The crisis,from Wall Street to Main

Street

Francesco Daveri

1

The year-to-year variation in Gdp growth is substantial. The 1978-2014 growth rate of world Gdp averaged 3.4 ppts (dotted line), with a standard deviation of 1.4 ppts

Plenty of business cycle fluctuationsin the world economy

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p, %

Actual GDP data mix up two parts, potential and transient GDPn = potential Gdp or output (dotted line, goes up over time

thanks to innovation and technical change) Transient part (excess/shortfall of actual Gdp with respect to Gdpn)

is the business cycle component of Gdp

Macroeconomic definition of Business Cycles

t

Gdpn

Gdp

Trough, “pavimento”

ExpansionFrom trough to next peak

RecessionFrom peak to next trough

Peak, “tetto”

Statistical definition of a “recession”

Business cycle: alternating expansions and recessions. What is a “recession”?Often cited definition: GDP growth <0 over two consecutive quarters.

Not very useful; Sequence of quarterly GDP growth of -2%,

+0.01%, -2%, +0.01 would not be a recession, although the yearly number would be sharply negative

Common practice: Business cycle dating committees look at broad set of variables (GDP but also industrial production and turnover, total employment, retail sales) with varying time frequency.

316 304

269

270 266

245

232

299 301

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302 299

290 287

428 416

342

380

405 414 416 423

410

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398 403

371 363

230

250

270

290

310

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370

390

410

430

2007 2008 2009 2010 2011 2012 2013Investment Govt consumption

Export Import

5

1.492 1.475

1.394

1.417 1.424

1.390 1.365

863

856 843

856 856

820 799 780

880

980

1.080

1.180

1.280

1.380

1.480

2007 2008 2009 2010 2011 2012 2013

gdp Consumption

Gdp = C +I+G+ Exp – Imp: what the yearly data show

1) C often fluctuates less than Gdp (not in 2012)2) Gdp more stable than I, Exp e Imp 3) G is “countercyclical” item

Source: ISTAT Data unit: Billions of €, constant (chained) prices

Growth rates Gdp c i g x mMean 2008-13 -1,4 -1,3 -5,0 -0,7 0,0 -2,2Std. deviation 2,5 2,0 4,5 1,3 9,9 8,8

Questions on Gdp and consumption

Question: Why does Gdp (often) fluctuate more than C?

Answer1) C is a function of disposable income (Gdp – taxes

+ transfers), not of Gdp as such. Disposable income has more stable trend than Gdp, hence C is also more stable

2) C is also a function of wealth. Wealth fluctuates less than Gdp.

Question: Why has C fallen more than Gdp in Italy in 2012-13?

Answer1) In 2012-13 maxi increase in taxes (Imu, excise

taxation) 2) Also: fall in housing market made people feel

poorer than in the past

Nota di aggiornamento al Documento di Economia e Finanza (DEF), ottobre 2014

2011 2012 2013 2014 2015

Real Gdp growth +0,4 -2,4 -1,7 -0,3 +0,5

Gdp at current prices (bn €) 1638,9 1628,0 1618,9 1626,5 1642,8

Deficit / Gdp (“quadro tendenziale”)

3,8 3,0 2,8 3,0 2,22,2

Deficit / Gdp (“quadro programmatico”)

3,8 3,0 2,8 3,0 2,92,9

Public debt /Gdp (“quadro programmatico”)

120,8 127,0 127,9 131,6 133,4

Tax revenue / Gdp (“a legislazione vigente”)

46,6 48,1 48,3 48,3 48,5

Govt spending / Gdp (net of interests on public debt) 45,6 45,6 46,3 46,6 46,2

Total Govt spending / Gdp 50,4 51,1 51,1 51,3 50,7

The tax revenue hike in 2012 (and projections)

Quarterly data give more details

Qualitative picture is the same as for yearly data:

• C less volatile than Gdp (but for 2012);• Exports, Imports, I more volatile than

Gdp;• G is countercyclical.

