The Cyprus model

We keep hearing about the Cyprus model. So I’d thought I’d do a quick post consisting mostly of a few charts about this issue.

The pillars of the so called Cypriot model can be seen in the next few charts. Forgive me for keeping text at a minimum (I'm typing this although I know that you'll actually be grateful for that occurence) but this is a post done on an moment's impulse.

I am not including charts concerning Cyprus' banking sector, since this part of the jigsaw has already been more than adequately covered by other more competent commentators. So, here we go.

source: Eurostat

source: Eurostat

source: Eurostat

 

Finally, here are contributions in GDP and Gross Value Added (GVA) growth of the components highlighted above, using my usual facile approach (i.e. plotting changes in components so that we get a sense of each one's contribution in growth). 

source: Eurostat, own calculations

 

source: Eurostat, own calculations

I think that there's no need for me to add something, since the charts paint the picture rather eloquently. Let's hope that Cyprus' ordeal will soon be over and that the issue is resolved at the best possible way.

P.S. Have to add that imports are inverted in the charts above.

Greece and the Revealed Comparative Advantage revisited

For a while now I want to do a post on the Revealed Comparative Advantages of Greece. With all the talk about which sectors have the capacity to propel Greece forward I think this is more topical than ever.

In case you are not familiar with the Revealed Comparative Advantage (RCA) you can read a rather succinct definition of it here.

Of course, like all indicators, RCA does have some flaws. In my humble opinion, one of these is the fact that the OECD calculates it only for merchandise exports, while for a considerable number of countries, their strengths lie in the services sectors. This is becoming increasing true for “developed countries” which have de-industrialised considerably (I think all the talking about the possible re-industrialisation of developed markets due to rising wages in China and other emerging markets is pre-mature for their validity to be judged and maybe a “tiny” bit overblown). Another drawback could be that the universe which is the base that the index is calculated on is OECD countries only. Of course, these are just my personal views and it sure is easier to tap your keyboard and criticize an indicator than it is to devise one from scratch. 

Quite a lot of charts in this post too so I hope that you’ll bear with me...

Enough with the prologue, let’s move on to our beloved Greece. Greece is one of the cases that the above indicator misses out on quite a big part of its potential, since services exports are a bigger chunk of total than they are for the EU.

source: Eurostat

 

source: Eurostat

 

Another shortcoming, applying to Greece particularly (especially at the time the RCA was calculated) is that the Greek economy is the least export oriented among the OECD crowd, hence, a sector that sports a few success stories can be characterized as one that the country possesses a comparative advantage. Well, I’m more skeptical about that. Finally, given how static (if one is charitable enough to characterize it as such and not as declining) the Greek tradable sector was in the 00s, one sector possessing a comparative advantage doesn’t mean that it displays dynamism or that it is booming, it could merely mean that it is declining in a slower pace than others (or that none other has emerged to take its place). I will elaborate on that and try to overcome the “obstacle” that the last point remarks on later in the post.   

source: World Bank, own calculations

The last year that the OECD calculated the RCA for is 2009. Of course it is “a bit” dated but we have to make do with what we have. Here is the chart.

source: OECD

Greece’s comparative advantages lay in Food Products, Beverages & Tobacco, Textiles, Chemicals, Non-Metallic Minerals and Basic Metals. All segments are characterized by low technological content and low added value.

It would be interesting to see where RCA for the Euro Area 12 countries lay. 

source: OECD, own calculations

RCAs for EA 12 countries cover most segments, with the exception of electrical and optical equipment where the clustering of RCAs is rather low. 

The grouping of activities into segments is different from SITC or the other classifications of merchandise exports. 

To get a sense of the value added of each segment in the next chart I’ve plotted the Export Unit Values for each one of them, as far as the Eurozone is concerned. The Export Unit Values are considered a measure of a product’s (perceived) quality. As such they are not a perfect indicator of the product’s value added, since the import content (and some other factors) for each one may vary; nonetheless this is an extremely useful indicator.

source: Euostat, own calculations

As you can see, the RCAs for Greece lay in the segments for which export unit values are the lowest among the ones featured in the chart above.

Back to the opening paragraphs, when recounting the shortcomings of the RCA as an indicator, I said that possessing an RCA does not necessarily mean that the country is actually particularly competent in that niche. To get past that reef, we will use a filter, namely the Export UnitValues. Again this is not in any way a perfect measure for the stated purpose, but which measure is perfect after all..?

