – which peaked at 22.3% of GDP in 2007 in Latvia, 14.5% in Lithuania, and 17.2% in Estonia – ballooning foreign debt, and increasing vulnerability to volatility in access to foreign financing. The correction of built-in imbalances started in 2008-2009 (real estate prices had started to retreat in 2007). The collapse of demand in domes-tic and foreign markets led to a dramatic fall in economic activity. The cumulative fall in GDP was 25% in Latvia, 20% in Estonia, and 17% in Lithuania. This led to an increase in unemployment and reduction in wages. In the first quarter of 2010, the unemployment rate peaked at 20.4% in Latvia and 19.8% in Estonia, while in Lithuania it reached its maximum in the second quarter of 2010 at 18.3%. Gross average monthly wages declined in 2009 by 4.6% in Estonia, by 4.1% in Latvia, and by 4.4% in Lithuania.

2008-2009: recession

With diminished purchasing power and increased uncertainty about future incomes, households’ willingness to spend decreased – domestic de-mand fell and savings rates increased. The household gross savings

2 Swedbank Analysis • June 14, 2011

rate1 rose most in Estonia – from 3.4% in 2008 to 13.3% in 2009; in Lat-via, over the same period, it increased from 5.0% to 9.4%, while in Lithuania it soared from -2.3% to 6.6% (the savings rate was negative in all three countries in 2007). Credit overdues rose, as households lost their incomes or incomes were significantly below those in the boom years. The economic recovery of 2010-2011 has been export driven in all three countries. From the trough in the second half of 2009 to the first quarter of 2011, GDP rose by 10.4% in Estonia, 8.2% in Lithuania, and 3.8% in Latvia. Domestic demand has remained weak, as labour markets natu-rally show signs of revival later than GDP. The structures of economies have become more balanced, and economic restructuring is set to con-tinue (the longest path is for Latvia, where imbalances were the biggest).

2010-2011: recovery

2. Fundamental factors that cause more rapid inflation in the Baltic countries than in the euro area During 2004-2008, consumer prices2 rose by 45% in Latvia, 29% in Esto-nia, and 26% in Lithuania. During the same period, prices in the euro area increased by only 10%. What are the reasons behind this differ-ence? Longer-term and cyclical factors are both at work. In this section, we will look at fundamental longer-term issues and turn to cyclical factors in the next section. Index of consumer prices, 2005=100

80

90

100

110

120

130

140

150

2004 2005 2006 2007 2008 2009 2010 2011

EU27

EAEE

LV

LT

HUPL

Source: Eurostat

Convergence and the Balassa-Samuelson effect The more rapid inflation in the Baltic countries can be partly explained by the Balassa-Samuelson effect. This effect describes the mechanism of the catching-up process, when faster growth in relative productivity in tradable sectors causes quicker wage increases, which are later transmit-ted into the nontradable sectors. This causes higher inflation in the catch-ing-up countries. The Balassa-Samuelson effect in Central and Eastern Europe (CEE) has been widely analysed and by and large confirmed, see Lojschová (2003), Coudert (2004), Mihaljek and Klau (2009), and others. However, there is controversial evidence on the relative size of this effect,

As an economy improves its productivity, price levels rise …

1 The gross savings rate of households is defined as gross savings divided by gross dis-posable income. Gross savings is the part of the gross disposable income that is not spent as final consumption expenditure (thus savings include also repayment of loans). 2 Here, as well as later in the text and in the graphs, the harmonised index of consumer prices (HICP) is used (Eurostat data).

Swedbank Analysis • June 14, 2011 3

because of questions about data reliability, e.g., the empirical split be-tween tradable and nontradable sectors. Another part of the convergence process is an increase in prices, as pro-ducers shift to foreign markets, where prices are higher, and thus (given their constrained capacity), raise prices of their output also in local mar-kets. There is nothing wrong in inflation and price convergence per se, but it becomes more dangerous if prices and wages increase faster than productivity, thereby worsening external competitiveness. Unfortunately, this was exactly the case in all three Baltic countries. The largest excesses were visible in Latvia, where the ratio of the com-parative price level to GDP per employed peaked at 134% in 2008 (being at par with the EU27 average would place the value of this ratio at 100%). This means that prices in Latvia had converged much faster than produc-tivity and GDP per capita in the years following EU accession. In Estonia and Lithuania, the excesses were smaller, but since 2004 they have both lost competitiveness as well, as price levels have increased faster than productivity. The ratio of the comparative price level to productivity peaked in Estonia in 2008 at 111% and in Lithuania at 106% in 2009.

… but price convergence in the Baltics was swifter than productivity con-vergence in 2004-2008.

Relative price level, % of productivity level*, 2000-2009

0

20

40

60

80

100

120

140

EA EE LV LT HU PL* Comparativ e price lev el (% of EU27) / GDP per employ ed (PPP, % of EU27) Source: Eurostat, Swedbank estimations

In 2009, Estonia and Latvia managed to reduce this ratio – it declined to 106% in Estonia and 127% in Latvia, as both countries moved towards a more balanced situation. Most of the rebalancing was achieved through deflation. It is very likely that the situation in these countries continued to improve in 2010 (no data available so far), mostly via productivity gains.

Some of the imbalances corrected in 2009

Comparative price level indices, EU27=100

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

EE

LV

LT

HU

PL

Source: Eurostat


During the recession, a bigger contraction in domestic demand caused a deeper deflation in Latvia – relative price levels declined from 69.2% of the EU27 average in 2008 to 67.3% in 2009. The adjustment in Estonia was also deep – from 71.2% to 69.5%. In Lithuania, however, relative prices remained at a broadly similar level – in 2008 and 2009, they were, respectively, 60.5% and 60.7% of the EU27 average. Compared with the Baltic countries, such CEE countries as Poland and Hungary had more significant corrections of relative price levels in 2009. But this was achieved via depreciation of the zloty and forint. The Baltic countries chose to hold on to their fixed exchange rate regimes vis-à-vis the euro and achieved lower relative price levels via deflation. Comparative price level indices for main product groups, EU27=100 (2009)

0

20

40

60

80

100

120

Housing Food andnon-

alcoholicbeverages

Transport Householdfurnishings

Clothing andfootw ear

EE

LV

LT

HU

PL

Source: Eurostat

Average price levels in the Baltics are still below EU average.