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enta

ge c

hang

e co

mpa

red

to

corr

espo

ndin

g pe

riod

of t

he p

revi

ous y

ear

Gdp

Imp

C

I

G

Exp

Source: Eurostat

Problem: data comparability across quarters

Question: How do we compare q1 2013 with q4 2012?

Q4 2012 did have Christmas, q1 2013 doesn’t.

Sales (and Gdp) shoot up in q4 every year, then down in January. August sales and production drop and then they automatically recover in September. Yet economy may still be depressed in September.

How do we measure this?Answer: data must be “de-seasonalised” to be

made comparable across quarters.Link to the Istat website

10

De-seasonalised QoQ data on Gdp indicate end of recession for the EZ17 (Eurozone) and the US

between q2 and q3 2009Quarterly Gdp data

Ita Euro Usa Ger Fra UK Spa

Q1 08 vs Q4 07 +0.5 +0.8 -0.2 +1.6 +0.5 +2.4 +0.4

Q2 08 vs Q1 08 -0.6 -0.3 +0.4 -0.6 -0.4 -0.3 +0.0

Q3 08 vs Q2 08 -0.8 -0.4 -0.7 -0.3 -0.3 -0.7 -0.6

Q4 08 vs Q3 08 -2.1 -1.8 -1.4 -2.4 -1.4 -1.7 -1.1

Q1 09 vs Q4 08 -2.7 -2.5 -1.6 -3.5 -1.4 -2.4 -1.6

Q2 09 vs Q1 09 -0.5 -0.2 -0.3 +0.3 +0.3 -0.6 -1.1

Q3 09 vs Q2 09 +0.4 +0.4 +0.4 +0.7 +0.3 -0.3 -0.3

Q4 09 vs Q3 09 -0.1 +0.1 +1.2 +0.3 +0.6 +0.4 -0.1

Q1 10 vs Q4 09 +0.4 +0.2 +0.9 +0.5 +0.2 +0.3 +0.1

Gdp loss during 2008-09 recession

-6.5 -5.1 -3.8 -6.4 -3.2 -5.6 -4.6

11

The takeaway from previous table on the 2008-09 recession

1. The 2008-09 recession started a couple of quarters before the financial crisis has precipitated.

2. In the US and the euro area the Great Recession of 2008-09 has ended by mid 2009. In Germany and France starting from 2009 Q2. In Italy, the euro area and the US from 2009 Q3.

3. In the UK and Spain the recession lasted longer (UK, until 2009 Q4 and Spain until 2010 Q1)

4. Italy, Germany and the UK showed the highest cumulated Gdp losses in 2008-09. France and the US showed the lowest cumulated loss. Spain in between.

Reminder: If an economy exhibits a “+4%” in the wake of a “-4%”, its GDP has not come back to where it was, but stays below the previous level

12

2° half of 2009- 1° half of 2011: gradual recovery. NOT for Germany & Usa, where recovery was fast

Pil, quarterly Ita Euro Usa Ger Fra UK Spa

q209 vs q109 -0.5 -0.2 -0.3 +0.3 +0.3 -0.6 -1.1

q309 vs q209 +0.4 +0.4 +0.4 +0.7 +0.3 -0.3 -0.3

q409 vs q309 -0.1 +0.1 +1.2 +0.3 +0.6 +0.4 -0.1

q110 vs q409 +0.4 +0.2 +0.9 +0.5 +0.2 +0.3 +0.1

q210 vs q110 +0.4 +1.0 +0.6 +2.2 +0.6 +1.1 +0.2

q310 vs q210 +0.2 +0.4 +0.5 +0.7 +0.4 +0.8 +0.0

q410 vs q310 +0.1 +0.3 +0.8 +0.4 +0.3 -0.5 +0.2

q111 vs q410 +0.1 +0.8 +0.1 +1.3 +0.9 +0.5 +0.4

q211 vs q111 +0.3 +0.2 +0.2 +0.1 0.0 +0.2 +0.2

Gdp during 2009-11 recovery

+1.8 +3.4 +4.8 +6.7 +3.7 +2.8 +1.0

Compared to end 2007: Germany +3%, France about the same, Spain -5%, Italy -9%

Where do growth differences leave us in terms of

real GDP levels?

