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Euro Area GDP Report: Not Pretty

by Rebecca Wilder

Euro Area GDP Report: Not Pretty

Today Eurostat released the second estimate of Q4 2011 Gross Domestic Product. Real Euro area (EA) GDP declined 0.3% over the quarter (-1.3% on an annualized basis). In this release Eurostat provides a breakdown across region, spending categories, and industry, and is much more detailed than the preliminary flash estimate. It’s not pretty.
The expenditure side was very weak. Household and government consumption declined 0.4% and 0.2%, respectively, while gross capital formation tumbled 0.7%. Inventory depletion accounted for much of the reduction in investment and fixed investment deteriorated to a lesser degree. Exports fell 0.4%, while imports dropped a full 1.2%; therefore, net exports contributed +0.3% to overall GDP growth. The only positive contribution to GDP growth was imports – this type of technical growth is not sustainable.

As the chart below illustrates, exports has been a major driver of growth during this recovery. However, export demand is dropping off at the margin, and more weakness is expected. The level of new export orders (a component of the Markit PMI) fell for eight consecutive months through February.


So it it’s up to domestic demand to spur further recovery. I also have my doubts there, given that fiscal austerity pushed the unemployment rate to a historical high of 10.7% in January (rather vertically, I might add).

A second part of the EA GDP report was the disturbing minority of countries that posted positive growth: just three out of thirteen. French growth clearly added balance to the average, given its large weight in the index. However, there are plenty of things that can go wrong there with higher energy costs, the rising unemployment rate, and minimal business confidence.

Going forward, it’s either up or down again for the EA. With the tight fiscal and now tightening monetary policy, the economy surely faces a lot of headwinds – down again would be my bet.

originally published at The Wilder View…Economonitors

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European Daily Catch: Retail Sales Stabilizing?

by Rebecca Wilder
European Daily Catch: Retail Sales Stabilizing?

Today’s real retail sales gave the ECB and EU heads of state another reason to keep their fingers crossed for stability of the Euro area economy (.pdf of release). In January, volume adjusted retail sales increased 0.3% in the Euro area (EA) and broke a 4-month trend downward. On a 3-month annualized basis, though, real retail sales are falling at a 2.2% pace. Therefore, on a trended basis the second derivative may be stabilizing but the first derivative remains conspicuously negative.


I suppose that the ECB and EU heads of state will take this month of reprieve to pat themselves on the back for policy well done. However, in looking at the cross section of the monthly gains, France was the primary driver of the regional improvement, +2.1% over the month. We’re not out of the woods yet.

Greece, Spain, and Italy haven’t reported for January, so we’ll have to wait on the over or under regarding revisions. I’ll take the under, however, given that Spanish and Italian service PMIs are in the low 40′s with the employment component a serious drag (.pdf of the Markit release).

originally published at The Wilder View…Economonitors

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All of the Euro Area Usual Competitive Suspects in One Chart…But with a Twist

by Rebecca Wilder

All of the Euro Area Usual Competitive Suspects in One Chart…But with a Twist

The European Commission’s Economic and Financial Affairs initiated the Macroeconomic Imbalance Procedure (MIP) Scoreboard. The MIP Scorecard will be used to identify emerging or persistent macroeconomic imbalances in a country. In their inaugural release, the EC listed 12 EU countries in need of further review for potential imbalances (program countries are exempt from this review process).

The accompanying database of the factors in the MIP score is made available at Eurostat. This database is particularly exciting for a data geek like me. Included in the MIP database is an indicator that I’ve wanted to construct for some time: country level exports as a share of world exports. World export share is a much broader measure of competitiveness than the commonly reported export share of country GDP.

Belgium, which is one of the 12 countries on review for potential imbalances, has experienced an 0.5 ppt drop in world export share, 2.4% in 2002 to 1.9% in 2010. Seems like a big drop – but what does a 1.9% export share mean in terms of the size of the Belgian population in the Euro area 12 (EA 12)? In 2010, Belgium’s world export share was 2.2 times what it’s EA 12 population share implies – loss of competitiveness, yes, but still competitive.
The chart below illustrates the following: (country world export share as a share of EA 12 world export share)/(country share of EA 12 population). The data can be downloaded at Eurostat: export share, and population).


