The Eurozone experiment in austerity continues to fail as the peripheral countries endure ongoing cuts. Following up on my post of August 15, it’s time to look at the most recent Irish immigration data to update it through April 2013 (Ireland records population data from May 1 to April 30) and see how it affects the reported unemployment rate. The picture remains ugly, with emigration climbing once again, from 87,100 in 2011-2012 to 89,000 in 2012-13. Immigration increased by 3200, so net emigration fell by 1300, with net out-migration over the year declining by about 3% to 33,100. Here are the details:
Take a good look at the last line: Net emigration by the Irish themselves increased by 35.9% and accounts for all net out-migration; there was net in-migration by non-Irish citizens of 2100 in 2012-13. Indeed, the Irish comprised 57.2% of all emigrants in the most recent report.
Go no further than the following two charts to understand why markets freaked out over Dijsselbloem’s comments. Europe is way overbanked and vulnerable to financial sector shocks. Even in the so-called “safe haven” Switzerland the banking system is outsized relative to the country’s GDP. Compare the relative size of UBS, for example, to the largest bank in the U.S., JP Morgan. Nuff said.
I recently appeared on a local public access TV show, Conversation with Lee Presser, discussing tax increment financing and European Union subsidy control regulations. It’s a great format, just an almost 30-minute discussion without interruption, which allowed me to explain the problems with TIF as it has been used in Missouri in great detail. We also had a shorter conversation about EU regulations to control investment incentives and other subsidies, which covered the basics of transparency, maximum subsidy rates that vary by how rich the region is, and the reduction in those rates for large projects. Many thanks to Lee Presser for having me on. If you are interested in economic development issues, I think you will enjoy the program.
I wanted to familiarize myself with the economic statistics in Ireland, so I thought that I’d share my findings with you all. Many politicians refer to Ireland as the poster child of austerity – according to the contentious thesis of expansionary austerity (a review from the IMF .pdf here), is it therefore the poster child of growth? In this post, I review the cyclical data and find that the Irish economy is quite divergent with optimism only evident in the industrial and export sectors. In aggregate, there’s really been no momentum at all. On the one hand, the industrial sector seems to be holding in okay, with the manufacturing PMIs remaining above 50 since March 2012. Furthermore, international saving, or the current account, moved from a 6% of GDP deficit in Q3 2008 to a small surplus in the fourth quarter of 2011 (4-qtr moving average). However, the current account has been deteriorating slightly at the margin, beginning in the second half of 2011.
Note: Except where noted in the legend, all charts below relate to the Irish economy.
In contrast, the consumer sector is suffering quite explicitly. After yesterday’s revisions to previous months, we now see the harmonized unemployment hovering near its peak rate, 14.6% in May vs. 14.8% peak (in the chart below, the red line maps the pre-revised unemployment rates). Consumer confidence is very low, which implies that retail sales could tumble a bit in coming months. Furthermore, price inflation lost some steam, although it remains above the deflationary period that ended in 2010 by the headline measure. Core inflation dropped off in the last couple of months to just 0.4% Y/Y in May. Finally, for all of the optimism on Ireland, Q4 2011 GNP and GDP are just 1% and 0.7%, respectively, higher than their 2010 lows.
It’s probably too early to fully discount the orthodox expansionary austerity thesis – but at the minimum, it does appear as if any economic momentum has been gained primarily through global trade, and that sector is struggling. In all, I’d say that Ireland looks more economically depressed than ambitious and not the poster child of growth.
Update: This post from 6/28 has been re-posted today 7/04 as I believe it was lost in last Thursday’s reaction to the Supreme Court’s ruling on the health care ACA. Robert Waldmann has also subsequently expressed an opinion on how Germany should proceed.
Re-posted: The NYT carries a data filled op-ed by Gunnar Beck, and takes a stance not widely discussed in media (at least from a quick survey). Assuming the figures are reasonably accurate, and knowing there are ins and outs to the idea not in the article, what about it?
…Those who think that Germany has been a winner with the euro almost always rest their case on Germany’s export surpluses. The euro created stability; it eliminated exchange rate risks; appreciated less than the Deutsch mark would have, and thus aided German exports.
But has the euro benefited Germany more than other countries?
According to my calculations, based upon the federal statistics, German exports rose most — by 154 percent — to the rest of the world; by 116 percent to non-euro E.U. members; and least of all, 89 percent, to other euro zone members. In 1998 the euro zone still accounted for 45 percent of all German exports; in 2011 that share had declined to 39 percent.
Between 1995 and 2008, Germany saved more than most, yet it exhibited the lowest net investment rate of all O.E.C.D. countries. On average, from 1995 to 2008, 76 percent of aggregate German savings (private, governmental and corporate) were invested abroad.
There is more of course, so it is worth a visit to see his complete reasoning.
Certainly worth a discussion, and has implications for domestic economic reform in Germany. Does it have implications for Germany’s needs in the Eurozone?
Confidence Indicators Deteriorated Significantly This Week
This week national confidence surveys rolled in with just one story: the economic infection in Europe is spreading. Business confidence indicators in France and Germany declined 1.1% and 1.6%, respectively, in the month of June. In Italy consumer confidence hit another record low since 1996 of 85.3 after falling 1.4% in June.