The fact that the product classification used in the RCA calculation is different from the SITC means that a few more charts are needed here to take a tour of the product categories that Greece possesses a RCA.

The first segment is Food and Live Animals. Here Greece is ranked mid-table among the EU countries. Note were Italy, Portugal and Spain are ranked, whose climates are similar to ours hence their produce in the said niche could be similar to ours. 

source: Eurostat, own calculations

Next, Beverages and Tobacco.

source: Eurostat, own calculations

Here too, Greece is placed in the middle of the ranking table.

Next chart concerns Chemicals and related products. Greece lies almost at the very end of the table.

source: Eurostat, own calculations

Finally, a chart about Manufactured Goods classified by material (which include, among others, textiles, Basic Metals and Non-metallic Minerals).

Here Greece is ranked even lower, with the export unit values of its produce higher only than those of Latvia’s.

source: Eurostat, own calculations

The charts above portray in a crystal clear way, that the only niche where Greece’s produce is not considered to be of very low quality is Food products, Beverages and Tobacco.

A clarification, since I am sure that some people may take this as an indication that Greek products are actually rather cheap, hence their becoming cheaper is not desired or necessary. Actually, the exact opposite is true; when competing in the lower quality segments, price-competitiveness is the only channel through which you can differentiate your produce. 

Moreover, since according to Eurostat data, in all the sectors mentioned above, personnel costs comprise a non-negligible part of total production value then producers (and as a result workers) in Greece are in a severely handicapped position, with their products classified as low-quality and wages-related costs being double of that of other countries. This is a perfect illustration of what being stuck in a lose-lose situation actually means.

source: AMECO, own calculations

source: Eurostat

This is an monstrously long post, so I hope I didn’t lose you earlier and you got that far. To wrap this up, what the RCA, with the additional filtering of Export Unit Values, tells us is that Greece’s comparative advantages lay in low value-added and low technological content sectors. Out of all these sectors, in my humble opinion, Greece is better positioned to compete in the Food, Beverages & Tobacco segment, where its products are considered to be of higher value and it may not take much to raise value-added even further. The rest of the manufacturing sector currently does and will probably keep finding it hard to compete since, its products are deemed to be of rather low quality, while at the same time, it is very difficult (economically and socially) for Greece to improve its cost-competitiveness against low-cost countries.

Greek Exports 2012 Update: some potential green shoots..?

I was trawling through trade data these days, so it was a good chance to write up a post on Greek exports and how they fared in 2012. Well, data for the whole of 2012 are not available, so the piece will be about how Greek exports fared in the 10 months of 2012, but I hope you will allow me that.

Look at the first chart.

source: Eurosta, own calculations

 

As you can see, according to my calculations, the value of Greek merchandise exports rose by about 13% in the Jan – Oct 2012 timespan, on a nominal basis. If one looks at export quantities (my favourite measure) then Greek merchandise exports posted a 15% increase.

I had talked about the distortion in the overall export figures due to the parabolic rise of oil products exports backin the summer of 2011. It is interesting to see, how exports fared after oil products exports have been subtracted. It turns out that the rise in value terms is below 3% but, here comes the interesting part, quantity-wise exports rose by about 10%.

That is the exact opposite of what happened in 2011. Back then exports, rose by 11% after being adjusted for oil products but decreased by 7,6% in quantity terms.

What does that mean? It means that the spike in 2011 was purely due to pricing and even masked a decline in demand for Greek products, while in 2012 a pick-up in demand for Greek products was recorded. A further point (probably the most important too) should be made here regarding that fact, but I will come back to that later.  

I would now like us to take a look at how each segment of Greek merchandise exports performed. 

source: Eurostat, own calculations

Once more, the Oil Products segment was the top performer, followed by Crude Materials, Beverages and Tobacco and Machinery and Transport Equipment. What is of note here is that Manufactured Goods classified chiefly by material posted a decline in value terms and Miscellaneous Manufactured Articles were virtually flat. 

Maybe some of you would be interested in having a picture of which segment is more important in absolute terms.

source: Eurostat, own calculations

Oil Products top that table too, followed by Manufactured Goods classified by material, Food and Live Animals, Chemicals and finally Machinery and Transport Equipment.