In 2009, the average price level was still below the EU average in the three Baltics: by around 30% in Estonia and Latvia, and 40% in Lithuania. However, clothing and footwear in the Baltic countries was more expen-sive. One possible reason is that the Baltic markets are relatively small – because producers, wholesalers, and retailers cannot benefit from economies of scale, they may be introducing higher markups than their counterparts in Western Europe. Furthermore, lower turnover also nega-tively affects retailers’ bargaining power and their ability to obtain the lowest wholesale prices. Another reason is the popularity of market-places, where a lot of trade is unaccounted for and not taxed and thus cheaper – further reducing the ability of retailers to achieve economies of scale. Since cheaper clothes traded in the markets are at least partly un-accounted for, their prices are not reflected in official statistics and thus inflate the average clothing price level in the country. The recent reces-sion has also increased the popularity of second-hand clothing retail. There are unexpectedly large housing cost differences in the Baltic coun-tries. Lithuania’s price level is at 43.8% of the EU average, whereas Lat-via’s housing costs are at 60.6% and Estonia’s at 71.4% of the EU aver-age. One reason why housing costs are much lower in Lithuania than in the other Baltic countries is the widespread government scheme of hous-ing expense discounts for poor households in the former, which signifi-cantly cuts the average price paid for utilities. Furthermore, Lithuania and Latvia, unlike Estonia, apply a reduced value-added tax (VAT) on heating services. Consumer basket is skewed towards necessities Unfortunately, current global developments have a stronger impact on inflation in the Baltic countries than in the euro area. In the former, food, energy, housing, and transport make up 50-55% of the average house-hold consumer basket, which is above the EU average (47%), especially

Stronger impact from global price growth


for food. Furthermore, poorer households spend an even bigger fraction of their income on these products.3 This means that current inflation hits poorer households the hardest. Weights of main product groups in consumer basket, 2011 (%)

0

5

10

15

20

25

30

Householdequipm.

Clothing &footw ear

Transport Housing Adm. reg.prices

Food &non-

alcoholicbeverages

EE

LV

LT

EA

Source: Eurostat

Food and nonalcoholic beverages make up 25.9% of the average Lithua-nian’s consumer basket, and 24.6% and 23.3% of the respective baskets in Latvia and Estonia. Except for Romania, no other EU country is as highly dependent on food prices as the Baltic countries. Not surprisingly, housing expenses in Lithuania have a lower weight in the consumer basket than in other Baltic or European countries’ baskets. This is directly related to housing costs – as we mentioned above, hous-ing prices are relatively lower in Lithuania, as is correspondingly the weight of these expenditures in the consumer basket. It is interesting that Lithuania has not only a somewhat lower weight for heating expenses, but also the lowest weight for water supply expenditures (4% vs. 7-8% in Estonia, Latvia, and the euro area). One of the possible explanations is the distribution of population between urban and rural areas – house-holds in urban areas more often have self-sustained houses, without cen-tral heating and water. For example, in Lithuanian urban areas, only 6% were living without baths or showers in 2009, whereas there were 36% such households in rural areas. Currently, 66.9% of Lithuanians, 67.5% of Latvians, and 69.4% of Estonians live in urban areas; however, this statistics is slightly distorted, as not all within the country migrants declare the change in their living place. Products with administered prices4 make up 16% of the consumer basket in Lithuania, and 14% in Latvia – well above Estonia and the euro area average (about 11%). The list of administratively regulated prices differs somewhat among the countries. For instance, Estonia is less dependent on natural gas than Latvia and Lithuania, as heating production in Estonia is mainly oil shale based (which is locally produced), while in Latvia and Lithuania mainly natural gas is used.

Larger share of adminis-tered prices in Latvia and Lithuania…

3 For instance, for pensioners in Lithuania, the share of these products in the consumer basket is about 67%; in Latvia, about 62%. 4 Administrated (administratively regulated) prices are those that are set/ approved/ moni-tored by the local or state authorities, mostly in sectors with natural monopolies, e.g., prices of energy, public transportation, health and education, post, railways, etc. An inde-pendent state institution in each country is responsible for regulation of these prices. In Latvia, these are energy (gas, electricity, and heating), telecommunications, water supply, post, and railway. In Lithuania, institutions regulate energy, water, and public transporta-tion, and, in Estonia, energy, water, railways, and electronic and postal communications.


On the one hand, the larger share of administratively regulated prices in Lithuania and Latvia means higher level of state intervention; on the other hand, price regulation must ensure higher consumer protection, at least in theory. This also means that Lithuania should have more levers than Latvia or Estonia to control inflation, at least in the short term. But in prac-tice it does not always guarantee lowest prices. For instance, the sole natural gas supplier to Baltic countries Gazprom kept the delivery price for Lithuania unchanged in 2011 (arguably because of a conflict due to Lithuania’s recent plans to liberalise its gas market in line with EU energy policy), whereas for Latvia and Estonia it was reduced by 15%.

… implies larger influ-ence of local authorities on inflation.

3. Cyclical factors affecting inflation The development of general economic situation and the stage of a busi-ness cycle definitely influence price trends as well. During the three stages of economic development in 2004-2011 (as outlined in Section 1), inflation was supported by a combination of different factors. In the boom years (2004-2007), inflation was mainly demand driven. Rising global commodity prices in 2008 added to consumer price inflation in the Baltics (supply factors). The following recession and demand contraction caused prices to fall in 2009-2010. Currently, domestic demand is still weak and inflation is largely driven by supply factors (see the next section). Demand factors Rising private consumption definitely supported consumer price growth in 2004-2007. As already outlined in Section 1, cheap and easily receivable credit, together with excessive optimism about future incomes of house-holds, was one of the factors that stimulated consumer demand and made it easier for companies to increase their margins, which, in turn, af-fected the overall price level.