The National Bank of Belgium and Statistics Netherlands released their balance measures of consumer confidence. Both balances fell 2 points over the month of June. Notably, consumer confidence in the Netherlands is depressed, hitting a record low since 1986 at -40 in June.
These are highly credible indices with robust correlations with hard data like real retail sales and production. Given the precipitous decline in confidence, it’s hard to imagine how European economic sentiment will turn around without truly innovative policy action.
Euro area consumer prices increased at a 2.4% annual pace in May, down 0.2 ppt from the 2.6% pace in April. Core inflation fell to 1.8% in May from 1.9% in April. Headline and core inflation peaked in the fourth quarter of 2011, and disinflation is underway.
Euro area price inflation is burning out but at a very slow pace.
The 0.6 ppt differential between headline and core inflation is explained by energy and unprocessed food prices. In May, the energy component in HICP (harmonized index of consumer prices) fell 1.4% over the month and posted a 7.3% pace compared to May 2011. Energy prices peaked in April 2012, but base effects will prop up headline inflation through early 2013 even if energy prices go unchanged over the near term. That means headline inflation could be sticky for some time above 2%. But core inflation is not.
President Draghi often speaks of the upward pressure on inflation stemming from tax hikes across the various fiscal austerity programs. Stripping out the tax effects (this data is provided by Eurostat), the theoretical inflation rates in Portugal and Italy are 1.8ppt and 0.8ppt, respectively, below the headline rate. The downward pressure on inflation may quicken through next year, as the effects of VAT and various tax hikes wear off across the region…barring a miraculously robust economic recovery, of course.
(Note: In the chart below, the black line represents 0% difference between headline inflation and tax-adjusted inflation. For orange triangles above the black line, headline inflation is above tax-adjusted inflation, i.e., taxes are boosting aggregate prices.)
Inflation takes time to build, so this disinflationary trend is unlikely to change anytime soon without significant policy accommodation.
Euro Area ‘Hard Data’ Catching Up with the ‘Soft Data’ – Industrial Production
Euro area industrial production (ex construction) declined 0.8% in the month of April. Across the major sectors, the largest decline occurred in capital goods; however, the trend in consumer and intermediate goods is worse than that of capital goods.
The regional divergence is clear, as the two-month trend in industrial production – I use the two month trend since this series is quite volatile month-to-month – is strongest in Luxembourg, Slovakia, Slovenia, and Ireland, and weakest in the Netherlands, Spain, Estonia, and Greece. (much more below the fold)
Another way to look at the divergence is to plot German production against the rest of Europe. It’s evident that Germany, with its large 35% weight in this index, is propping up the average. German industrial production is 10% above 2005 levels, while the Euro area ex Germany’s industrial production is 8% below levels in 2005. That’s an 18 ppt divergence.
Finally, a comparison to the US is illustrative. The US industrial sector is outperforming that in Europe, as production continues its positive trend with relatively easy fiscal and monetary policy accommodating the private sector’s desire to save. The US production base is 2% above that in 2005, while that in the euro area (including Germany) is 2% below.
In all, the euro area April industrial production release points to further divergence in growth prospects and a very weak start to the second quarter of 2012. The ‘hard data’ seems to be catching up with the weak ‘soft data’, like the PMIs (see Edward Hugh’s summary on the Euro area PMI).
Today I.Stat released the breakdown of Q1 2012 real GDP for the Italian economy. Weak external demand plus a precipitous drop in private sector spending dragged the headline real gross domestic product (GDP) 0.8% over the quarter (3.2% at an annualized rate). The highlights are the following:
Gross fixed capital formation (investment net of inventory formation) fell 3.6% over the quarter, or 13.7% at an annualized rate. This was the fastest quarterly rate of decline since Q1 2009 when GFCF fell 5% over the quarter.
Private consumption dropped 1.0% over the quarter, or 3.9% at an annualized rate
Imports fell 3.6%, or 13.6% at an annualized rate
Exports fell 0.6%, or 2.2% at an annualized rate
The only positive contribution to domestic spending was government consumption, which increased 0.4% over the quarter, or 1.4% at an annualized rate.
Italy’s real GDP is only 1.1% higher than its lowest point during the recession (Q2 2009). Furthermore, gross fixed capital formation has dropped at an increasing rate for four consecutive quarters. Hope for stabilization eludes, as the current business confidence survey continues its decent – IStat manufacturing confidence was 86.2 in May, which was the second lowest level since the outset of the EMU and well below the 100 average since 2000. Broadly speaking, the economy is imploding.
Don’t pin your hopes on exports. The contribution of exports to real GDP growth has dropped for two consecutive quarters, bucking a trend of positive contribution since the middle of 2009. The only reason that the net export contribution was positive in Q1 was due to the +1% contribution coming from a sharp decline in imports. This cannot be sustained, as the crisis of confidence has begun. (Note: In the chart below, if real import growth is positive, then the contribution is negative; and if the real import growth is negative, then the contribution is positive.)
This is a product of failed policy at the Euro area level, and something needs to be done to break the positive feedback loop.
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?