Economics help blog – Page 191

Improvements in Eurozone Competitiveness

18 November 20175 December 2012 by Tejvan Pettinger

In the lead up to the Euro debt crisis, there was a marked divergence in competitiveness within the Eurozone. In fact, some economists suggested that the currency imbalances were the root cause of the Eurozone fiscal crisis. (VOX article)

However, recent evidence suggests some restoration of competitiveness within the Eurozone.

We can examine competitiveness in a couple of ways. To see the divergence in competitiveness, we can look at unit labour costs. Relative to Germany, unit costs tended to rise much faster in southern Europe. The graph below shows the divergence of southern European economies compared to Germany. Remember in the Eurozone, this decline in competitiveness could not be offset by devaluation.

Decline in competitiveness in Eurozone

europe's competitiveness crisis — Source: lessons in Europe

Competitiveness and Current Account deficits

This decline in competitiveness was reflected in substantial current account deficits in the south, and current account surpluses in the north.

By 2008/09, countries such as Portugal, Greece, Ireland and Spain had achieved record current account deficits.

To What Extent is Eurozone Competitiveness being Restored?

Unit Labour Costs 2009-2014

This research from the OECD suggests a significant restoration of competitiveness. Note, it includes forecasts for 2013 and 2014. This change in relative competitiveness would explain, at least, part of the fall in current account deficits in southern Europe.

How Did Portugal Reduce Current Account Deficit?

22 January 20205 December 2012 by Tejvan Pettinger

Readers Question: Can you tell what Portugal has done to reduce the Current Account GDP deficit so steeply?

portugal-current-account-deficit

The reduction in the Portuguese deficit is quite striking. In researching the answer to this question, I came up with a different post – The Portuguese Economic crisis

From what I can gather, essentially, the rapid reduction in the current account is due to a sharp fall in consumer spending on imports, combined with some growth in exports – helped by improvements in unit labour costs. However, bear in mind, I may have missed out a few other reasons due to lack of data.

Likely Reasons for Reduction in Current account deficit

1. Fall in consumer spending on imports.

portugal-germany

Portuguese economic growth compared to Germany

As mentioned in The Portuguese Economic crisis Portugal has seen the biggest fall in real GDP (apart from Greece) in the Eurozone. Portuguese consumers have seen a rapid fall in disposable income due to a combination of tax rises and public spending cuts. With lower income, Portugal is simply buying less imports – this improves the current account.

The wasted years of the UK Economy 2008-12

18 November 20173 December 2012 by Tejvan Pettinger

By any standards, 2012 has been a dismal year for the UK economy. Despite a temporary Olympic bounce, GDP remains below 2008 levels, and the Bank of England is as pessimistic as it’s ever been. Unemployment might be lower than other European economies, but with 1 million underemployed – official statistics perhaps mask the wasted resources in the economy.

A woeful recovery. Worst than the Great Depression of the 1930s.

GDP is 3.1% below where it was when the recession began 18 quarters ago in early 2008.

The Chancellor has a lot of bad news to contend with.

He will miss his deficit reduction plans.
His forecasts for economic recovery proved overly optimistic. Instead Britain has entered into the first double dip recession since the 1970s. It is quite possible, we might see first triple dip recession in 2013.

In his defence, you might point to the Eurocrisis and say it is inevitable the UK economy was harmed by the slowdown across the channel.. But, despite the recession in the Eurozone (which have problems relating to single currency), it is hard to avoid the fact that two and half years into the job, he has to take responsibility for the direction of the economy.

Essentially, Osborne started the job with great fanfare about reducing the deficit. Deficit reduction was sold as the most important objective – the implication was that without immediate cuts, the UK could end up like Greece or Italy.

But, unfortunately, the experience of the past two and half years is that fiscal consolidation during a recession tends to be counter-productive (austerity will increase deficit). Freezing public sector spending, whilst the private sector is still very fragile, has led to a large negative multiplier effect. It is hard to avoid the conclusion that the double dip recession is largely the fault of economic policy.

Forecast for Pound Sterling in 2013

18 November 201730 November 2012 by Tejvan Pettinger

A look at the future prospects for the Pound in the coming months of 2013.

The Sterling index measures the value of the Pound Sterling against a basket of trade weighted currencies.

In Dec 2011 the index was 80.4
By Oct 2011, the exchange rate index has increased to 83.6

This modest appreciation in the Pound has occurred despite:

Double dip recession in UK
UK Inflation remaining above target
Growing current account deficit
Quantitative easing increasing money supply.
One of largest budget deficits in OECD

Therefore the appreciation in the Pound is not so much a reflection of the strength of the UK economy – but a reflection of market nervousness about other currencies. In particulary, given the Euro crisis and difficulties of Eurozone economies, the Pound offers a greater semblance of normality and confidence.

However, given the weak state of the UK economy, it is likely that the fortunes of the Pound could deteriorate in 2013 – especially against the dollar and currencies other than the Euro.

In particular, the growing UK current account deficit (now over 5% of GDP) suggests underlying lack of balance between imports and exports.

uk-current-account-quarterly-oecd

The UK has one of the largest current account deficits in the OECD. There are other reasons to explain the current account deficit, but the widening of the deficit to over 5% of GDP, suggests the Pound is becoming more uncompetitive against its main rivals. In a floating exchange rate, this is likely to lead to some depreciation in the future.