Rising consumption dur-ing 2004-2007…

Annual growth of credit stock and private consumption, %

-25

0

25

50

75

2004 2005 2006 2007 2008 2009 2010

Consumpt., EE

Consumpt., LV

Consumpt., LT

Credit, EE

Credit, LV

Credit, LT

Source: Reuters

The overheated labour market due to the booming local economies and the opening up of labour markets after the Baltic countries joined the EU in 2004 (i.e., emigration to the old member states) resulted in labour de-mand sharply exceeding quality labour supply. In competition for labour, companies were outbidding each other, pushing wages above productiv-ity, which increased overall wage expectations. Households’ ability to spend improved, which put additional pressure on inflation. For instance, in 2004-2008, real gross average wages grew by 57% (while average la-


bour productivity by just 17%) in Latvia, 46% (23%) in Lithuania, and 39% (13%) in Estonia.5 With the collapse of economic activity in 2008-2009, unemployment rock-eted, wages declined, and consumer pessimism replaced the previous optimism; meanwhile, households needed to repay their loans. House-hold purchasing power decreased dramatically, putting downward pres-sure on wages – with a lack of demand, firms tend to lower prices to keep those few consumers who are still willing to spend. In Estonia, prices were decreasing in annual terms from June 2009 until February 2010. In Latvia, the period of deflation was from October 2009 until August 2010, while the shortest period of deflation was in Lithuania – only three months at the beginning of 2010.

… a dramatic fall in de-mand in 2008-2009

Nominal gross wage annual growth, %

-20

-10

0

10

20

30

40

2004 2005 2006 2007 2008 2009 2010 2011

Estonia

Latvia

Lithuania

Source: Reuters

Supply factors Wage growth during the boom years affected firms’ production costs – given the widespread optimism engendered by productivity and wage convergence with the old member states and booming consumption, ris-ing labour costs were easily passed onto consumers. However, such a swift and sustained increase in costs eroded the external competitiveness of local producers – see, e.g., Benkovskis et al (2009). In Latvia, the wage increase in 2005-2007 was higher than in the other two countries, indicating that this increase might have put more pressure on consumer prices in Latvia than in Estonia and in Lithuania (thus explaining higher inflation rates and then deeper deflation in Latvia; see the next section).

Increase in labour costs was transferred to con-sumer prices in boom years.

5 It should be taken into account that average labour productivity had already started to fall in 2008 in Estonia and Latvia due to the decline in economic activity (in Lithuania, the fall began in 2009).


Difference between real gross wage and real average labour productivity annual growth rates, pp

-20

-10

0

10

20

2004 2005 2006 2007 2008 2009 2010 2011

Estonia

Latvia

Lithuania

Source: Reuters

All three Baltic countries are small and open economies, with fixed ex-change rates; this makes them extremely open to developments in for-eign markets. If a global shock occurs (e.g., in commodity prices), it will feed through import prices into local consumer prices. For instance, the substantial increase in global commodity prices (especially oil) in 2008 affected import prices in all three countries and, through that, consumer prices.6 Higher global commodity prices have not only direct effects, like an increase in prices of fuel, but also indirect effects, e.g., a rise in hous-ing tariffs (e.g., gas and heating), which are usually linked to oil price de-velopments. Benkovskis et al (2009) show that the largest changes in administrated prices indeed accrue from changes in energy prices.

Some of the inflation has been imported.

Global commodity prices, 2005=100

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 20110

30

60

90

120

150

Total

Food

Non-foodagriculture*Metals

Crude oil (Brent),USD (rs)

Source: Reuters Ecowin

* cotton, timber, w ool, rubber, oils, hides

Tax harmonisation with the EU added to inflation in the Baltics.

In 2004-2008, inflation was also supported by tax harmonisation with the EU (e.g., gradual increases in excise tax rates on tobacco, alcoholic bev-erages, and fuels). Tax hikes were also transferred by wholesalers and retailers to consumer prices.

6 Lithuania differs a bit from Estonia and Latvia, as it has the Mažeikiu Nafta oil refinery plant. Therefore, the share of oil products in Lithuania’s import prices is larger, which means that its import prices are more vulnerable to changes in oil prices in the world mar-ket. However, the effect of this on the HICP is very small.


During the crisis years, wages were reduced (see Section 1), and enter-prises tried to raise effectiveness and productivity. The decrease in la-bour costs allowed many firms to decrease prices as well. Global com-modity prices also fell, thus diminishing prices of imported inputs. The price decrease would have been much deeper, but the governments de-cided to increase their melting revenues by raising taxes (VAT, excise, income tax, etc). These were at least partially transferred into consumer prices – as the domestic demand was very weak and households ex-tremely sensitive towards the price increases (especially of necessities), the companies were forced to squeeze their profit margins as well.7

During recession, pro-duction costs were re-duced, and profit mar-gins squeezed.

4. Current inflation trends: is there a cause for concern? Despite the ongoing deleveraging and still high unemployment rates, which undermine consumer spending and thus put downward pressure on prices, inflation rates are again rising in all three Baltic countries. In April 2011, annual inflation reached 5.4% in Estonia, 4.4% in Latvia, and 4.3% in Lithuania.8 Inflation in Estonia accelerated well before it did in the other Baltic countries; this can partly be explained as an attempt by busi-nesses and households to pre-empt the euro effect. 9 Accession to EMU increased household expectations and consumption, which could have caused some demand-driven inflation. Furthermore, facing somewhat stronger demand in the second half of 2010, producers and retailers in Estonia may have been expecting scrutiny after January 1, 2011 and raised some prices in advance.

Demand factors are still very weak.

Annual growth of consumer prices, %

-8

-4

0

4

8

12

16

20

2004 2005 2006 2007 2008 2009 2010 2011

EA

EE

LV

LT

HU

PL

Source: Eurostat

One of the (supply) factors behind price growth in all three countries is developments in world commodity markets; for instance, global food prices have already exceeded their previous peak in 2008. Still, compar-ing HICP developments across Europe, it can be seen that price growth is somewhat higher in the Baltics and CEE countries than in the euro area.

Part of inflation is im-ported.

7 It is hard to say, though, how big the pass-through was – while in 2009 and early 2010, consumer prices might have risen less than taxes increased, in late 2010-early 2011 the opposite might have been the case (most likely owing to higher inflation expectations). 8 In May 2011, annual growth of national consumer prices reached 5.4% in Estonia, and 5% in Latvia and Lithuania (harmonised consumer price indices are not available yet). 9 Estonia joined the euro zone on 1 January 2011. The official decision on this was made by the EU authorities in July 2010.