Source: Eurostat

90,092,094,096,098,0

100,0102,0104,0

Q1-2

008

Q2-2

008

Q3-2

008

Q4-2

008

Q1-2

009

Q2-2

009

Q3-2

009

Q4-2

009

Q1-2

010

Q2-2

010

Q3-2

010

Q4-2

010

Q1-2

011

Q2-2

011

Q3-2

011

Q4-2

011

Q1-2

012

Q2-2

012

Q3-2

012

Q4-2

012

Q1-2

013

Q2-2

013

Q3-2

013

Q4-2

013

Q1-2

014

Q2-2

014

Francia Germania Italia Spagna

14

Gdp only at quarterly frequencies. Need other indices to learn how the economy

fares between Gdp releasesMonthly indicators of the business cycles are either coincident or forward or backward with respect to Gdp.

Total employment or unemployment Backward-looking indicator Depends on past Gdp

Industrial production and turnover Coincident indicator Quarterly IP and turnover highly correlated with same-

quarter Gdp growth

Orders Forward looking variable Predicts what is going to happen to industrial production

and turnover (and Gdp)Retail sales

Coincident.

Not all retail sales fell equally abruptly Food sales resilient, durables and semi-durables fell…

Fonte: Elaborazioni su Istat

Crisis not equally there for everybody.1) Small shops, dramatic fall2) A «new normal» for Big Box retail formats (GDO)?

Fonte: elaborazione su dati Istat

Even within the GDO, quite a bit of action

Fonte: elaborazione su dati Istat

One indicator, not manythat’s what we go for …

This is the Oecd CLI (Composite Leading Indicator) superindex!

http://www.oecd.org/std/leading-indicators/

19

What’s in the Oecd super-index for Italy today?

The Oecd super-index is a summary of six sub-indices (for Italy):

  Component Series (Unit) Source

• Consumer confidence indicator (% balance)Institute for Studies and

Economic Analyses (ISAE)

• Production: future tendency (manufacturing) (% balance)

ISAE

• Deflated net new orders (2005 = 100) ISTAT

• Order books level (manufacturing) (% balance) ISAE

• CPI All items (2005=10) inverted ISTAT

• Imports from Germany Cif (USD) ISTAT

Source: Oecd

20

The Oecd super-index is a summary forward looking indicator. In 2009 it has shown “signs of recovery” since early 2009.

Press cut, Sep 12, 2009

“OECD composite leading indicators (CLIs) for July 2009 show stronger signs of recovery in most of the OECD economies. Clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia”

The minimum of the super-index for Italy in 2009 was reached around the beginning of 2009.

21

What the CLIs used to say for Italy early on in 2009?

What the super-index shows today?

In 2013 the Oecd super-index showed signs of recovery everywhere, with an acceleration in the EZ, Germany, Italy and consolidation (“growth firming”) in the US. Instead, EZ struggling not to fall in recession for the 3rd time

Release: Oecd, October 2014

23

Another summary indicator: PMI Markit• Purchasing Managers' Index™ (PMI™) series

compiled by Markit are key benchmark indicators for measuring the business and economic conditions in any given economy.

• In particular: Eurozone Complete PMI data collected from

5,000 manufacturing and services firms; Eurozone Services PMI data collected from a

2,000 private service sector firms.• There are two parts to the monthly PMI releases;

the first is the headline PMI number, designed to provide a snapshot of the health of the economy;

the second is the sub-indices, or component level data. These sub-indices provide insight into key economic drivers such as inflation, exports, employment and inventories

24

PMI Markit: benefits and functions

• Benefits: Reliable guide to future official economic data releases such as

GDP; Data are produced very rapidly, and far faster than equivalent

official data, often providing the first indication of economic trends each month;

Represent the most comprehensive global economic survey available to professional investors (more than 20.000 companies are in the panel).

• Functions: Provide a snapshot of the health of the economy; Data are comprehensive and cover private sector economic

activity in all of the world’s (major developed and emerging economies);

Data are produced using the same methodology, including all main developed economies and key emerging markets, offering uniquely accurate international comparisons.