If the index level > 1, then the country has a greater share of the EA 12 world export share than that implied by its population as compared to that of the EA 12 – competitive; If the index level < 1, then the country has a smaller share of the EA 12 world export share than that implied by its population relative to that of the EA 12 - not competitive.
Some takeaways from this chart are:

  1. All the usual ‘competitive’ suspects are at the top: Ireland, Netherlands, Belgium, Austria, Germany, and Finland. These countries hold in excess of 1.2 to 3.1 times EA 12 world export share than their relative size in the EA 12.
  2. All of the usual ‘uncompetitive’ suspects are at the bottom: Greece, Portugal, Spain, Italy, and France. These countries hold anywhere from 30% to 70% less world export share of that in the EA 12 than their population share would imply.
  3. Ireland is the most competitive in this respect, and Greece is the least.
  4. Germany is more in the middle with just a 27% higher export share of the EA world export share than that implied by its population share….

That’s it for today. I’d like to hear your feedback.

Rebecca

originally oublished at The Wilder View…Economonitors

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Does Latvia Give Us Any Clues?

by Rebecca Wilder

Does Latvia Give Us Any Clues?

Short answer: yes, as long as global trade growth is negligible.

Over the weekend I came across a December CEPR paper about the Latvian economy. Authors Mark Weisbrot and Rebecca Ray highlight the Latvian experience with internal devaluation, which may prove to be a case study for the current Eurozone model of internal devaluation by the program countries (Ireland, Portugal, and Greece). Weisbrot and Ray find the following (emphasis mine):

The paper also finds that Latvia’s net exports contributed little or nothing to the economic recovery over the past year and a half. This means that “internal devaluation” cannot have succeeded in bringing about the recovery. Rather, it appears that the recovery resulted from the government not adopting the fiscal tightening for 2010 that was prescribed by the IMF, and also from an expansionary monetary policy caused by rising inflation. The data contradict the notion that Latvia’s experience provides an example of successful internal devaluation.

Note: Internal devaluation is Europe’s favored prescription for any country seeking liquidity assistance; it refers to the process by which an EZ country that cannot devalue its currency reduces relative costs (wages) and prices by raising the unemployment rate in order to shift export income in favor of the deflating economy.

Internal devaluation didn’t work for Latvia, as evidenced by export demand. I wondered, though, how has real export demand performed for the current program countries, Ireland, Portugal, and Greece? Have these countries followed Latvia’s path?

To date, as regards to export income, internal devaluation appears to be working in Ireland and Portugal but not in Greece. For comparison to Latvia, I illustrate the path of real exports and imports spanning 2005Q1 through 2011Q3, as demonstrated for Latvia on page 14 of the CEPR paper.

Similar to Latvia’s experience, real import demand deteriorated in the face of fiscal austerity, especially in the case of Ireland and Greece. In contrast to Latvia’s experience, though, real exports in Ireland and Portugal are roughly 6% and 8%, respectively, above levels in 2007Q1. The Greek experience looks more like that of Latvia, as real imports and exports plummeted below pre-crisis levels, having yet to recover.

As I highlighted in a December post, relative unit labor costs have been cut in the case of all program countries, so internal devaluation is evident. (Note: the chart in the post illustrates the 4-q average Y/Y growth in nominal unit labor costs compared to the EA overall – it’s not intended to be a thorough examination of real exchange rates.) But has that been the driving force behind the export growth?

The resurgence in global trade has been an influential factor in the case of Ireland and Portugal. The chart above illustrates the Dutch estimate of world trade. Notably, there was a resurgence of trade spanning mid 2009 to Q1 2011, which support European exports broadly. It’s difficult, in this respect, to attribute all of the export success to internal devaluation.

Going forward, Ireland and Portugal are very likely slaves to global demand for exports. Prospects there are not looking too bright, given the slowdown in Asia.

Ultimately, I do think that Latvia serves as a warning for EA program countries. Internal devaluation is impossible for those countries with high private sector leverage without a burst of external demand. Unfortunately, the burst of external demand seems to have passed.
(Insert here a discussion of the 3-sector financial balances model, and why Ireland depends exclusively on generous export income to facilitate economic growth).

originally published at The Wilder View…Economonitors

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Euro Area Portfolio Flows

by Rebecca Wilder

Euro Area Portfolio Flows

Today the ECB released the Euro area balance of payments for December. This is a statistical release that is worthy of only the biggest data geeks – but it is quite interesting, especially in forming relationships between FX and capital flows. I’ll demonstrate what’s been going on in EA bond, equity, and money markets in one just chart. The data come from the ECB, and can be seen in the Monthly Bulletin, Table 7.3.