It should also be considered that the tax changes in 2010 and early 2011 also influenced current annual price growth. A closer look at annual growth in prices at constant tax rates (i.e., disregarding the impact of tax changes on consumer prices)10 indicates that inflation in Latvia is much lower (just 2.8% vs. 4.1% in March). This is due to the January 2011 changes in VAT and excise tax rates. As there were no major changes in consumption taxes this year in Lithuania and Estonia, their inflation net of taxes is almost the same as the usual HICP inflation (in Estonia, only the excise for tobacco was raised, first in early 2010 and again in 2011).

Part is due to tax hikes.

Annual growth of consumer prices (constant tax rates), %

-8

-4

0

4

8

12

16

20

2004 2005 2006 2007 2008 2009 2010 2011

EAEELVLTHUPL

Source: Eurostat

A closer look at the main product groups of the consumer basket reveals that, currently, consumer price inflation is mainly driven by food, housing, and transport prices (especially in Latvia and Lithuania). Although there are differences in the growth rates of prices for transport and housing be-tween the Baltic countries and the euro area, these differences are not unusually big. For instance, the annual growth of fuel prices in April 2011 was 17.6% in Latvia (partly explainable by excise tax hikes),11 15.6% in Lithuania, 14.6% in the euro area, and 10.5% in Estonia (due to an earlier more rapid rise in the first half of 2010). The annual growth of housing re-lated prices was 7.3% in Latvia (partly explained by VAT changes for electricity, gas, and heating), 6.3% in Lithuania, 5% in the euro area, and 4.1% in Estonia. However, the largest differences in inflation rates are observed for food prices, which is a topic of the next section. Contribution to annual inflation in the first quarter of 2011, pp

-1 0 1 2 3 4 5 6

EU27

EA

EE

LV

LT

Food

Housing

Transport

Other

Source: Eurostat, Swedbank calculation

10 This indicator reflects the theoretical influence of a change in the VAT and excise tax rates (i.e., assuming a full pass-through on prices and no second round effects). 11 Unfortunately, Eurostat does not provide data on HICP at constant tax rates for particu-lar product groups.


5. Current inflation trends: food inflation is disquieting In April 2011, food prices in Estonia were 12.2% higher than a year ago; in Latvia and Lithuania, 9.9% and 10.3% higher, respectively. These in-creases are much higher than in the euro area (2%), albeit similar to such Central and Eastern European countries as Hungary and Poland.

Higher food inflation in the Baltics than in EU27…

Annual growth of consumer prices (food and non-alcoholic beverages), %

-8

-4

0

4

8

12

16

20

24

2004 2005 2006 2007 2008 2009 2010 2011

EAEELVLTHUPL

Source: Eurostat

Demand remains weak in all three Baltic countries due to the still-high unemployment and slow rise in wages; for instance, annual growth of re-tail trade turnover of food items is still negative in Latvia and just about 1% in Estonia and Lithuania (at constant prices). Emigration flows also undermine private consumption since a shrinking population demands less. This implies that supply factors are leading to food price growth. As was shown above, global commodity price growth certainly plays a role; however, the extent it influences consumer price inflation differs across countries. Moreover, price developments differ for various food items. To understand what is behind the more rapid growth of food prices in the Baltic countries vs. that in the euro area, it is important to examine micro factors (i.e. characteristics of particular industries) that might affect con-sumer prices.

… mostly due to supply factors

Annual growth of retail trade turnover – food, beverages, and tobacco (constant prices), s.a. %

-30

-20

-10

0

10

20

30

2004 2005 2006 2007 2008 2009 2010 2011

EA

EE

LV

LT

Source: Eurostat

Annual price growth for meat products is much lower than for food on av-erage, both in the Baltics and in the euro area (although somewhat more rapid in Estonia). Meat product prices in Estonia, Latvia, and Lithuania are still lower than two years ago (i.e., the peak). This can be explained partly by the fact that it is a more expensive good, which can be given up

Price of meat products still lower than two years ago; growth rates are similar to euro area.


if incomes are under pressure. Meat also has shorter due dates and can-not be kept for long. Its price mainly depends on the price of grains, which are the main source of nutrition for livestock, and labour costs. While grain prices surely were rising, producers were also cutting their labour costs. Another issue is regional competition – for local consump-tion, pork (which is the most popular meat) is often imported, Meanwhile, local producers mainly export their meat to Russia, as they find it difficult to compete with cheaper imported products at home. Annual growth of consumer prices (meat), %

-8

-4

0

4

8

12

16

20

24

2004 2005 2006 2007 2008 2009 2010 2011

EA

EE

LV

LT

HU

Source: Eurostat

Prices of bread and cereals, on the other hand, have already surpassed previous peaks, particularly in Estonia and Lithuania. Annual inflation in this sector in April 2011 was much more rapid in the Baltics than in the euro area (2%):14.3% in Estonia, 7.1% in Latvia, and 12% in Lithuania. Prices of bread and cereals in the Baltics follow quite closely global grain price developments. However, grains and wheat are not the largest cost position for bread producers – the share of labour, energy, and logistics costs is bigger. Still, the fact that Baltic producers seem to be much more affected by global grain price developments than European producers on average is a bit puzzling. It may be the case that, while retailers in the Baltics transfer the increase in producer prices straight to consumers, European retailers take part of the price increase on themselves. Another possibility is differences in contract setting between farmers, producers, wholesalers, and retailers – how flexible/rigid are the terms with respect to changes in input prices as well as the length of contracts. These issues require additional micro-level research, which is out of this paper’s scope.

Prices of bread and ce-reals already exceed pre-vious peaks; growth rates are higher than in euro area.

Annual growth of consumer prices (bread and cereals), %

-10

-5

0

5

10

15

20

25

30

35

2004 2005 2006 2007 2008 2009 2010 2011

EA

EE

LV

LT

HU

Source: Eurostat


Grain prices in Europe, EUR/t

0

100

200

300

400

500

600

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Rapeseed

Milling w heat

Source: FOB W-Europe

Dairy product inflation poses the biggest conundrum. In April, prices of milk, cheese, and eggs in Lithuania exceeded those of a year earlier by 14.6%. Corresponding prices in Estonia rose by 15%, and in Latvia by a staggering 21%. These rates by far exceed the annual inflation of these products in the euro area (2.3%). No other country in the EU has double-digit inflation of dairy products; the next biggest inflation is in Bulgaria, where prices are 9.4% higher than a year ago. Of course, it should be taken into consideration that this rapid growth in dairy prices in the Baltics follows a period of swift price declines. However, dairy prices in Latvia and Lithuania have already exceeded their peaks of early 2008, and in Estonia have nearly reached it.

