Economics and politics - comment and analysis

The condition of the European economy at the start of 2016: the misery is clear. Part 2

The first part presented evidence on the bleak economic situation in Europe. In the second part, we will complement our analysis by presenting three other indicators (construction, retail and price evolution). We will also provide an answer to a question that is often being asked by our readers: how can we be so sure that the official figures of the statistical offices adequately capture what they are supposed to measure? Often readers tell us that there are so many other indicators, which often show economic improvement, which we should not ignore. Most of the time, however, this is not correct.

The crucial mistake is also made ​​by journalists. Let me show you an example from The Financial times (see here, although you probably need a subscription). In this article, the author says that, on the one hand, German industrial production declined, but that, on the other hand, the German Federal Statistical Office reports that domestic demand has been strong and that more investments are taking place. The implication is that the German economy is all by all doing quite well. The cardinal flaw consists in giving equal weight and significance to the data that refer to the production side of GPD and to the data from the Federal Office that refer to the demand side. I will return to this very important misunderstanding at the end of this article. Let us look at the indicators first.

As is the case with industrial production (see part 1), in the construction sector only stagnation can be observed. Even in Germany, where the housing market supposedly overheats at the moment, no increase in activity can be noticed, although it is true that the main construction industry is doing slightly better than the finishing trade. The situation is especially bad in France: there is no limit to the decline in sight (see figure 1).

Figure 1


In Southern Europe, the situation is not any better (see figure 2). Spain stagnated at its already low level, in Italy construction activity is still decreasing, although less outspoken than before, and after years of continual decline Portugal is still going downhill. All of this happens notwithstanding the fact that interest rates have been falling for years and are still falling. If this is not proof positive that European economic policy is fundamentally misguided, then what is?

Figure 2


The retail trade, which was the only bright spot for a long time, also experienced a slump in December. This was most outspoken in France, although the country caught on again in the meantime (see figure 3). However, for the EMU as a whole, the evolution does not amount to anything more than mere stagnation. In Germany, retail stagnates almost at the level of early 2015. Italy’s slight improvement came already to an end.

Figure 3


It is even worse in Southern Europe (see figure 4). In Portugal, retail sales are falling, in Spain the previous slight upward movement is no longer detectable and in Greece the situation is absolutely hopeless. This makes you realise what the Troika has done to this country!

Figure 4


Unemployment in Southern Europe remains catastrophic (see figure 5). Official figures show indeed a decrease. In reality, this only means that people no longer register as unemployed because there is no realistic chance of finding a job anyway or because the statistics do not count several categories of people without work as officially unemployed. The fact that a country such as Spain still shows an unemployment figure of more than 20% says everything there is to say about the level of social carnage that European economic policy created.

Figure 5


Eight years after the outbreak of the global financial crisis, the unemployment rate in the EMU as a whole is still more than ten percent (see figure 6).

Figure 6


The price evolution in the EU is further proof of the grandiose policy failure in Europe (see figures 7 and 8). Producer prices and consumer prices remain far below the goal set by the monetary union. The ECB announced that it will make a bigger effort to bring the inflation rate up to around two percent in the near future, but, in reality its options are very limited.

Figure 7


Figure 8



The analysis that Mario Draghi recently presented to the European parliament is completely correct (see part 1 here). The stagnating European economy is deteriorating further. This certainly does not bode well for the future. The stoic calm with which this is received in Berlin shows the frightening inability to see the storm gather in Europe. Berlin does not even seem to understand that the resistance to take in more refugees is the indirect result of the German resistance to change economic policy in Europe. I said this many times before, but it needs to be repeated: those who have to deal with ten percent unemployment or more and with the exodus of a part of their own population cannot be made to understand that they have to act in solidarity with Germany and need to take in a similar proportion of refugees.  I will now come back to the problem that I mentioned at the beginning regarding the calculation of GDP. To begin with, one has to know that GDP projections are always based on assessments of the demand side. This is the only way to produce sensible predictions. On the other hand – and that is the key difference – ex post calculations of quarterly GDP developments are based exclusively on data regarding the production side. Only here you have a real-time recording of what happened. This also holds for the data that we use for manufacturing output, construction activity and the turnover in the retail trade. Of course, the latter is not referenced as production in the statistics: a product is being produced (or imported) only once. Selling it is not production.

This applies, of course, in equal measure to the entire demand side. As a consequence, it is completely incorrect to say that consumption rises and to present this as an argument against a decline in production. If there is no increase in production, no increase in consumption can take place (unless the existing stock is being depleted, which can also only happen once), not in a closed economy anyway. Ex post one always has to use data on the production side. The demand side is used to make predictions, but these predictions cannot be used to falsify facts (what we know happened) about the production side. The problem with the calculations of national accounts in the short term (and for the calculation of GDP of the previous three months) is that there are no recent enough data for large parts of the production side. This is true for almost all services, for which it is impossible to construe real production data anyway. Instead, workers’ wages and estimates of employment in these sectors are used. All these data can be updated easily on the assumption that no major fluctuations in economic activity in these sectors are taken place. The same is true for data on the country as a whole. If, as has been the case in recent months, production data are very sluggish, but the calculations show of an increase of GPD, this can only mean that the Federal Statistics Office believes (or hopes) that all other sectors continue to grow. To make such an assessment, data on employment and unemployment are used and as well as probably some well-chosen but nonetheless faint indications. Indications, not indicators. There are no real waterproof data.

It would therefore be accurate if the Federal Office would call its ‘predictions’ something like ‘projections’ and it would be honest if the Office would not act as if its ‘calculations’ are set in stone.