The chart illustrates portfolio flows as the 3-month sum total flows in and out of Euro area bond, equity, and money markets, or portfolio investment. The red line plots the dynamics of investment flows by foreign residents in (positive) and out of (negative) the Euro area. The blue line plots the dynamics of investment flows by Euro area residents in (positive) and out of (negative) the Euro area.

When the blue line is positive, Euro area residents are bringing assets home, or repatriating capital. This is rare. When the red line is negative, foreign residents are moving capital out of the Euro area by selling euro assets. This is also rare. Both occurred in 2011.

Foreign investors reduced exposure to euro-denominated assets, -€78.9 billion in Q4, while Euro area investors brought assets back home, +€55.8 in Q4. Spanning 2011, foreign inflows into equity, bond, and money markets turned 180 degrees from +€183 net accumulation in the 3 months ending in June to -€78.9 in Q4.

For 2011 as a whole, foreigners accumulated similar amounts of euro-denominated assets as in 2008 (the last time the foreign flows turned negative), €233 billion versus €266 billion, respectively. In contrast, the repatriation flows did make a big 2011 dent compared to the 2008 comparable year of repatriation, +€60.2 billion of inflows for the year as a whole versus -€4.9 billion in 2008.
We’ll see if 2012 is a year of normalization – EA resident outflows and positive foreign inflows. Certainly recent actions by the ECB have helped to assuage foreign investors, as evidenced by the +€5.3 billion portfolio inflow in December 2011. The January release will be an interesting one!

Happy Presidents’ Day, Rebecca

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Unfounded Obsession With the Greek Minimum Wage

by Rebecca Wilder

Unfounded Obsession With the Greek Minimum Wage

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.
First, the Greek people aren’t lazy at all. In fact, Greek workers spent more hours working 2010 (in annual hours actually worked per worker) than those in Chile, Hungary, Czech Republic, Poland, Estonia, Turkey, Mexico, Slovak Republic, Italy, the US, New Zealand, Japan, Portugal, Canada, Finland, Iceland, Australia, Ireland, Slovenia, Spain, the UK, Sweden, Luxembourg, Austria, Belgium, Germany, Norway, and the Netherlands – and in that order. (You can download and view the data from the OECD 2011 Employment Outlook.) Marc Chandler also highlighted this fact back in January.


Sure, one could argue that the Greek workers work a lot of hours, but it’s for less output. Furthermore, labor costs have risen substantially relative to other Euro area countries, so the country’s worse off. That’s the uncompetitiveness route. If you care about productivity and relative wage gains, why not look at the drop in Greece’s relative unit labor costs?
The chart below illustrates the average accumulated gain/loss in nominal labor costs (labor costs per hour) across the EA 12 in the run-up to the crisis, 2005-2008, and then since the recession, 2009-Q32011 (Finland data unavailable). By this measure, Greece is certainly doing what the Troika want of it: relative devaluation in nominal labor costs. Since 2009, Greek labor costs have fallen 5.3%.

(Note: the data are constructed as the percentage gain/loss of the average 2008 quarterly labor costs over the average of 2005 labor costs versus the average of Q4 2010 to Q3 2011 labor costs over the average 2009 quarterly labor costs, all working-day adjusted.)

French and Austrian labor costs appreciated 12% and 10.7%, respectively, spanning 2005-2008, and another 5.7% and 4.0%, respectively, since 2009. In Ireland, the 1.8% average reduction in labor costs since 2009 pales in comparison to the 2005-2008 14.7% surge. Greece saw a lower accumulated gain in labor costs spanning 2005-2008 than most countries and cut labor costs since 2009. The ‘wage’ cost anger towards Greece seems to be misdirected.

Now I’m really wondering what is this obsession with the Greek minimum wage? True, the Greek minimum wage did rise 0.8% spanning 2010-2011 (you can see Eurostat data here). However, as a proportion of average monthly earnings, the 2010 minimum wage in Greece is roughly in line with other program countries, Ireland and Portugal, and lower than that in France, Luxembourg, and the Netherlands.

Only in 2011 do Greece’s policies stick out when monthly minimum wage as a proportion of average monthly earnings surged to 50.1%. However, simple calculations demonstrate that for Greece the higher 2011 ratio of minimum wage to average monthly earnings was largely a function of falling average monthly earnings, -18.7%, rather than the rise in the minimum wage, +0.8%.