The most rapid price growth for dairy prod-ucts, exceeding previous peaks in Latvia and Lithuania, after swift de-clines of 2009

Annual growth of consumer prices (milk, cheese, and eggs), %

-20

-10

0

10

20

30

40

2004 2005 2006 2007 2008 2009 2010 2011

EA

EE

LV

LT

HU

Source: Eurostat

At the same time, the dynamics of raw milk price developments are much more similar across Europe. In addition, the peak price levels of early 2008 have still not been reached. Of course, price levels differ across countries, as they depend on the size and concentration of dairy markets and regional competition, as well as purchasing power. In the Baltics, Es-tonian and Latvian farmers enjoy somewhat stronger pricing power than those in Lithuania, as there is a bigger share of larger farms in these two countries. Another factor that significantly influences raw milk prices in Latvia is the strategy of Lithuanian dairy producers, who buy a large share of available Latvian raw milk (by offering more attractive prices than Latvian dairy producers), process it in Lithuania, and then sell part of the final production back to Latvia at lower prices than Latvian producers can afford.

Raw milk prices still be-low previous peaks


Raw milk price, EUR/100kg

10

15

20

25

30

35

40

45

2005 2006 2007 2008 2009 2010 2011

Italy

Germany

Lithuania

Estonia

Latvia

Source: CLAL

One of the reasons why Lithuanian producers are able to do this is that they enjoy larger economies of scale and have greater market power. Lithuania is definitely a leader in the Baltics, based on the turnover of dairy processing companies. There is also the largest concentration in Lithuania – the top four dairy producers constitute about 80% of the mar-ket. The market is most fragmented in Latvia, where the top four dairy producers form just about 60% of the market; meanwhile, in Estonia, this group accounts for about 64%.12 Furthermore, in Latvia, capacity utilisa-tion is lower than in Estonia and Lithuania,13 implying inefficiencies in production. In Estonia, an additional factor that drives prices up is the ability of dairy producers to charge higher prices in the local market (as imports constitute a small share of consumption) – the recent pickup in demand from Russia has allowed Estonian dairy producers to increase prices for exports and also motivated them to ask for higher prices in their local market.

Consumer dairy prices depend on producers…

Food prices depend not only on the pricing strategy and power of manu-facturers, but also on those of retailers. The retail market is quite concen-trated in Latvia and Lithuania, but less so in Estonia. In Lithuania, the two largest retail chains (Maxima and Palink) account for close to 60% of the market; in Latvia, about 55% (Rimi Latvia and Maxima Latvia); and in Es-tonia, about 43% (ETK and Rimi).14 In Latvia and Lithuania, the two larg-est retail chains gained market shares during the last years, thus enhanc-ing their dominating position, while in Estonia the two largest lost ground somewhat. In Latvia, all other players are very small (market shares of less than 5% each).

… and retailers

In the case of Latvia, recent discussions in the media and a review by the Latvian Competition Council15 suggest that retail chains is the most im-portant and often the only possibility to distribute locally produced prod-ucts; retailers thus exploit their bargaining power and impose discounts on producer prices, which producers have to accept as they lack an al-ternative way to sell their production in the local market. The Competition Council also concludes that retailers might actually gain additional profits by passing through the increase in commodity and producer prices fully to consumers, since retailers’ markup is usually defined in percentage terms. In Lithuania and Estonia the situation may be better since there are more local retail chains; however, a similar cost pass-through issue exists.

There are indications that retailers might be exploiting their dominant position in the market, especially in Latvia.

12 Data from annual reports of companies and national statistics. 13 Industry analysts’ estimates suggest that capacity utilisation of milk manufacturers is about 50-60% in Latvia, while close to 80-90% in Estonia and Lithuania. 14 Data from annual reports of companies and national statistics. 15 Latvian Competition Council (2011).


There are cases when re-tailer prices are raised more than justified by in-put price growth.

A recent study by the Bank of Estonia shows that the increase in dairy prices for consumers in Estonia was larger than explained by input price developments.16 Also, the Lithuanian Competition Council in autumn 2010 concluded that increase in prices of raw materials did not alone ac-count for the rise in certain food products. The Latvian Competition Council claims that, although, in the majority of cases, dairy and bread price increases of producers and retailers are symmetric, there were cases when retailers were increasing final prices to a larger extent than producers.17 When domestic demand is weak (as it currently is) and if competition is high, one would expect that prices of producers and retail-ers should absorb part of the input price increases, and that final prices should not rise to the same extent. Overall, in these areas, we have more questions than answers. More mi-cro level data are necessary, which we do not have access to, in order to draw conclusions. However, there are hints that regional competition as-pects, as well as possibly inadequate domestic competition, have played a role in food price developments.

5. Room for improvement in product market competition Research supports the relationship between product market competition (usually proxied by markups) and inflation, although there are different opinions on whether this relationship is long-term or short-term. There are studies showing that stronger product market competition leads to a per-manently lower inflation rate, see, e.g., Cavelaars (2002), Przybyla and Roma (2005), but also some concluding that the intensification of compe-tition is a temporary means of curbing price increases and competition loses its explanatory power for inflation rates when longer time spans are considered, e.g., Janger and Schmidt-Dengler (2010).

Stronger product market competition curbs infla-tion pressures…

The economic literature also points to the importance of competition in product markets for easing labour market pressures. Namely, the less competitive are product markets, the more depressing is the effect on la-bour reallocation because of less dynamic firm entry and exit (OECD, 2010). Taking into account sizeable structural unemployment in the Bal-tics, labour reallocation is one of the crucial factors that might help to ease potential imbalances building up in the labour market that may oth-erwise spill over into excessive wage growth and then into inflation.18

… and eases labour mar-ket imbalances.

As it was shown above, there are some indications that competition prob-lems in food processing and retailing might be one of the factors behind the more rapid price growth in the Baltic countries. These indications cer-tainly call for more detailed research. For instance, the Global Competi-tiveness Report by the World Economic Forum suggests that domestic competition in all three Baltic countries has worsened recently relative to other countries. Estonia scores better that Latvia and Lithuania.

