Wednesday, 28 November 2012

Netherlands: mired in balance sheet recession...?

With all the ruckus regarding sovereign debt and the Euro-Area periphery, the economic malaise that is present in part of the “core” flies unnoticed under the radar. Like we say in Greece “in the kingdom of the blind the one-eyed man reigns”…

What’s more, with sovereign debt taking center stage, other kinds of debt are largely ignored. I’ve written about this again awhile back.

I would like to take a look at Netherlands that surely are relevant with my little prologue above.  

After the base effect, induced from the GDP collapse in 2009, gradually wore off (along with export growth) so did recovery in the Netherlands. 

source: Eurostat

Recession is technically defined as two consecutive Quarter over Quarter declines in GDP. If one uses this definition then Netherlands are not in recession. Year over Year growth (which I generally prefer) though paints a different picture with GDP declining since Q4 2011 and the decline appearing to accelerate (?) in Q3 2012.

Since I am not able to find a dissection of growth for Netherlands I have to resort to my usual facile method. Here’s the chart.

source: Eurostat, own calculations

Private final consumption has barely grown since 2008 (bar a brief interlude in 2010) with exports being the sole actual growth driver. With export growth being anemic lately the Dutch economy finds itself struggling.

Here’s private final consumption’s evolution compared with that of the Euro Area 12. The underperformance is striking and it’s not that Euro Area 12 is a particularly fast grower in that respect. 

source: Eurostat

A good question is why is that the case? If one looks back at the beginning of the post he/she could get an inkling of where I’m heading. That’s right, the reason in my humble opinion is household sector’s over-indebtness.

source: Eurostat

Household debt is close to the whopping level of 130% of GDP, the second highest household debt load in the Euro Area 17. 

source: Eurostat

With the state that their balance sheets are in, it is no wonder that households are trying to deleverage, not exactly the easiest thing to do in such an environment though. Moreover, the majority of mortgage debt in Netherlands is of the fixed rate variety meaning that current low rates do not help households much. Household investment has plummeted to about 10% of disposable income from almost 15% and gross saving has posted the sharpest increase in over a decade.

(Gross household saving rate and gross household investment are expressed as a % of gross disposable income and net lending/borrowing as a % of GDP)

source: Eurostat

All that said, isn’t what Netherlands are finding themselves in, a textbook case of a balance-sheet recession?

Of course, a debt load of this magnitude and in this economic background is not going to go away anytime soon, so Netherlands will probably keep relying on export growth for the foreseeable future..

Wednesday, 7 November 2012

Finland: cracks in the facade ?

All good things come to an end. It is a sad, yet uncontested truth. I think that the Finnish tradable sector may have already entered such a phase.

It is no secret that one pillar of the Finnish miracle was the phenomenal growth of the country’s electronics/telecommunication equipment cluster. This was the sector that led the country’s re-industrialization (I’ve talked extensively about that in thepast). There is a classification of manufacturing sectors according to their technological content. You can see which sectors are classified in each segment here. OECD runs some data on that but they are not particularly up to date. So I used sectoral data for the manufacturing sector and constructed these aggregates myself according to the definitions by Eurostat. This is what the following chart shows for the Finnish case. It can be seen that post 2008 the high tech segment, which includes electronics, halved in relative size.

source: Eurostat, own calculations

On the surface everything appears to be just fine, as GDP growth, compared to the mess that Euro Area currently is, is more than satisfactory.

source: Eurostat

Some cracks have started to appear though. 

Export growth for Finland, post the 2009 global trade collapse, has been lackluster. As far as growth of exports per inhabitant, compared to the 2008 levels, are concerned, Finland is the worst performer of the Euro Area 12 countries, lagging behind even Greece. 

source: Eurostat, own calculations
What’s more, the country recorded a trade deficit in 2011. This had not happened for a long time, namely since the beginning of the 90s.

source: Eurostat

If one starts digging deeper, the cracks mentioned earlier start to appear much larger.

A great chunk of Finland’s growth this past decade was due to its stellar export performance.

source: Eurostat, own calculations

The most important component of Finnish merchandise exports is the machinery and transport equipment segment.

source: Eurostat

And Telecommunications Equipment accounts for a large part of the overall Machinery and Transport Equipment exports.

source: Eurostat

It seems that besides the collapse in Telecommunications Equipment exports there has been a sizeable decline in other segments too.

If we take a more detailed look at exports of that particular niche we might be able to draw some conclusions.

During the 00’s telecommunications equipment exports stopped growing altogether. After a decline till the mid-00’s they rebounded. At the same time imports of telecommunications equipment spiked too. This could mean that part of the production process was outsourced abroad or delocalized. After the 2009 global trade collapse, imports as well as exports essentially halved. I would be surprised if moving part of processes abroad is not to be blamed for a large part of that.

source: Eurostat

Unfortunately, Eurostat does not publish data concerning Finland’s industrial production in the electronics sector but overall production for the manufacturing sector is lagging all core countries by a wide margin. In crises of the magnitude of the one we entered in 2008, the first sectors to feel the heat are the ones that were struggling all along. European manufacturing was one such sector. 

source: Eurostat, own calculations

It seems that the country’s tradable sector has run into trouble.

There are further cracks in other parts of the Finnish economy but I don’t want to get into that now. My intention was not to produce a report on the overall health of the Finnish economy. The purpose of this post was to highlight the slow undoing of the Finnish miracle and that in this ever-changing world nothing is forever and nothing stays still. Of course the Finns have managed to get over massively-sized shocks in the past and I surely hope they do so this time round too (but this is a different world that we live in now and an incredibly harsh environment)…

Sunday, 30 September 2012

Euro Area 12: Inflation and Regulatory Quality

I was just fumbling with the Worldwide Governance Indicators and I stumbled upon this, so I thought that I should share this chart with you. I tried to include as many years as possible to minimize as much as possible the probability that only one of the multitude of factors that can induce inflation is at work there. For example, during the 2002 – 2007 period, demand-pull inflation must have been present at peripheral countries. Enough with my blabbing here’s the chart.

source: Eurostat, World Bank, own calculations

Of course correlation is not causation, but with such a multi-factoral affair such as inflation this is not a bad fit so I couldn’t resist sharing it.

P.S. In case you're wondering what this indicator includes here it is