Now, I would like to cross-check how export values and export quantities for each segment fared.

source: Eurostat, own calculations

What is encouraging is that most segments witnessed an increase in export quantities, hence external demand. The first 4 codes, witnessed growth in export quantities but that growth was inferior to the growth in export values, so part of the increase in exports of these categories was due to pricing.

Chemicals witnessed a slight decrease in export demand, so the anemic growth recorded was due to pricing.

Now, what I was referring to earlier in the post. Manufactured Goods classified chiefly by material, witnessed a decrease in export value BUT a quite robust spike in export quantity. That was the case too for Miscellaneous Manufactured Articles, with the sole difference that they were flat in value terms. On the other hand, Machinery and Transport Equipment posted increases in both value and quantity terms. Could it be that the effects of internal devaluation have been passed through to export prices? If that is the case, we can see that the overall effect in export values was not positive thus far. Does that by any chance remind you of the J-Curve effect?  In other words, prices are faster to adjust than volumes but volumes ultimately follow posting an increase that leads to a rise in the value of exports. If that is the first part of the J-Curve effect that we’re witnessing, then export volumes should increase further and over-compensate for the lower prices of goods due to the internal devaluation. Fingers crossed that this is the case here.

Finally, here is the breakdown of growth in Intra-EU15 and Extra-EU 15 shipments.

source: Eurostat, own calculations

Positive growth comes from Extra-EU15 with Intra-EU15 shipments being a drag, as is the case for most Euro Area countries (after the overall figure has been adjusted for Oil Products).

To wrap this up, Greek merchandise exports from January till October 2012 grew marginally in nominal terms (after being adjusted for Oil Products) but not that shabbily in quantity terms. There were some sings that the first part of a J-Curve-like effect could be in progress as far as industrial products are concerned. If that proves to be the case, then in the future we should see exports (of industrial products) in value terms, rise significantly and make up for lower prices charged (of course the fact that a fair number of countries are trying to pull the exact same trick could prove to be detrimental here). Finally, as far as growth drivers are concerned, all growth came from extra-EU15 shipments with Euro Area stagnation proving to be a drag here.

EU27 countries' Merchandise Exports: IntraEU stagnation, ExtraEU growth

For some time now I wanted to do a snapshot of merchandise exports growth for EU countries. Unfortunately, full year data for exports are not yet available and the lag that they do become available is one source of frustration for persons (like the author) who spend their time looking at statistics and poring over spreadsheets, but we’ll make do with what we have.

What I think would be rather interesting is look at the breakdown of growth between the intra-EU15 and Extra-EU15 segments. 

First, I would like us to take a look at intra-EU15 export growth.

source: Eurostat, own calculations

As you can see for the vast majority of EU countries that particular market was not a source of growth, as far as the Jan-Oct 2012 interval is concerned. What’s more, Euro Area countries bar for less than a handful, out of which only one was a member of the so-called core, did not post any growth worth mentioning.

Now let’s take a peek at extra-EU15 export growth.

source: Eurostat, own calculations

The picture here is the polar opposite of the one above. Bar for two countries, all others recorded robust growth. What is of note here is that my native Greece ranks third in the relevant table.

This of course, makes me skeptical, since in the past aggregate figures of Greek exports were skewed by phenomenal growth in the Oil Products segment. Taking that into account I hope that you will allow me that slight modification to see if that is the case here too.

Here is the chart for Intra-EU15 exports after Oil Products are subtracted.

source: Eurostat, own calculations

The picture here is not altered meaningfully in terms of ranking, it is just that a few more countries slipped into negative growth territory (Portugal being one of them).

Here is the chart for Extra – EU15 exports. 

source: Eurostat, own calculations

  

Some quick takeaways from the chart. Growth in Extra-EU15 Portuguese exports is apparently not due to mineral fuels exports and is indeed rather robust, as is growth for Cypriot and Baltics’ exports. On the other hand, Greece slipped from the 3^rd place to the 15^th of the said table, meaning that the lion’s share of exports growth still comes from Oil Products.

To wrap this up, growth for EU countries’ merchandise exports originated mostly from the Extra-EU15 segment. The fastest growers were the Baltic countries, along with Central and Eastern Europe (CEE) countries and Southern Euro Area coutnries undertaking internal devaluation. 

P.S. Figures used here are nominal.

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.

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…