25

Example of PMI Markit

Release: February 2014

• Flash Eurozone Composite Output Index: 52.7 (January 2014 was 52.9)

• Flash Eurozone Services Business Activity Index: 51.7 (January 2014 was 51.6)

26Release: February 2014

PMI Markit for Core vs Periphery EZ countries

The periphery (and France) lag behind Germany both in output and employment

Measuring the labor market implications of the crisis

Two keywords:

• Output gap

• Okun’s law

Definition: the “output gap”

Output gap - a synthetic measure of fluctuations= (GDP-GDPpotential) / GDPpotential

If output gap positive, economy overheated & inflation mounting;

if output gap negative, economy working at less than full capacity & inflation cooling down.

Yet formula above not very useful: who knows the value of Gdp or GDPpotential in $ or €?

See useful substitute in the next slide.

Computing the output gap on the flip side of your business card

Previous formula: Output gap = (GDP-GDPn) / GDPn may be replaced with

something simpler and measurable: Output gapt output gapt-1+ (actual growtht – potential growtht), where “actual Gdp growth” is a known number and “potential growth” = avg.

growth of recent years

Euro area 2009 2010 2011 2012 2013

Actual GDP growth

1.9 1.4 -0.6 -0.4

Potential GDP growth

1.0 0.9 0.8 0.8

Output gap

-3.9 -3.0 -2.5 -3.9 -5.1

Source: Oecd Statistics website

Definition: Okun’s law

Over the cycle: GDP and unemployment co-vary negatively. Need rule of thumb to translate U rate above or below its natural rate in terms of output gap. Okun’s law is such rule of thumb.

Okun’s law: Any extra % point of actual unemployment corresponds to 2% points of output gap (Okun’s coefficient = (negative) 0.5).

An empirical regularity. With exceptions (see next slides)Rationale for Okun’s law? Why does GDP fluctuate more than U?

As GDP falls, labor hoarding; as GDP rises, overtime In both cases, changes in U lag behind changes in GDP For about six to nine months if employment very

protected, less so in the US

Okun’s law in excess of 1 in the US economy in 2006-2009 …

Source: International Monetary Fund, World Economic Outlook, 2010

... And closer to zero for Germany …

Unemployment rate in Germany

4,5

5,5

6,5

7,5

8,5

Jan-0

8fe

b-0

8m

ar-0

8apr-0

8M

ay-0

8Jun-0

8Jul-08

Aug-0

8Sept-08

Oct-08

nov-0

8D

ec-0

8Jan-0

9fe

b-0

9m

ar-0

9apr-0

9M

ay-0

9Jun-0

9Jul-09

Aug-0

9Sept-09

Oct-09

nov-0

9D

ec-0

9Jan-10

feb-10

mar-10

apr-10

May-10

Jun-10

Jul-10

Aug-10

Sept-10

Oct-10

nov-10

Dec-10

Jan-11

feb-11

mar-11

apr-11

May-11

Jun-11

Jul-11

Aug-11

Sept-11

Oct-11

nov-11

Dec-11

Jan-12

feb-12

mar-12

apr-12

May-12

Jun-12

Jul-12

Aug-12

Sept-12

Oct-12

nov-12

Dec-12

Jan-13

feb-13

mar-13

apr-13

may-13

jun-13

jul-13

aug-13

sep-13

oct-13

nov-13

dec-13

Source: Eurostat

90,092,094,096,098,0

100,0102,0

Germany's Gdp

Germany

.. And Italy still in 2008-09. Then in the years closer to us, Okun’s law back in business