Perhaps I am not understanding things clearly here – I am sure that you all will correct me if I am not – but what’s this obsession with minimum wages? It looks to me like the fiscal austerity driven recession is indeed resulting in a reduction in Greece’s relative labor costs irrespective of minimum wage policy. Isn’t that the point?

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I Still Don’t Get Why the ECB Hiked Rates

by  Rebecca Wilder

I Still Don’t Get Why the ECB Hiked Rates

I still don’t get why the ECB hiked rates in April and July of 2011. I questioned this using bond market pricing back in August 2011. Now I question it once more using the ex post trajectory of mortgage rates.

Across the Euro area, 43% of total home loans are made on a variable rate basis – this means that mortgage rates are highly elastic to ECB rate setting policy.
Average mortgage rates started rising well before the ECB actually hiked rates. The bottom in mortgage rates was seen in June 2010 and hit a local peak in August 2011 when rate cut expectations started to pass through. But the high correlation between ECB policy and average mortgage rates was to be expected and very harmful to those economies with a rising household desire to save.


It would be one thing if the variable mortgages were concentrated in the core countries; but they’re not. The Periphery economies drive up the average share of variable rate mortgages. In the most extreme case, Portugal, 99% of all home loans are made at a variable interest rate. It doesn’t take a PhD to figure out the speed at which tighter monetary policy will pass through to the real economy when 99% of all loans are made at a variable rate.

Like I said, I still don’t get why the ECB hiked rates.
Source data: ECB for current rate data, and an ECB structural issues report on EA housing for the variable rate shares.

originally published at The Wilder View…Economonitors

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Temporary Employment: A New Ugly Rearing its Head in Europe?

by Rebecca Wilder

Temporary Employment: A New Ugly Rearing its Head in Europe?

Last week Clive Crook opined on some fallacies of labor reform, specifically related to the unions and through the Spanish experience. Labor reform is a highly contentious subject, given its close ties to welfare and politics. Based on Clive Crook’s article, I delved into global temporary employment using OECD data and noticed two things: (1) not only is it too ‘simple-minded’ to attribute labor problems to one or two broad agents (unions, in the case of Europe), but it’s impossible to compare one country’s problem to another; and (2) other global economies – Ireland being the most worrisome candidate – saw respective shares of temporary employment surge in recent years. To me, this highlights the fact that known labor issues are just the beginning – new problems are surfacing that will require attention in the future.

As highlighted by Clive Crook via Bentolila, Dolado, and Jimeno (or the Vox version), the cyclical aspect of Spain’s two-tier labor market – the two tier system consists of a large share of temporary workers ‘outside’ the permanent employment positions – can explain in part the boom in employment during the bubble and its crash during the recession. But that doesn’t explain the experience of the US. In 2005 (the last measured date for the US), temporary workers accounted for just over 4% of employment compared to 33% in Spain; however, like that in Spain, the US unemployment doubled during the crisis. What’s one country’s problem is not necessarily another country’s structural issue.

In contrast to other key players in Europe, the Spanish rate of temporary employment fell 8.4 ppt since 2005, where most of the drop occurred in 2009 and 2010. The crisis eradicated some of the inefficiencies of Spanish temporary employment by consolidating those industries that tended to favor temporary employment during the bubble, construction for one. More worrisome, though, is the trend in temporary employment in other European markets. The rate of temporary employment increased 3.5 ppt, 3 ppt, and 5.7 ppt in Portugal, the Netherlands, and Ireland, respectively, spanning 2005-2010.

The problem with Spain’s two-tier labor market is well known, while that in Ireland and Portugal, for example, is emerging. The 2002 OECD Employment Outlook Chapter 3 outlines some adverse impacts of temporary employment. Temporary employment is associated with higher wage gaps among the temporary and permanent employees, fewer health benefits, negative effects on well-being for individuals and families, and minimal job security. I haven’t read recent research to this point; however, those countries with outsized surges in temporary employment – Ireland, Portugal, Netherlands, Italy, Greece, and the UK are among the highest in the sample above – are likely to experience a drop in welfare relative to other countries, all else equal.

Another interesting aspect of the Spanish labor market on a relative basis is that while Spain has a large presence of temporary workers, these workers do have a relative advantage relating to claim of unfair dismissal than do other global workers. The implication could be, that as the share of temporary workers rise in Ireland, Portugal, or the Netherlands, for example, the employment becomes more volatile and reduces expected lifetime income, hence spending or growth. (Data from the OECD.)