16 Lindpere et al (2011). 17 Latvian Competition Council (2011). 18 See our Swedbank Analysis (2010), “High unemployment in Latvia – is it here to stay?” for more details.


Extent of domestic competition, rank out of 139 countries (1 is the best-performing country)

-115-5-9

-15-13

-13

-17

-13-16

-5

-17

0

20

40

60

80

100

120D

omes

ticco

mpe

titio

n,of

that

Inte

nsity

of

loca

lco

mpe

titio

n

Exte

nt o

fm

arke

tdo

min

ance

Effe

ctiv

enes

sof

ant

i-m

onop

oly

polic

y

EE

LV

LT

Source: Global Competitiv eness Report, 2010-2011

change in rank 2009 -2010

Competition authorities have become more active recently in monitoring product markets (especially in Latvia and Lithuania) and inviting produc-ers to complain if they face unfair terms and conditions in their contracts with retailers. In Lithuania, a web portal was created where consumers can see maximum, minimum, and average prices for the most important food items in the retail network (updated each week). There have been cases in Latvia recently in which the Competition Council imposed fines on the two biggest retail chains for abusing their dominant position (e.g., one in late 2010 regarding the dairy industry and another in January 2011 regarding the bakery industry).

Competition authorities in the Baltics have be-come more active.

Profit margins19 of retailers and manufacturers have widened over the last year.20 In Estonia and Lithuania, these groups managed to retain positive profitability throughout the recession. Of course, an increase in profit margins does not necessarily imply a reduction in competition or an increase in prices of final production – companies need to regain profit-ability after a crisis when the profit margins were in most cases squeezed below sustainable levels. Still, profit margins in manufacturing have al-ready approached the levels of 2006-2008 in Latvia and Lithuania (data for 2010 for Estonia are not available).

Profit margins have wid-ened.

Profit margins, %

-4

-2

0

2

4

6

8

10

2006

-07

aver

age

2008

2009

2006

-07

aver

age

2008

2009

9M 2

010

2006

-07

aver

age

2008

2009

9M 2

010

Manufacturing

Domestic trade

Source: ESA, Bank of Latv ia, LDS

EE LV LT

19 Calculated as a profit before tax divided by a turnover. 20 It should be taken into account that a large part of manufacturing output goes to export markets, where the margins could be higher and the average margin in manufacturing is likely to exceed that in domestic market.


6. Inflation outlook One of the forward-looking measures (or leading indicators) that might help to forecast inflation is inflation expectations. The idea behind this is as follows: if households believe that prices will grow faster in the near future, they might cut back their future consumption and increase current consumption. When households believe that prices will rise, they are more ready to accept higher prices; this makes it easier for businesses to increase their final prices. According to a consumer confidence survey,21 the share of consumers who think that prices will continue to rise in the next 12 months has risen in all three countries. Inhabitants see that prices are increasing and tend to believe that they will rise in the future as well (i.e., adaptive expecta-tions).

Inflation expectations have risen.

Price expectations over next 12 months, points (balance of answers)

-60

-40

-20

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011

Estonia

Latvia

Lithuania

Euro area

Source: DG ECFIN

Our recent analysis using Granger tests22 show mixed results on the link-ages between inflation expectations and actual inflation. In the case of Estonia, the test shows that actual inflation is the explaining factor of in-flation expectations (a similar result is presented in Benkovskis et al (2009)), which might, in turn, mean that expectations in Estonia are mostly a backward-looking phenomenon. In the case of Latvia, the results show no clear direction of causality – both variables include information about the other. In the case of Lithuania, expected inflation describes the movements of actual inflation. Therefore, one may conclude that the rela-tionship between inflation expectations and inflation differs across coun-tries. Inflation expectations certainly cannot be used as the sole leading indicator to forecast inflation; other cyclical and fundamental factors, de-scribed above, should also be taken into consideration. However, rapidly growing inflation expectations (similar to the pre-crisis years) should defi-nitely be taken seriously.

21 Data from DG ECFIN. 22 See Swedbank discussion paper, to be published in June 2011. Granger causality tests examine whether information in one variable helps to predict the other (i.e., they may not indicate a strong one-way relationship or the direction of the influence). Monthly data from 1997 till 2011 are used. Test results are available upon request.


Inflation rates to peak this year

We expect prices and productivity to continue to converge in all three Bal-tic countries with that in the advanced EU economies, and a mix of sup-ply and demand factors to drive inflation in the nearest future. We are of the opinion that annual inflation in all three Baltic countries will peak this year. It should be emphasized that we do not see a risk of uncontrolled, runaway inflation; however, we do see certain risks that might cause a more rapid inflation than our base scenario assumes. The influence of demand-side factors is still very weak, although eco-nomic recovery is on the way in all countries. In the first quarter of 2011, Estonia’s GDP was 8.5% higher than a year ago, Lithuania’s GDP rose by 6.9%, and Latvia’s by 3.5%. Labour markets are slowly improving, as are consumer expectations (wage expectations are rising, and fear of un-employment decreasing), and consumer spending is expected to grow slowly. At the same time, deleveraging and growing consumer prices are hindering households’ willingness to spend. Banks have become more conservative in issuing loans than in the boom years but willingness to lend is gradually improving. The outlook for the next two years has im-proved, and the impact of demand-side factors will gradually grow as all three economies continue recovering (a bit slower in Latvia than in Esto-nia and in Lithuania).

Demand-side factors will become more important in the near future...

Supply-side factors will also play a significant role. The main one is global prices of commodities and energy, especially as food, transport, and housing constitute a large share of consumer expenditures. We expect oil and food prices to grow much more slowly next year, partly owing to the slowdown in emerging economies;23 however, the uncertainty with regard to this forecast is high. Labour costs will also grow, thereby increasing production costs, but this growth, at least for now, is expected to be slow.

… but supply-side factors will still play a role.

We anticipate inflation rates to fall somewhat in 2012: in Estonia, from 3.8% this year to 3.2% next year; in Latvia, from 4.2% to 2.6%; and, in Lithuania, from 3.2% to 2.5%. These are April 2011 forecasts, and it is likely that we will revise our 2011 forecast upwards somewhat in August. This is our base scenario, which is, however, prone to several risks (es-pecially on the supply side):

Inflation rates to fall next year, but there are risks to this forecast.