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7

8

9

10

11

12

13

Jan-08

feb-08

mar-08

apr-08

May-08

Jun-08

Jul-08

Aug-08

Sept-08

Oct-08

nov-08

Dec-08

Jan-09

feb-09

mar-09

apr-09

May-09

Jun-09

Jul-09

Aug-09

Sept-09

Oct-09

nov-09

Dec-09

Jan-10

feb-10

mar-10

apr-10

May-10

Jun-10

Jul-10

Aug-10

Sept-10

Oct-10

nov-10

Dec-10

Jan-11

feb-11

mar-11

apr-11

May-11

Jun-11

Jul-11

Aug-11

Sept-11

Oct-11

nov-11

Dec-11

Jan-12

feb-12

mar-12

apr-12

May-12

Jun-12

Jul-12

Aug-12

Sept-12

Oct-12

nov-12

Dec-12

Jan-13

feb-13

mar-13

apr-13

may-13

jun-13

jul-13

aug-13

sep-13

oct-13

nov-13

dec-13

Italia

Source: Eurostat

90,092,094,096,098,0

100,0102,0

Italy's Gdp

Italy

Come erano le previsioni 2014-15

nei primi mesi del 2014

Le slide dal corso 2013-14 …

Nel 2014-15 tornerà (dovrebbe) il segno più …+pil, +consumi, +export, +import. Pil a prezzi correnti su del 2 per cento. Ma effetto zero su disoccupazione.

Consumi 2014 (variazione %, volumi)Governo Nota di Aggiornamento al DEF, settembre 2013

+0,5(previsione Pil: +1,0)

IstatPrevisioni per l’economia italiana, ottobre 2013

+0,2(previsione Pil: +0,5)

Commissione EuropeaAutumn Economic Forecasts, novembre 2013

+0,3(previsione Pil: +0,7)

35

Il segno più del 2014 viene dalla ripresa (oscillante) degli ordini industriali …

36

90,0

92,0

94,0

96,0

98,0

100,0

102,0

set-

11

ott

-11

no

v-11

dic

-11

ge

n-1

2fe

b-1

2m

ar-

12

ap

r-12

mag

-12

giu

-12

lug-1

2ag

o-1

2se

t-12

ott

-12

no

v-12

dic

-12

ge

n-1

3fe

b-1

3m

ar-

13

ap

r-13

mag

-13

giu

-13

lug-1

3ag

o-1

3se

t-13

ott

-13

no

v-13

dic

-13

ge

n-1

4

Ord

inati

vi

tota

li

dell

’in

du

str

ia, 2

010=

100

GENNAIO-DICEMBRE 2013: -1,5% SU GEN-DIC 2012, IN MIGLIORAMENTO RISPETTO AL 1O SEMESTRE 2013 RISPETTO A 1°SEMESTRE 2012 (ERA -3,2%)

Fonte: Elaborazione su dati Istat

La ripresa 2014 è poi trainata dal recupero della fiducia di imprese e famiglie nel 2013 (la ripresa della fiducia delle famiglie si è però incrinata negli ultimi mesi dell’anno)

85,087,089,091,093,095,097,099,0

101,0103,0105,0

gen-

11

giu-

11

nov-

11

apr-

12

set-

12

feb-

13

lug-

13

dic-

13

Fiducia famiglie

37

75

80

85

90

95

100

gen-

11

mag

-11

set-

11

gen-

12

mag

-12

set-

12

gen-

13

mag

-13

set-

13

Fiducia imprese

Fonte: Istat

… E da ordini e fiducia si va ai fatturati, con una marcata differenza tra interni ed esteri …Fatturato, industria

(dati destagionalizzati)

Totale Nazionale Estero

Aprile 2008 100.0 100.0 100.0

Aprile 2009 76.8 77.9 74.1

Aprile 2011 93.2 91.6 96.7

Aprile 2013 83.1 76.8 99.3

Gennaio 2014 86.0 79.1 103.9

38

IL FATTURATO ESTERO DELL’INDUSTRIA GIÀ NELL’APRILE 2013 ERA RITORNATO AI LIVELLI PRE-CRISIIL FATTURATO INTERNO È MOLTO SOTTO, MA È IN LIEVE RIPRESA

Fonte: elaborazione su dati Istat

Secondo la Confindustria c’era anche uno «scenario B» più pessimistico.Lo scenario B si è rivelato più ottimistico di quello che è accaduto, soprattutto per il peggioramento della congiuntura internazionale (Ucraina)

39

Il peggioramento della fiducia dei consumatori, un problema comune a tutti i governi italiani

40Fonte: Elaborazione su dati Istat