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Commission Forecasts Watch – March 2014 Edition

March 13, 2014 1 comment

Last week the Commission published its second flash estimates for 2013 GDP growth. This allows to update an earlier exercise I had made on forecast errors by the Commission (around this time last year). This is what I had noticed at the time:

The Commission tends to be overly optimistic, and forecasts turn out to be in general higher than actual values. It should not be like this. While I expect a government to inflate a bit the figures, a non-partisan, technocratic body should on average be correct.
Related, it is also surprising that in November of the same year the Commission is still consistently overoptimistic (yellow bar). Let me restate it. This means that in November 2012 the Commission made a mistake on GDP growth for 2012. November!

I had concluded that there was a likely political bias in the Commission’s forecasts, with excessive optimism used to deflect criticisms of austerity. I also ventured in a quick and dirty estimate of the range for GDP growth in 2013, based on the Commission’s past errors. Actual growth turned out to be -0.5%, i.e. at the lower bound of my range (and below the forecast of the time by the Commission, that was -0.3%). I must nevertheless confess that my range was rather wide…

But what about this year? Read more

Reduce Inequality to Fight Secular Stagnation

December 22, 2013 5 comments

Larry Summers’ IMF speech on secular stagnation partially shifted the attention from the crisis to the long run challenges facing advanced economies. I like to think of Summers’ point of as a conjectures that “in the long run we are all Keynesians”, as we face a permanent shortage of demand that may lead to a new normal made of hard choices between an unstable, debt-driven growth, and a quasi-depressed economy. A number of factors, from aging and demographics to slowing technical progress, may support the conjecture that globally we may be facing permanently higher levels of savings and lower levels of investment, leading to negative natural rates of interest. Surprisingly, another factor that had a major impact in the long-run compression of aggregate demand has been so far neglected: the steep and widespread increase of inequality. Reversing the trend towards increasing inequality would then become a crucial element in trying to escape secular stagnation.
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Wrong Models

July 1, 2013 5 comments

Sebastian Dullien has a very interesting Policy Brief on the “German Model”, that is worth reading. Analyzing the Schroeder reforms of 2003-2005, it shows that it fundamentally boiled down to encouraging part-time contracts, but it did not touch the core of German labour market regulation:

Note, however, what the Schröder reforms did not do. They did not touch the German system of collective wage bargaining. They did not change the rules on working time. They did not make hiring and firing fundamentally easier. They also did not introduce the famous working-time accounts and the compensation for short working hours, which helped Germany through the crisis of 2008–9.

Thus, Dullien concludes, the standard Berlin View narrative, i.e. the success of the German Economy is due to fiscal consolidation and structural reforms in particular in labour markets, needs to be reassessed to say the very least. But there is more than this.

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Dani for President

June 13, 2013 6 comments

Dani Rodrik has an excellent piece on Project Syndicate. I strongly advise reading and sharing it. Rodrik points out that structural reforms (if well designed, I’d add) tend to destroy jobs in low productivity sectors, and to create them in high productivity ones. He then argues that for the second effect  to happen, the high productivity sectors need to face strong demand. This is not happening right now, so that structural reforms, where implemented, are only contributing to depressing employment and growth. He concludes that the very success of structural reforms depends on fixing the short run aggregate demand deficiency problem, through standard Keynesian policies. The zest of the paper is in the last two paragraphs:

Ultimately, a workable European economic union does require greater structural homogeneity and institutional convergence (especially in labor markets) among its members. So the German argument contains a kernel of validity: In the long run, EU countries need to look more like one another if they want to inhabit the same house.

But the eurozone faces a short-term problem that is much more Keynesian in nature, and for which longer-term structural remedies are ineffective at best and harmful at worst. Too much focus on structural problems, at the expense of Keynesian policies, will make the long run unachievable – and hence irrelevant.

Rodrik states something rather obvious:  Read more

Living in Terror of Dead Economists

May 24, 2013 6 comments

Kenneth Rogoff has a piece on the Project Syndicate that is revealing of today’s intellectual climate. What does he say?

  1. The eurozone problems are structural, and stem from a monetary and economic integration that was not followed (I’d say accompanied) by fiscal integration (a federal budget to be clear). Hard to disagree on that
  2. Without massive debt write-downs, no reasonable solution to the current mess seems feasible. Hard to disagree on that as well
  3. Some more inflation would be desirable, to bring down the value of debt. Hard to disagree on that as well.