• There is a concern that imbalances might build up again in the

labour markets. For instance, wages were already growing in line with productivity in Estonia and Latvia in the first quarter of this year (see the graph on page 9). In an environment of free labour mobility (and wages in the advanced EU countries that are sig-nificantly higher than those in the Baltics), growing economies (which will need larger labour forces), and poor labour supply (due to emigration, structural unemployment, aging populations, and lack of immigration policies), there is a risk that labour de-mand in the Baltics will significantly exceed the labour supply, and, consequently, that wage growth will exceed that of produc-tivity. Especially taking into account that it will be impossible to hold up such swift productivity growth rates as in the beginning of recovery period – it can be seen that productivity growth is al-ready slowing. Of course, given the recent experience, both fiscal policy and bank lending in the foreseeable future will be more conservative and will not support a buildup of such imbalances as in 2005–2007; nevertheless, it seems that the labour market may still be vulnerable to the same old ills that spurred inflation previ-ously.

23 See Swedbank’s latest Energy and Commodities: May 16, 2011, April 15, 2011, as well as Swedbank Economic Outlook, April 2011


• There is a very high uncertainty with regard to global commodity price developments. It is hard to predict how the political situation in the Middle East and North Africa will evolve, or what will hap-pen with agricultural production (weather conditions, protection-ism risks, etc.). A more rapid global price growth would result in more expensive imports in the Baltics and, thus, higher consumer prices.

• Domestic competition might become a more serious problem. There is a risk that, given the opportunity to raise prices (which, with the rising inflation expectations, is likely), retailers may aim to return to profit margins seen in the boom years more quickly than economic fundamentals would justify.

It can be seen that, for Latvia and Lithuania, the 2012 inflation forecasts are already on the margin of not fulfilling the Maastricht criterion,24 imply-ing that close monitoring of price developments is necessary and that the authorities should step in to ensure that the countries actually introduce the euro in 2014. This stepping in should not be seen as a one-off ma-nipulation, as this would not be perceived as sustainable and would not help to fulfil the Maastricht criterion. In Estonia, the more topical issues related to the relatively high inflation rates are external competitiveness and social cohesion. The next, and concluding, section thus makes policy suggestions to local authorities for reducing inflation rates.

Policy action is needed to curb inflation.

7. Policy options: what to do and not to do to curb inflation

Undoubtedly, the recent rise in inflation in Estonia, Latvia, and Lithuania to a large extent has been driven by commodity price growth in the world markets, which local authorities, businesses, and households cannot influence. However, there are also domestic issues that can and should be addressed – by doing so it is possible to reduce price pressures.

There are three policy areas in which action can be taken to address the inflation problem: monetary, fiscal, and structural policies. By altering bank reserve requirements, adjusting interest rates, and raising public awareness of the issue, a central bank can affect inflation and its expectations. However, given the existing exchange rate regimes, monetary policy is largely exogenous in the Baltic countries, having only a very remote and indirect impact on inflation dynamics. Fiscal policy, especially in Latvia and Lithuania, is constrained by the necessity to carry on with budget consolidation – its main avenue to curb inflation is via the deflationary effects of expenditure cuts and the clear communication of future actions so as to reduce uncertainty and inflation expectations. Thus, the most versatile and influential – but, unfortunately, also the most complex and time-consuming – policy area is structural policy, which extends over a wide range of fields: competition, corruption, labour market, etc. To have a strong and lasting result on inflation, all three policy areas must be explored concurrently.

One of the major issues is competition policy and the transparency of a price formation mechanism. Strengthening competition, especially between retailers, would weaken their ability to raise profit margins and pass cost increases on to consumers. Measures include strengthening

DO: strengthen competi-tion and improve price transparency

24 12-month average inflation should not exceed the result of the three best-performing EU countries (i.e., those with the lowest inflation) by more than 1.5 percentage points. According to the autumn 2010 forecasts of the European Commission, this criterion could be about 2.4% in 2012.


Competition Councils’ capacity to monitor the market’s micro structure in order to identify abuses of the dominant position, easing entry of new market players, and making it easier for consumers to compare prices across shops (e.g., online weekly monitor of average, maximum, and minimum prices of the main food items has been introduced in Lithuania). Bringing competition into the public sector service provision (e.g., by privatisation and/ or introduction of “money follows” schemes, like students’ vouchers in Lithuania) is yet another solution.

The source of the problem should not be misunderstood, though. For instance, in Lithuania, an outright regulation of mark-ups has been proposed several times (especially when elections approach). Although the setting markups is a must in administratively regulated sectors, it would by and large be a mistake to try to enforce similar regulations in the private sector – a well-designed and strong competition policy would provide a more efficient, transparent and sustainable solution.

Another area where improvements can be made is by raising productivity and cost efficiency. Whatever permits to cut costs will lower prices if competition is fierce. This certainly is in the companies’ competence, but authorities can support and speed up this process by lifting administrative barriers and encouraging a more effective and targeted acquisition of EU funds. Given that energy costs have been particularly volatile and directly (e.g., heating) and/ or indirectly (e.g., as food producers’ costs) form a key part of HICP, improving energy efficiency in order to reduce energy dependency should be one of the key objectives (especially since EU funds support this objective). It also includes strengthening the capacity of the regulatory authorities25 that oversee monopolies and the provision of public services to set the lowest possible tariffs by being able to carefully vet their cost structures.

DO: raise productivity and cost efficiency

The factor that has definitely added to inflation during the last two years is tax hikes. Further government budget consolidation attempts in Latvia and Lithuania must exclude tax burden increases (especially that of VAT and excises) and centre on expenditure cuts and the eradication of the shadow economy. Unfortunately, the shadow economy has expanded in all three countries. This, however, does not preclude a rebalancing of the overall tax burden by, for instance, reducing labour taxes to foster job creation and compensating for this reduction by raising the real estate tax. For instance, a decrease in labour taxes is planned in 2013 in Estonia. A clear and timely communication of tax changes (or none of them) is crucial to diminish consumers’ inflation expectations.

