Yesterday Eurostat published growth flash estimates for a number of EU countries. As expected, they do not look good. In 2013 Q1 the eurozone has lost 1 per cent of its GDP with respect to the first quarter of 2012 (-0.7 for the EU 27). It is the longest recession since the inception of the single currency, and it brings with it record unemployment at 12.1 per cent.
Not surprising, I said, because in spite of increasing talks about softened austerity, austerity ain’t over. In many countries, government final consumption in real terms (the G in national accounting equations, just to be clear) sharply decreased. And this is, surprise, correlated with subsequent growth:
In plain English, countries that expanded government consumption (in real terms) in 2012, tended to have more growth in the first quarter of 2013. I took away extreme cases (Latvia and Lithuania, that had exceptional exports increase, and Cyprus and Estonia, that had a rough first quarter for other reasons; lighter in the figure), and ran a raw regression (excel! and with only 17 observations! R&R taught me nothing…). The regression shows that one extra euro of public consumption in a given year would yield 31 cents of extra GDP (annualized) in the first quarter of the following year. I know, it has already been said, but it is worth repeating over and over again: austerity is not good for growth…
Two more considerations:
- The few positive growth outliers (in particular Latvia and Lithuania) had very strong export performances over the year 2012 (around +10%). In general, one may argue that once considered exports, that especially for small countries have a major impact on growth, the effect of government consumption could turn out to be smaller than simple correlation would imply. Well, actually not really. Adding export change (in 2012) to the regressors (once again, do not take this as more than suggestive evidence; 17 observations is really too little to claim robustness), the impact of government spending is only slightly reduced even if the goodness of fit is improved.
- I went maybe a bit too fast when I said that the Eurostat press release was not surprising. In fact, the surprise is that growth in Germany has been anemic throughout 2012. After all the alarmist talk about the poor performance of France, and the danger it poses to the eurozone stability, it turns out that its public consumption did not expand more than Germany’s, and that the growth performance is equally bleak (-0.3 against -0.4 per cent). Advocates of the German model should come back a bit later…
Meanwhile a standard (and trivially textbook-Keynesian) monetary and fiscal expansion is boosting growth in Japan, to levels that in Europe would be considered miraculous. More important, besides exports, behind the boom for the first time there is a robust increase of domestic (household) spending. The Keynesian multiplier at work… If I recall correctly we were told just a few months ago (no wait, it was a few days ago) that Abenomics was a risky bet, and that our wise European leaders were right in putting the house in order. For Japan it is maybe too early to tell, but for Europe certainly not. At the interval, Abe leads Rehn-Merkel 3.5 to -0.8. I do not see how we could win the game in the second half if we do not change strategy..