I’m worried and just conjecturing here. But, not only have countries not reformed labor issues already in the pipeline – the Spanish two-tier labor issues date back to 1984 – we’re creating new ones. The Great Recession and forced austerity is likely a very big factor in the surge in Irish temporary unemployment employment. This will bring with it unintended consequences that may require further reform (or alternative scenarios like exit from the EMU) at some point in the future

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Which Economy Is Pursuing Procyclical Fiscal Policy?

by  Rebecca Wilder

Which Economy Is Pursuing Procyclical Fiscal Policy?

Today the BLS reported that the US unemployment rate dropped to 8.3% in January 2012. This is the lowest measured rate since February 2009 – a local trough. Also this week, Eurostat reported that the Euro area (EA) unemployment rate stabilized in December at 10.4%. This is the highest level since inception of the euro – a global peak (so far).

It’s pretty easy to see through relative labor performance which economy is pursuing procyclical fiscal policy, namely deficits rise when the economy is booming and fall when the economy is contracting: the EA.

originally published at The Wilder View…Economonitors

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Is the ECB/EU Achieving Stated Objective of Balanced Growth

by Rebecca Wilder

Is the ECB/EU Achieving Stated Objective of Balanced Growth?

The primary objective of the European Central Bank is to maintain price stability; however, as a compliment to its primary objective, the Eurosystem shall also ‘support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’. These include inter alia ‘full employment’ and ‘balanced economic growth’”. These objectives are laid out in Articles 3 and 127 of the Treaty on the Functioning of the European Union. I wonder whether or not the objectives related to ‘balanced economic growth’ and ‘full employment’ are indeed being achieved? One could argue that they are not.

Put more simply: nominal GDP is diverging across program and non-program countries. If this economic duress leads to early exit, I would posit that the balanced growth clause has been breached.

The charts above illustrate the dynamics of nominal GDP (NGDP) across the largest non-program and program countries (I explicitly refer to a program country as falling under an explicit EFSF program). These charts demonstrate that unbalanced growth may already be in the works. In Q3 2011, Ireland, Greece, and Portugal are producing an average 2.2% above their minimum level of NGDP during the crisis (Greece’s last data point was in March 2011, so this number is clearly biased upward). In contrast, the largest non-program countries are producing at 6.1% above their minimum levels of NGDP during the crisis – a 3.9% differential in recovery patterns. Germany alone is producing 110.3% 10.3% above its trough during the crisis. I suspect that the program country average will fall below 100 in coming quarters, as the debt deflationary cycle grabs hold. This view of the Euro area is anything but “balanced”.

Balanced, according to Merriam-Webster online, takes several definitions, but essentially it’s some measure of equality in weight on two sides of a vertical axis. Let’s call the vertical axis the Euro area average NGDP recovery. It’s a pretty close call because France is running just below the EA average – but compared to the minimum level of NGDP attained during the recovery through Q3 2011, 56% of the EA has recovered by a % less than the EA average of 6.3%, while 44% have recovered by more. I’m sure that there are many ways to define balanced growth – but in NGDP terms, this looks unbalanced.

Now, the Treaty defines no explicit time frame for ’balanced growth’ – if it’s a long-term objective, lets say 5-10 years, then one could argue that the forced structural reform in Ireland, Portugal, and Greece (even Spain, Italy, and France) will increase long-term potential growth, thereby not breaching the treaty.

But what if the countries are forced to exit before the structural reform starts producing positive growth in average real GDP? Chapter III of the 2004 World Economic Report highlights two important points that should be considered: (1) it’s rare for countries to tackle multiple levels of structural reform at once; and (2) it takes a long time, as in the case of New Zealand, for aggressive structural reform to pass through to the real potential growth rate. The EA is attempting many levels of reform, including financial, labor, product, and tax. This is rare and history shows that this can take up to a decade to show results (as in New Zealand’s case).
I can only deduce that Greece, Ireland, and Portugal probably don’t have enough time and are likely going to be, if they haven’t started already, weighing the pros and cons of exit. If these countries do choose exit, it’d likely be under economic duress; hence, the EU would have failed to target ’balanced growth’, as outlined in Article 3.

I like the way that Megan Greene (@economistmeg) put it in her response to the Irish Times query “Is austerity the best policy?”: “There is a fighting chance that Ireland can eventually grow its way out of it – but I think the time is too short for Ireland to turn it around.”

The Wilder View…Economonitors

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