DO NOT: increase tax burden

One of the measures recently discussed in the Latvian media to curb inflation is a wage freeze in the public sector (and possible agreements with social partners to do the same in the private sector). We are of the opinion that such a measure would clearly be counterproductive and misplaced – inflation is driven predominately by supply-side factors, while private consumption remains very weak. Furthermore, when wage growth is justified by productivity gains (which is currently the case in the Baltics, especially in the exporting sectors), wage growth controls in the private sector with free labour market mobility would simply boost emigration and push wages even higher, due to the lack of labour. It should be noted that the current slow income growth is largely “eaten up” by inflation, and households’ purchasing power is thus improving only marginally.

DO NOT: freeze wages

Yet, keeping a close track of labour market developments is important and should not be underestimated. To reduce the labour market risks described in the previous section, reforms in labour markets must

DO: improve labour market efficiency and sustainability

25 The Public Utilities Commission in Latvia, Regulatory Division of Competition Au-thority in Estonia, and National Control Commission for Price and Energy in Lithuania.


deepen. To mention just a few of the major avenues for economic policy action: cut structural unemployment by improving skills of job seekers and support labour reallocation between sectors and regions (inside the countries), discuss and design skills based immigration policies, and promote the alignment of wage growth with that of the underlying labour productivity.

Lija Strašuna Mārtiņš Kazāks Nerijus Mačiulis Annika Paabut


Abbreviations CEE – Central and Eastern Europe DG ECFIN – European Commission's Directorate-General for Economic EA – Euro area EE – Estonia EMU – European Monetary Union ESA – Statistics Estonia EU – European Union HICP – Harmonized index of consumer prices HU – Hungary LDS – Lithuanian Department of Statistics LT – Lithuania LV – Latvia PL – Poland

References Benkovskis, K., Kulikov, D., Paula, D., Ruud, L. ”Inflatsioon Balti riikides” [”Inflation in Baltic States”], Kroon ja Majandus 2/2009, Bank of Estonia

Cavelaars, Paul (2002), “Does competition enhancement have perma-nent inflation effects?”, De Nederlandsche Bank Research report

Coudert, V. (2004). Measuring the Balassa-Samuelson effect for the countries of Central and Eastern Europe? Banque de France Bulletin Di-gest.

Ed. Lindpere, M. (co-authors Soosaar, O., Pungas, K., Lambing, M.) “Kuidas Eesti toiduaineteturg turuosalisi teenib? Valik mõttearendusi” [“How food market serves the market participants? Selection of lines of reasoning”] May 2011, Bank of Estonia

Janger, Jürgen, Philipp Schmidt-Dengler (2010), ”The relationship be-tween competition and inflation”, Monetary policy and the economy Q1/10, Austrian Central Bank, p.53-65

Latvian Competition Council (2011). “Secinājumi par piena produktu un maizes tirgu” (Conclusions about dairy and bakery markets), http://www.kp.gov.lv/uploaded_files/KPPP085PienaSecinajumi.pdf (in Latvian)

Lojschová, A. (2003). Estimating the Impact of Balassa-Samuelson Effect in Transition Economies.

Mihaljek, D. and Klau, M. (2009). Catching Up and Inflation in the Baltics and Southeastern Europe: the Role of Ballasa-Samuelson effect.

OECD (2010), “Moving beyond the jobs crisis,” OECD Employment Out-look 2010, Chapter 3: Institutional and policy determinants of labour mar-ket flows

Przybyla, Marcin, Moreno Roma (2005), Does product market competi-tion reduce inflation? Evidence from EU countries and sectors, Working Paper No. 453, European Central Bank


http://www.kp.gov.lv/uploaded_files/KPPP085PienaSecinajumi.pdf

Economic Research Department

Sweden Cecilia Hermansson +46 8 5859 7720 [email protected] Group Chief Economist Chief Economist, Sweden Magnus Alvesson +46 8 5859 3341 [email protected] Senior Economist Jörgen Kennemar +46 8 5859 7730 [email protected] Senior Economist Anna Ibegbulem +46 8 5859 7740 [email protected] Assistent Estonia Annika Paabut +372 888 5440 [email protected] Acting Chief Economist Elina Allikalt +372 888 1989 [email protected] Senior Economist

Latvia Mārtiņš Kazāks +371 6 744 5859 [email protected] Deputy Group Chief Economist Chief Economist, Latvia Dainis Stikuts +371 6 744 5844 [email protected] Senior Economist Lija Strašuna +371 6 744 5875 [email protected] Senior Economist

Lithuania Nerijus Mačiulis +370 5 258 2237 [email protected] Chief Economist, Lithuania Lina Vrubliauskienė +370 5 258 2275 [email protected] Senior Economist


Disclaimer This research report has been prepared by economists of Swedbank’s Economic Re-search Department. The Economic Research Department consists of research units in Estonia, Latvia, Lithuania, and Sweden, is independent of other departments of Swed-bank AB (publ) (“Swedbank”) and responsible for preparing reports on global and home market economic developments. The activities of this research department differ from the activities of other departments of Swedbank, and therefore the opinions expressed in the reports are independent from interests and opinions that might be expressed by other employees of Swedbank.

This report is based on information available to the public, which is deemed to be reli-able, and reflects the economists’ personal and professional opinions of such informa-tion. It reflects the economists’ best understanding of the information at the moment the research was prepared and due to change of circumstances such understanding might change accordingly.

This report has been prepared pursuant to the best skills of the economists and with re-spect to their best knowledge this report is correct and accurate, however neither Swed-bank nor any enterprise belonging to Swedbank or Swedbank directors, officers, or other employees or affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faults within this report.

Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report and provide financial services (issue loans, among others) to them. Aforemen-tioned circumstances might influence the economic activities of such companies and the prices of securities issued by them.

The research presented to you is of an informative nature. This report should in no way be interpreted as a promise or confirmation of Swedbank or any of its directors, officers, or employees that the events described in the report shall take place or that the forecasts turn out to be accurate. This report is not a recommendation to invest into securities or in any other way enter into any financial transactions based on the report. Swedbank and its directors, officers, or employees shall not be liable for any loss that you may suffer as a result of relying on this report.

We stress that forecasting the developments of the economic environment is somewhat speculative in nature, and the real situation might turn out different from what this report presumes.

IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACT SOLELY ON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTION INDEPEND-ENTLY.

Swedbank Analysis - June 14, 2011

Documents

Transcript of Swedbank Analysis - June 14, 2011