Showing posts with label European growth. Show all posts
Showing posts with label European growth. Show all posts

Saturday, February 25, 2012

25/02/2012: Poster-boys of Recovery?

So does this really, I mean really, look like a recovery to any one of you?


The chart above plots evolution of nominal GDP in current US dollars from the pre-crisis peak (set = 100 for every country) through years following the beginning of the crisis (t=0). All data - IMF WEO and September 2011-February 2012 country-specific updates.

Friday, November 25, 2011

25/11/201: Growth is the only solution to Europe's crisis

My latest post for Canada's The Globe and Mail is up - link here.

Please note, when I say 'growth' or 'economic growth' I obviously do not have in mind a bubble re-inflation or growth based on weak fundamentals. Hence, the concept of growth I accept and support is growth that is anchored in both demand and supply fundamentals, aka sustainable growth.

Enjoy and comment.

Monday, August 15, 2011

15/08/2011: Italian "reforms" 2011

So Mr Berlusconi's plan for Italy is now clearly outlined, but as usual with Italian government, it remains to be seen if:
  1. There will be effective government push to implement it, and
  2. There will be a government to implement it.
Italy's new austerity budget is the country only political and macroeconomic response to the increase in bond spreads and its reliance on ECB purchases of the Government paper. In a clear concession to the emergency of the situation, the new budgetary measure were passed by decree, and are now subject to a 2 months-long debate and amendments by the Parliament. Which, of course, is risk number one – the Parliament amendments can significantly reduce the bill effectiveness.

Overall, the bill plans for budgetary savings of €20bn in 2012, and €25.5bn in 2013.

Majority of the reductions will be driven by higher taxes, which means:
  • They will have a longer-lasting adverse impact on growth, and
  • Cannot be seen as permanent or even long-term, as point (1) above implies that for an already heavily taxed economy (with General Government total revenue accounting for 45.5-46% of the country GDP in 2010-2011 against G7 average of 35.2-35.4%), Italy will have to come off higher tax path sometime in the near future.
Given that the country already runs low rates of economic growth (with IMF latest projections for the average growth of under 1.3% per annum in 2011-2016), low personal income base (with GDP per capita adjusted for price differentials expected to return to pre-crisis levels some time in 2013 – the latest of all Big-4 Euro area economies), high unemployment (8.6% in 2011 against G7 average of 7.6%), the gross government debt of 119% this year, and the worst current account deficit of 3.4% this year amongst the Euro area Big-4 economies, it is hard to imagine that the country can actually master these tax increases.

Overall, based on IMF data, the estimated impact of the budgetary plan announced yesterday will take out roughly €1,980 per working person in new taxes and spending cuts, which amounts to 9.3% reduction in the per capita income, adjusted for price differentials. Accounting for this, IMF projections for Italy suggest that Italian real disposable incomes will not return to their pre-crisis peak anytime before 2016. And this is based on IMF's rather rosy assumptions for growth in 2011-2013, which were compiled prior to the onset of the recent economic slowdown.

Of course, in a typical Italian fashion, the new plan is virtually devoid of the structural spending cuts and reforms on the spending side. Overall spending cuts include:
  • Central government ministries cuts of €6bn in 2012 and €2.5bn in 2013.
  • Savings on the funds allocated to town councils, regions and provinces of €6bn in 2012 and €3.5bn euros in 2013.
  • State pension system savings of €1bn in 2012 alongside the increase in retirement for women in the private sector by 5 years to 65. In addition, there will be restrictions on retirement funds for public sector workers who retire early.
  • Burden sharing with senior politicos was achieved by restricting MP's reimbursements for flights only to the economy class costs.
  • All public bodies with fewer than 70 employees will be abolished (excluding economics and finance functions).
  • Provincial governments with less than 300,000 inhabitants and covering less than 3,000 square kilometres will be abolished. Town councils with less than 1,000 inhabitants will be merged. It is estimated this will mean the abolition of up to 29 of Italy's 110 provincial governments.
In terms of revenue increases:
  • There is a new "solidarity tax" on high earners, to be levied for three years from this year, as an additional 5% on income above €90,000 per year and 10% on income above €150,000
  • Increase in taxation of income from financial investments from 12.5% to 20% - which is a regressive measure for Italy, where investment is running at 19.9% of GDP this year, down from the average of 21.6% of GDP in pre-crisis years
  • Increases on a so-called "Robin Hood" tax on energy companies
  • Increase in the base rate for corporation tax
  • Higher tax on lotteries and betting and higher excise duties on tobacco – the latter being a personal blow to the devotees of the Italian MS (aka Morto Sicuro) cigarettes, like myself
  • Further curbs in tax evasion – a set of policies that has been promised more often than the Italian Governments' went to elections, and yet to be delivered in any meaningful measure. Of course, the tax increases above are only going to add incentives to evade taxes in the future, and
  • Finally, in a silly season way, all non-religious public holidays will be celebrated on Sundays, to reduce their disruptive effects on national output (note to Berlusconi - outlawing Italian siesta hours in services would do some marvels to output too).
According to the IFC Paying Taxes 2011 report, Italy's total tax rate stands at 68.6%, compared to the EU rate of 44.2% and the world-wide average rate of 47.8%. The country ranks 128 in the world in Ease of paying taxes, 49th in the world in terms of Tax payments, 123rd in the world in terms of the time cost of complying with the tax codes and 167th in the world in total tax rate burden. (www.pwc.com/payingtaxes)

The only structural reform promised by Berlusconi emergency measures is, as of yet completely unspecified liberalisation of national labour contracts.

Good luck to all who would go long Italy on the back of these 'measures'. In my opinion, there is about 25% chance of the Italian Government actually delivering on revenue raising targets from this package and about 10% chance we will see noticeable reductions in the costs of the state sector in Italy, with one slight exception – the local and regional reforms. However, there is a good 75-90% chance that Italy will slide into a recession in Q3-Q4 2011 and its 2011-2016 average growth rate will likely slide from 1.31% projected by the IMF back in April 2011, to ca 1.02%. Which, of course, will mean that its debt will top 120% of GDP mark in 2012 and is
unlikely to alter the path set out for it in the IMF projections.

Here are few charts:


Friday, September 25, 2009

Economics 25/09/2009: Euroarea improving growth

Eurocoin is out for August and it is showing a positive reading for the first time in 15 months:
So it is time to upgrade a notch my forecasts.

Interesting detail - Eurocoin turn around is under-pinned by rising (though still negative) trend in industrial production, business surveys (both PMI and EU Commission) still staying on the negative side, with Commission survey being particularly gloomy. Consumer surveys are still in dire straits, with exception of Italy (happy summer, folks) and Spain, though Spain is now looking poised for a double-dip consumer recession. Stock prices still are posting poor performance except for Spain and to a lesser extent Germany. Exports are at zero growth rates across the Eurozone, but are modestly positive in Germany, France and Spain.

Net result - a mixed bag of continued weaknesses (abating) and some strengths (very modest).