Cost of Benefit Fraud v Tax Evasion in UK

18 November 201728 November 2012 by Tejvan Pettinger

Benefit fraud and tax avoidance are currently emotive topics. What is the extent of benefit fraud and tax fraud in the UK?

Benefit Fraud

For 2011/12 (preliminary), it is estimated that 2.0 per cent of total benefit expenditure was overpaid due to fraud and error.
In 2010/11 – benefit fraud was estimated at £3.4bn – 2.2% of total benefit expenditure (£154bn)
(Dept for Work and Pensions)
It is also estimated that 0.9%, or £1.3bn, of total benefit expenditure was underpaid due to error.

More specifically

4.4%, or £350m, of Income Support expenditure has been overpaid;
6.5%, or £290m, of Jobseeker’s Allowance expenditure has been overpaid;
6.0%, or £500m, of Pension Credit expenditure has been overpaid;
2.4%, or £130m, of Incapacity Benefit expenditure has been overpaid;
4.7%, or £1030m, of Housing Benefit expenditure has been overpaid.
(Dept for Work and Pensions)

Public Perception of Benefits

The public have an increasingly negative opinion to benefit claimants. A study suggested that 1 in 5 people believe a majority of claims are false, while 14% believe a majority of claims are fraudulent. Benefits stigma

Benefits Unclaimed

“In 2010 an estimated £16 billion in benefits and tax credits were unclaimed. (charities claim £16bn a year unclaimed at Telegraph)

For example, the Dept for work and pension estimate:

Pension Credit: The number of pensioners that were estimated to be entitled but not claiming Pension Credit was between 1.21 million and 1.58 million. The total amount of Pension Credit unclaimed was between £1.94 billion and £2.80 billion. (DWP)

Italian Economic Decline

18 November 201728 November 2012 by Tejvan Pettinger

In the past 20 years, the Italian economy has stagnated compared to its main international competitors. Using different measures, such as labour productivity and relative GDP growth – Italy has fallen significantly behind. Despite low budget deficits (and primary surpluses) Italy is facing high bond yields and crippling interest payments. These high bond yields are in response to both the high levels of debt – but also the continued economic weakness.

Italian Productivity

italian productivity

Italian productivity relative to the UK. In the 1990s and 2000s, Italian output per workers has fallen behind it’s main competitors. It’s a similar story if we compare Italian productivity to France or Germany.

The Economic Cost of High Bond Yields

18 November 201727 November 2012 by Tejvan Pettinger

Readers Question I’ve recently been looking up on the Eurozone financial crisis for random reasons and i don’t understand the statement in an FT article about what we must acknowledge in order to overcome the Eurozone problems. The statement goes ‘no country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors’. Please can you help?!

Firstly, it is not an easy article – there is a lot of jargon! To quote:

“A fundamental shift of tack is required, towards an approach focused on avoiding systemic risk, restarting growth and restoring arithmetic credibility rather than simply staving off disaster”

To answer your question:

A primary budget surplus is the government budget balance excluding the cost of interest payments on government debt.

Suppose the UK budget deficit is 11% of GDP.
But, interest payments on the government debt cost around £40bn or 3% of GDP.
Therefore, the primary budget deficit of the UK is 8%.
Suppose Italy’s budget deficit is 2% of GDP, but interest payments are 7% of GDP. In this case Italy actually has a large primary surplus of 5% (even though an actual budget deficit of 2% of GDP)

primary-budget-deficits — Source: OECD Economic Outlook June 2012

This graph showing changes in primary balances shows how countries in the Eurozone have pursued fiscal tightening (spending cuts and tax increases) to reduce their budget deficits. Excluding interest payments, many now have a primary budget surplus.

GDP at PPP compared to GDP in $US

18 November 201727 November 2012 by Tejvan Pettinger

A look at how GDP per capita in $US gives different values when measured at purchasing power parity.

gdp-capita-ppp-v-gdp-us-dollars

GDP at Purchasing Power parity (PPP) takes into account variations in living costs.

PPP is an attempt to work out how much currency will be needed to buy the same quantity of goods and services in different countries. If this can be done, it can show the underlying exchange rate between the two different countries and a more accurate reflection of actual living standards in countries.

Often exchange rates don’t actually reflect different living costs because some goods are not easily traded. For example, if you live in Norway, it is irrelevant if there is cheaper accommodation elsewhere in the world. What is important is how far your income goes in buying goods and services.

Norway v India

For example, GDP per capita in Norway is $98,102. However, in Norway the cost of living is much higher (higher VAT, higher wages, higher rents). Therefore, even if you have a salary of $98,102 – it doesn’t go as far as elsewhere in the world..

By comparison, in India, GDP per capita is $1,489 per year. However, in India, living costs are much lower and so that income goes much further. If we adjust for the relative cost of living in the different countries, the gap between India and Norway is much reduced.

Using GDP per Capita in $US, Norway’s national income is 65 times higher than India.
Using GDP per Capita adjusted for PPP, Norway’s national income is only 17 times higher than India.

So we get quite a different outlook.

GDP per capita in PPP is the most useful for comparing living standards. If your income increased £400 a month, but at the same time your rent increased by £400 – would you feel any better off? No.