In a sentence, intra eurozone imbalances are the source of the current crisis. Could not agree more…

Unfortunately, Rogoff does not stop here, but feels the irrepressible urge to add that

Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems [...] To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.

The question then arises. Who ever thought that a more expansionary stance in the eurozone would solve the French structural problems? And at the opposite, why would recognizing that France has structural problems make it less urgent to reverse the pro-cyclical fiscal stance of an eurozone that is desperately lacking domestic demand? Let me try to sort out things here. This is the way I see it: Read more

Raepetita Iuvant

May 16, 2013 4 comments

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:

Post_May_15_2013 Read More

It Ain’t Over ’til It’s Over

May 5, 2013 7 comments

Update: just a link to Wolfgang Munchau, who seems to make a similar argument.

Austerity partisans had a couple of rough weeks, with highlights such as the Reinhart and Rogoff blunder, and Mr Barroso’s acknowledgement that the European periphery suffers from austerity fatigue.
In spite of the media trumpeting it all over the place, and proclaiming the end of the austerity war, it is hard to believe that eurozone austerity will be softened. Sure, peripheral countries will obtain some (much needed) breathing space. But this is neither a necessary nor a sufficient condition for a significant policy reversal in the EMU.

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It’s the Denominator, Stupid!

February 25, 2013 1 comment

This weekend’s news was the downgrade of the UK by Moody’s. Chancellor Osborne took this as a sign that austerity should be strengthened even more, probably because he had little choice (never put all your eggs in one basket…). And yet, if only somebody in Downing Street bothered going through the text, they would have read this:

The key interrelated drivers of today’s action are:
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

Thus, Moody’s analysts clearly state the direction of causality: Read more

The Spring is Nice, but then Comes the Fall

February 22, 2013 13 comments

The much awaited European Commission Forecasts for 2013-14 are out. What do they say, in a sentence? That the situation is grim, but that the EU is gradually overcoming the headwinds. So that, surprise, surprise, the second half of the year will be better.
I guess we already heard that.  Every Spring forecast depicts a negative situation, and predicts an improvement in the Fall. And every year the Fall turn out as mother nature meant it to be, worse than the Spring.

I made a back-of-the-envelope exercise. The following figure depicts the forecasts error for each year of the Commission’s Eurozone GDP growth estimates from 3 different time horizons. The same year Fall forecast, the same year Spring forecast, and the previous year Fall forecast. To make it clearer, the three bars for say 2012, represent the forecast error of the Fall 2011 forecast (blue), of the Spring 2012 forecast (red), and of the Fall 2012 forecast (yellow).

ForecastErrorFeb22_1

I am not expert enough to judge whether these errors are “large” or “small”. Forecasting is a very difficult exercise, most notably in times of acute crises (the Commission underestimated both the severity of the recession in 2009, and the rebound of 2010). Yet, even a casual observer like me cannot help but notice two things:

  1. The Commission tends to be overly optimistic, and forecasts turn out to be in general higher than actual values. It should not be like this. While I expect a government to inflate a bit the figures, a non-partisan, technocratic body should on average be correct.
  2. Related, it is also surprising that in November of the same year the Commission is still consistently overoptimistic (yellow bar). Let me restate it. This means that in November 2012 the Commission made a mistake on GDP growth for 2012 (and in 2008-09-10-11…). November!

Taken together these two things seem to point to a political use of the Commission’s forecasts. Being overoptimistic, the people in Brussels first try to deflect criticisms of the austerity measures they help impose to most European countries; and second, probably, they hope to trigger the confidence fairy that is supposed to compensate fiscal consolidation and lift the EMU economy from the hole in which it put itself. “Look, things will be better, let’s go out and spend!”.  Vain attempt, if you ask me…

If we take the average error of the past 5 years, and assume that the Commission current forecasts are equally wrong (ok, this is just a game, it really is not rigorous!), we have this:

ForecastErrorFeb22_2

Then I have my own forecast for growth in the EMU for 2013. It ranges from -0.54% to -1.14%. The Commission forecasts -0.3%. We’ll see…