Wednesday, 26 June 2013

UK and Ireland: is monetary policy the reason for the unemployment differential...?

Some commentators claim that the UK-Ireland unemployment differential can be accounted for solely by the monetary policy differential.

source: Eurostat

But is that so…? Well, few things in life can be easily and conveniently packaged in one sentence statements and one chart explainers so that they look good in mass media.

I want to take a look at sectoral job losses along with “a few” other charts and maybe try to shed some light on the subject or just confuse you even more. I choose to use just three sectors (manufacturing, construction, retail trade&etc.) in the following charts since these are the most significant and employment there displayed the most volatility. Enough with that let the charts roll.

source: Eurostat, own calculations

The construction sector can be blamed for the bulk of jobs shed in Ireland.

source: Eurostat, own calculations

The same cannot be said about the UK, where job losses were more evenly spread across the three sectors pictured.

Even that cursory glance seems to confirm that the vast unemployment differential between the two countries can in its largest part be explained by the popping of the property bubble in Ireland.

One could say that there was a property bubble in the UK as well. Well, I don’t know if that goes for the whole of the country of just for a few select parts of it or if it goes at all. In any case even if one made that claim the distortions evident in Irish data are uncompared to the ones in UK data.

source: Eurostat

In a country where the manufacturing sector in the 00s was indisputably large, investment in dwellings came to account for more than 50% of total in the bubble’s heyday. This was not the case in the UK.

The extreme distortions present in Ireland in the 00s can be discerned in sectoral employment data as well.

source: Eurostat

At the bubble’s peak the construction sector briefly surpassed manufacturing as an employer. Needless to say, this never happened in the UK, which admittedly is much more de-industrialized than Ireland is.

source: Eurostat

Bear with me now, I’ve got a few more charts to share with you. I want us to look at employment’s sectoral performance in the two neighboring countries.

source: Eurostat

source: Eurostat

source: Eurostat

The differential in construction employment performance between the two countries is abysmal. So what is expansive monetary policy supposed to do? Prevent such a monumental-sized bubble from deflating? Even if someone thought this is possible is it really a preferable policy path? Moreover, it is obvious that retail trade employment fared much better in the run-up to the crisis in Ireland. A good question is how much of that performance was due to spillovers from the property bubble, so the post-bubble hangover (i.e. depressed activity) is evident here as well as in a few other areas I suspect.

That said, UK is thus far performing better than Ireland in both the retail trade and the manufacturing sectors. Here, maybe a more expansive monetary policy is one of the reasons this is the case, along with a multitude of other reasons (different household and corporate indebtness, different export propensity of the manufacturing sector, lower base in manufacturing employment, different levels of saving, different states of the banking sector etc.). But are comparisons among those two particular countries really that relevant…?

I think that such oversimplified statements make little sense. Furthermore, the truth usually lies closer to the middle of the road than at the two extremes. Sometimes commentators are eager to draw comparisons to satisfy their ideolepsies. As I’ve said in the past, it sure is easier to tap your keyboard than come up with sensible policy paths in the current nightmarish juncture…

P.S. In the US, where most people agree that there was a property bubble and super-lax monetary policy was applied, construction employment undershot the average level of the past 42 years. My point is that this could not go very differently even if monetary policy in the Euro Area matched what some commentators define as expansive/easy.

source: FRED, own calculations

Wednesday, 19 June 2013

A look at economic sentiment in Greece

I have to admit that I’m not a big fan of economic climate/sentiment indicators. That does not mean that I also dismiss the importance of sentiment and its undisputable effects on economic activity.

We hear a lot about how sentiment regarding the Greek economy has (or rather had) improved these past few months. If I said that I was willing to take that with anything less than a grain of salt I would be lying. 

Here’s one chart though that I came up with after messing about with sentiment indicators and investment activity. (I calculated tri-monthly averages of the industrial confidence indicator so that I could somehow compare its trajectory with investment). The industrial confidence indicator is depicted in the right hand scale while investment in the left hand one.

source: Eurostat, DG ECFIN, own calculations

There is no denial that the big spike in machinery investment observed in Q4 2012 was made easier by the (low) base effect, nonetheless it was the first positive reading since 2008. The 1st quarter of 2013, investment was flat on a yearly basis and the 4-quarter moving average reached its higher level since late 2009. At the same time sentiment, in Q1 2013 stood at its highest level since late 2008.

source: Eurostat, own calculations

I know it doesn’t sound like much and it is nothing much but for a country in the state that Greece finds itself into, it is a start. I would very much like, or rather, I very much dread to find out where the relevant indicators will stand in June and July 2013. I’m afraid that renewed political uncertainty will take its toll on these fragile green shoots look-alikes and sentiment will take a dive again. If nothing else the said readings will be as good as an event study regarding the effect of political uncertainty on business sentiment.