Friday, 25 January 2013

GDP growth and employment growth : implications for Greece

A facile and quick post for tonight. I was thinking about employment lately and how much Greece is suffering in this respect. A good question is this one: if and when GDP has bottomed when will employment bottom out?

If we look at aggregate figures regarding the Euro Area 12 then we can see that employment always lags GDP by a few quarters.

source: Eurostat

By looking at the chart above one could be misguided into believing that this lag is a couple of quarters. I guess that this depends on a number of factors as well, for example labour laws (not getting into this thorny subject here), the overall state of the economy in question, the international environment, etc.

Aggregate Euro Area data are skewed by the strong influence of Germany. I think it would be more interesting to look at the peripheral countries.

Here’s Spain.

source: Eurostat

Before the depression set in, employment and GDP moved in tandem, something that could be explained by the fact that most job losses in 2008-2009 originated from the construction sector where shocks are transmitted very fast. When GDP grew again in 2010 (due to the base effect no doubt) the economy kept shedding jobs. The reasons are rather obvious and give the message that in the current environment the rule above, has to be augmented and relaxed in the way that the lag between the two could be much larger.

Now let’s take a look at Ireland.

source: Eurostat

The economy has been growing anemically for two years so the base effect has run its course. But employment hasn’t grown at all since GDP growth turned positive. As if the generally present low visibility, uncertainty and stagnation isn’t enough, Ireland is plagued by a monster-sized balance sheet recession and the deleveraging efforts attached to that, which makes it even more difficult for businesses to hire again.

Since trying to gauge what would happen to Greece was my goal when deciding to write the post, here’s the chart about Greece (data concerning Greece are not seasonally adjusted because they’re the only ones available in quarterly format).

source: Eurostat, ELSTAT

As you can see, calling the situation dreadful is a euphemism. The question is: at what point we could hope to witness employment growth in Greece. If the usual rule is applied then a lag from the time that GDP growth turns positive could be expected and what’s more, if visibility is still low then we could wait a while longer than that. Is there a chance that due to the credit squeeze and the fact that Greek corporations were forced to become lean we could see a swift acceleration in hiring due to some pent-up demand for labour? Bear in mind that this is Greece we’re talking about, where the vast majority of businesses belong to the micro class and struggle to survive and become more internationally aware. I personally rule out such a scenario, so buckle up, we could be in for a long wait here... 

P.S. Of course all this is fiction right now, but I hope you agree that thinking out loud about it was worth it.

Monday, 7 January 2013

Greek Manufacturing: positive signs..?

This post is based on figures as they were until Monday the 7th of January. Due to October data being revised after that and November data being released shortly afterwards, I need to update the post since conclusions have to be slightly altered...

Since I started this blog two years ago I have been itching for an opportunity to write something positive about my native Greece. The first head-fake occurred more than a year ago when I first looked at aggregate exports data. Though, as it turned out the rise in Greek exports was powered along by the rise in petroleum exports, meaning that celebrations had to be postponed. 

Lately, industrial production has been showing some signs of life.

source: Eurostat

For the first time since 2007 (bar one month in 2008) industrial production rose, first in August and then again in October.  

The seasonally adjusted Industrial Production Index seems to have stabilized and the 5 month moving average of changes (over the same period of the previous year) is moving towards less negative territory.

source: Eurostat, own calculations

All these are positive signs but aggregate indicators are known to conceal nasty truths under shiny wrappers, so I would like to delve a bit deeper.

First, a tiny bit of background regarding the Greek manufacturing sector, which could go some way into explaining its current ill state.

The Greek manufacturing sector is the least export-oriented among those of all OECD countries. Actually, the US one is, but manufacturing sectors of larger countries tend to be less export-oriented in general, hence the wording of the previous sentence.

source: OECD, own calculations

Of course, the said feature of the Greek manufacturing sector was not coincidental and not all detrimental for Greek manufacturers during the boom years of the ‘00s (again judging by aggregate data that may mask significant divergences among manufacturers of different size and belonging to different sectors). Since, Greek manufacturers were better placed than their competitors (or maybe due to market regulation and a multitude of other reasons) they enjoyed hearty pre-tax margins, of course at the expense of Greek consumers.

source: Eurostat

Their pre-tax margins were the third highest among EU27 countries for which data were available.

Of course, when the tables turned and domestic demand collapsed after the sudden stop in external financing that the country experienced, what was an advantage turned out to be a severe hindrance to their viability. 

The extremely low technology content of Greek manufacturing is not helping in that respect as well, since the only producers it is effectively competing with are emerging markets at the earliest stages of industrial development.

source: Eurostat

As of 2011, the three more important sectors of Greek manufacturing were Food Products etc., Basic Metals and Coke and Refined Petroleum Products. 

I would now like to take a look at how each sector performed these past three months. Here’s the chart.

source: Eurostat

As you can see the bulk of growth comes from the Coke and Refined Petroleum segment that grew strongly on both August and October. On August, Food Products etc. posted a marginally positive contribution along with a few other sectors which lifted the overall growth figure. The same cannot be said for October on which only Coke and Refined Petroleum Products (and Other Manufacturing) posted a positive contribution.

If one looks at the aggregate index, it might appear as a bottom has been forming this past year. When delving deeper though, things do not appear to be that uncomplicated. 

In an effort to gauge the state the three main sectors mentioned above are, I calculated and plotted the 5-month moving averages to smooth out monthly fluctuations.

source: Eurostat, own calculations

Only Coke and Refined Petroleum Products is in positive territory, while the rest are still in the red, albeit moving on less negative territory lately. If in the next few months they break out of their respective downtrends, the overall picture of the sector will improve significantly (as far as the picture indexes paint is concerned). 

To wrap this up, in my humble opinion the current positive signs are at best weak, since most sectors are still wobbly. Strong growth by the Coke and Petroleum Products segment does skew positively the overall picture of the sector. If things stay that way though, with periodic upward spurts by a couple of segments at a time, that doesn't make for a meaningful improvement of the situation in the sector. We have to say though that when bottoms are formed things do look wobbly, uncertain and fragile. What's more, usually the human brain extrapolates the present situation into the future and when one has stayed for that long in depression as we Greeks have it is easy to be permanently negative. That said, one has to be careful (myself included) not to fall into that loop. Only time will tell though how far away from the bottom (as far as the manufacturing sector is concerned) we currently are…