Saturday, August 09, 2008

Blazing Economies

It is interesting how the US news media describes the German economy of the last year.

The Italian economy, chronically stagnant over the last decade, shrank in the second quarter by 0.3 percent, according to the government data.

Another quarter of decline would mark the country’s fourth recession — defined as two consecutive quarters of negative growth — in a decade.

More bad news appears increasingly likely this coming week in the form of data on growth in Germany and the 15-nation euro area.

Many economists believe the German economy, the engine of the region, may have contracted in the second quarter after blazing ahead by 1.5 percent in the first three months of the year. Much of that growth reflected technical factors like construction projects that will not be repeated. But the European Central Bank said Thursday that the fall-off in growth also stemmed from higher energy prices and cooling demand for German exports worldwide.
Got that a 1.5% growth rate in Germany is described as blazing.

And how has the growth rate the US been described lately?
'The fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession,' Bear Stearns (nyse: BSC - news - people ) economist John Ryding said in a research note.

'Indeed, the popular definition that a recession is two or more consecutive quarters of negative GDP growth is not used by the National Bureau of Economic Research (NBER) in dating recessions,' he pointed out.

The NBER is considered the official arbiter of recessions and defines the R-word this way: 'A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.'

In a 2001 paper, the NBER said it 'gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions'. In fact, NBER considers job and income growth more important than GDP.

Although there were two quarters of negative growth in 2001, those quarters were not consecutive. The NBER still named that period of downturn a recession.

While Rupkey said the U.S. should see at least one quarter of negative growth before naming a recession, others say meager growth will suffice for such a call.

'For the U.S. economy, which can potentially grow at about 2.75 pct, consistent growth below 1.0 pct should be considered recessionary,' said Aneta Markowska of Societe General.

'There's nothing magical about staying above zero,' said L. Josh Bivens of the Economic Policy Institute, a liberal think-tank in Washington.

'Despite the barely-positive growth, we are almost certainly in a recession,' he said.
Got that? German growth at a 1.5% annual rate is considered blazing. Any American rate below 2.75% is sluggish. Any rate below 1% is a recession.

I'm glad to know the new definitions. I wonder what the financial arbiters will be calling the Italian contraction? I think the term most common will be "minor correction". Why? Because Europe is creamy goodness and America is evil incarnate where the moguls of finance are bleeding the poor for their own personal gain where as the Europeans have just made a few minor mistakes.

Cross Posted at Classical Values

Update: 10 August 008 0751z

vantastic5 in the comments advises me that the German economy really did grow a blazing 1.5% in the first quarter. What happened? They got a years worth of growth (for Germany) in the first quarter. After that the economy was and will be essentially flat. The Financial Times reports:
Germany’s economy has performed robustly compared with other industrialised countries, with 2.5 per cent growth last year and 1.5 per cent quarter-on-quarter growth in the first three months of 2008.

However, second-quarter growth is expected to be significantly lower, the German finance ministry conceded this week, owing to high energy prices and inflation, the strong euro and the weak international economy.

Industrial production fell in May by 2.4 per cent – its largest monthly drop in a decade – and a second-quarter contraction in gross domestic product of 0.4 per cent was likely, according to an economists’ poll published on Wednesday by Reuters.

The German government has forecast that growth will fall to 1.7 per cent this year and 1.2 per cent in 2009.
Cross Posted at Classical Values

5 comments:

vantastic5 said...

Hi,

It is my understanding that the Europeans announce growth per quarter, not per year, like we do in the US. In that case a 1.5% growth, sustained over a year, would be >6% growth. The wording is likely a reflection of this difference.

M. Simon said...

It is highly doubtful that Europe or even Germany grew at a 6% yearly rate. Their long term tend has been to under perform the average US rate by about 1%.

So a 1.5% rate is about right.

In addition the Germans have been building plants in the US and shutting them down in Germany. Hardly a sign of a vibrant economy.

In addition the weak dollar has been sucking manufacturing capacity out of Europe. Another reason to believe 1.5% is right.

vantastic5 said...

m. simon, I don't disagree with what you've said. I think the German economy is in trouble. I'm only saying that their statistic is per quarter growth. It may be not reflect what is really going on in their economy, but calling 1.5% per quarter growth "blazing" would be pretty accurate.

M. Simon said...

vantastic5,

You are correct:

Germany’s economy has performed robustly compared with other industrialised countries, with 2.5 per cent growth last year and 1.5 per cent quarter-on-quarter growth in the first three months of 2008.

However, second-quarter growth is expected to be significantly lower, the German finance ministry conceded this week, owing to high energy prices and inflation, the strong euro and the weak international economy.

Industrial production fell in May by 2.4 per cent – its largest monthly drop in a decade – and a second-quarter contraction in gross domestic product of 0.4 per cent was likely, according to an economists’ poll published on Wednesday by Reuters.

The German government has forecast that growth will fall to 1.7 per cent this year and 1.2 per cent in 2009.


Financial Times

Basically what it looks like is that they got a year's growth in one quarter and the rest of the year will be effectively flat.

I have to go out for a while but I will correct it later and give you credit.

Nick said...

Seems to me the difference won't matter once the winter comes and the Russians shut the lights off on Germany.