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Tuesday, December 11, 2007

Romania Inflation November 2007

Well here it is, I wouldn't say it was exactly good news, but a drop in inflation to an annual 6.67% from an annual 6.84% isn't bad news at any rate, unless you thought inflation was going to suddenly go away it isn't.



On one level you might have thought that the rot had been stopped, but it's not that simple. The month on month rate is 0,93, which is down from last months 0,97. But if we look at the components, then food rose 1,17% month on month, while services rose 1,21 month on month. In October food was up 1.3% over September, while services where only up 0,98. So food seems to be slowing, but price increases in services are accelerating (pass through) and this is not good news.

4 comments:

Hoosier said...

speaking of inflation in Ro and looking at what appears to be a global real estate bubble bursting I wonder if you have any data on what it appears to me a real estate bubble in Ro ( especially in the capital bucharest but also in most of the 200000+ Romanian cities). I calculated roughly the price to income ratio for a grossly average apartment in bucharest and I cajme up with something around 7.5... more than London and definitelly a lot more than LA, Miami or Tampa 9 the areas hardest hit by realestate deflation) in US.

Edward Hugh said...

Hi Hoosier,

Just to let you know I have seen your various comments, and since the other two ask extensive questions I will try to find the time to answer them with the seriousness they deserve over the weekend.

"I wonder if you have any data on what it appears to me a real estate bubble in Ro"

No, I'm afraid I don't have data on this level. It is hard to say whether this is an actual bubble in international comparison terms since they started from such a low base. I am a macro economist, and what I can try to do is estimate the sustainability of what is happening (in terms of the current account deficit, the value of the currency, the trade deficit and the domestic level of inflation). Basically the currency can't have the current level and Romania continue with the domestic inflation process. Either one of two things happen get to happen next.

a) the currency stays put, and we enter a long period of low growth stagflation, like Portugal after 2000, only possibly worse.

b) the currency goes bang, and all that indebtedness becomes unsustainable.

I imagine that the latter is what will happen.

Either way Romania need a longer term fix to the labour supply problem if it wants to grow.

Hoosier said...

fixing the labor force problem will be a daunting task... anyway, Romania government does not seem to be too preoccupied by the problem. in the last 20 year politicians in Ro kept getting sidetracked from the main issues in the country to other problems - mainly political infighting, making and breaking of coalitions, obsession with finding the responsibles for abuses during the communism, etc...

returning to labor market problems it seems there is a sudden shift from a situation of labor excess ( including highly qualified labor - engineers, IT specialists, physicians, nurses)in the 90's to a situation of labor shortages - momentarily mostly in low level jobs but also medium level jobs ( especialy in construction). romania is in dire need of infrastructure development - there are only 3-400km of highways, Bucharest is a traffic nightmare, etc.

there is one succes of economic policy though. after the IT workers were exempted to pay income taxes ( there is a flat 15% income tax that masks though very high social/medical security contributions) thousands of IT people decided to remain in their country. Even though many of those who left in the 90's have not returned, after 2002 very few have continued to leave. that is probably too little too late ( tens of thousands have already left).

as long as Italy and Spain continue to have demand for low skilled Romanian labor there is little chance Romanian firms can compete to attract those workers back. there is modest influx of Chinese and Central Asian labor in textile and construction but I don't think it is statistically significant.

real estate prices even though they started from a very low base have grown hugely. an apartament in Bucharest that in 1995 cost 5-6000$ it is valued now at 75-80.000euros. same amount money will buy you a larger and in a lot more plesantly lanscaped area in Indianapolis, Cincinatti or Cleveland. Average wage in Bucharest was around 300$ in 1995 and it is now only 4-500 Euros.

a lot of foreign investment and remittances from Romanians outside have pushed the prices up. as the global real estate market seems to be heading south I am afraid that the problem may hit Romania even harder exactly at a time when it doesn't need any of this.

btw, demographics ( new household formation) may not help either the real estate market as the number of Romanians in their 20's is decreasing. what goes for the residential construction boom is that the quality of housing stock is relatively poor. over 70% of housing units in Bucharest are in stern communist-style high rise buildings that here in America are called "projects", in London suburbs have started to be demolished since the 90's and in France house the disenfranchised/minorities. The problem is that the land prices outside Bucharest are also exorbitant and a new 100sqm detached house costs over 250.000 euros, probably the same if not more than a similar unit somwhere on Spain's Mediterranean coast. a lot of the construction that is going on now is foreign investment related and speculative ( smels like recent year investment in Miami). the investors hope the prices will stay high or even increase but I doubt there will be enough local purchasing power to sustain it. While there is very likely that wealthy Canadians or west-Europeans might buy condos in Miami I find it hard to believe there will be many Brits or Dutch who will buy houses in the dusty streets of today's Bucharest.

Edward Hugh said...

Hi again,

"fixing the labor force problem will be a daunting task... "

Well obviosuly it will be. This is all a very difficult situation since the problem in principle exists right across central and eastern Europe. There is no easy answer here, but I think a good first step in the right direction would be to recofgnsise that the problem exists, and that in the longer term fertility has something to do with it. In the shorter term simply the massive out migration is a big enough problem.

The difficulty is that at this point in time there is a complete mismatch between people's perception of the problem, and what the problem actually is. Also, as you mention in your first point, excessive optimism and naievity are producing a large rise in property values and growing non-leu indebtedness. Unfortunately all of this can produce a large bump, and after that it isn't at all clear how things can be put straight. I am not optimistic.

"returning to labor market problems it seems there is a sudden shift from a situation of labor excess ( including highly qualified labor - engineers, IT specialists, physicians, nurses)in the 90's to a situation of labor shortages "

Well yes. This is just what ecomic growth does, produce a large demand for labour. The problem is that there is a cohort mismatch here too. In the early 1990s the structure was much better than it is now for facing this kind of rapid growth need. Of course there is also the salary gradient between east and west Europe to think about. So basically, one very large mess.

"as long as Italy and Spain continue to have demand for low skilled Romanian labor there is little chance Romanian firms can compete to attract those workers back."

Well Italy is now entering recession, and the Spanish economy is turning very sharply. So one of the big unknowns at this point is what will happen to the Romanian migrants, will they stick it out, or go back. And in either case, what will be the consequence. I'm afraid this is all very much like a laboratory at the present time.


"a lot of foreign investment and remittances from Romanians outside have pushed the prices up. as the global real estate market seems to be heading south I am afraid that the problem may hit Romania even harder exactly at a time when it doesn't need any of this."

Bassically and broadly I agree with all the points you make. Essentially now we are reduced to watching and waiting. The feeling of impotence that goes with this is more than a little frustrating.

Thanks again for the comments, and do keep reading and chipping in as we go along, this is, I'm afraid, only starting at this point. I have also put another comment up on the neoclassical growth post. Sorry I have taken so long, I am just being kept really busy by all of this right now.