A $6.3 billion question: Is the IMF or Anders Borg wrong?

On July 5th Anders Borg presented his revised (from the budget proposition in April) forecast for Swedish economic growth for the years 2010-2014. He presented it at Almedalen, the biggest political event of the year and with just about three months left until elections in September.

The new revised forecast states that "The recovery in the Swedish economy is becoming clearer with improved prospects for growth and a stronger labor market. This strengthens public finances and Sweden's ability to meet increasing economic concerns that comes with the uncertain fiscal situation in the world" (author's translation from http://regeringen.se/sb/d/13357/a/149354).

In the Table 1 below you can see that Borg revises GDP growth for 2010 up from 2,5 % to 3,3 % since the proposition in April. The changes in the forecast for the coming years are not as drastic. Unemployment rate however gets revised across the board. The new forecast predicts the unemployment to be on an average 0,5 % lower (than the April forecast) every year until 2014 where it will stay on 6 %, also notice that the GDP gap is predicted to be close to zero in 2014.

Table 1 (Yellow highlighting by the author) download here

Were this to be true this would all be very good news indeed, the economy does seem to be recovering and you are always inclined to accept good news easier than the bad.
 

However, on July 14th the IMF released their annual Staff Report for Sweden. Their predictions for 2010-2014 can be seen in Table 2 below. The interesting and maybe also disconcerting fact about it is that it, especially for the years 2010-2011 and for the unemployment forecasts, predicts drastically different numbers from that of minister Borg. The biggest different is the GDP forecast for 2011 and the forecast for the unemployment rate for the years 2010-2014. Instead of the 3.8 % growth for 2011 that Borg's new forecast predicts the IMF believes that GDP growth for 2011 will only be 1,9%, that is 1,9 percent lower! The predictions for the unemployment are also considerably gloomier than that of Borg. According to the IMF the unemployment in Sweden will not come down below 9 % this year and will stay well above 7 % until 2014. This is in stark contrast with Anders Borg's statement saying that: "The trend in the labor market is a sign of strength for the Swedish model and a development that needs to be protected" (author's translation from http://regeringen.se/sb/d/13357/a/149354). Anders Borg further claims that the stronger labor market will help to further improve the public finances and make them show a surplus in 2012. Well, you do not need to be very good at math to see that seems very unlikely if it turns out that the IMF are right and not Anders Borg.

IMF, 2010. Country Report 10/220

Now, certainly it is perfectly normal that different organizations and persons have different opinions about something as uncertain as future GDP growth. But a 1,9 % difference is too much to just be a coming from different ways of measuring. Either both the IMF and Anders Borg are mistaken or one of them is really wrong. 1,9 % may not sound like very much, but when you are talking about GDP 1.9% translates to enourmous amounts. A quick calculation gives a good idea of how much we are talking about. The CIA world factbook puts the estimated Swedish GDP for 2009 to 333,5 billion. 1,9 % x $333,5 bn = $6.3 bn. Multiplying that with the current SEK/$ gives you: 6.3 bn * 7.33 =  SEK 46 179 000 000. Now that is a lot of value that would not be created would the IMF's forecast come true!

The big question is of course who is right and who is wrong?

I cannot help to think about who has an election to win in September and who is part of a government whose most important political question is the "Job line" and who has lately been giving them self credit for the soundness of public finances?

I'm just sayin' now.

I owe U, U owe me, We owe the future

I stumbled over a new very pedagogic interactive graphic of world debt, divided on households, government, financial and non financial companies, from the Economist and saw that usdebtclock.org had been updated to include real time numbers on external and public debt for a couple of countries.

They can be found here:
usdebtclock.org 
World debt 


















Ones again it worth the while to point out the importance between the implications of external and internal debt (if you owe other countries money or if you owe your own citizens).

If you are not 100 % sure about these terms here are two good definitions and explanations from wikipedia:

External debt
Internal debt

Electric cars & sustainable growth

The much troubled carmaker GM's new electric car Opel Ampera (Chevrolet Volt in the US and Vauxhall Ampera in the UK) will probably be available somtimes in 2011. This is some of best news I have heard in a long while and apperantly this was one of the reasons that convinced the Obama administration to save the giant company last year. Good job.

I think that the transition from fuel driven vehicles to electric ones is one of the most important if not the most important change that has to happen for real sustainabe growth to be possible.

To begin with, the car industry is one that drives new technology and innovation. Secondly cars is one of the most important consumer good, one that drives economies worldwide both from a real economic aspect and as an indicator of the current economic situation, and since it seems virtually impossible to get something to replace the C in Y=C+I+G+NX a change in the car industry will change future growth, for better or for worse. Last but least a new orientation towards electric cars will mean a huge increase in energy demand and in that industry there exist two roads to take. One possible scenario is that this will mean a surge in cheap fossil fuel or nuclear based electricity or it will help push renewable energy forward. Well, the first scenario would probably add up to almost nothing, because if the electricity does not come from renewable sources electric cars will make little or no difference. The second scenario on the other hand would constitute a real revolution and it would do so by still letting people live their lives the way they want to. Cars mean freedom, and people value their freedom more than ever. The transistion from fuel driven to electric cars will mean that a lot new cars will be bought, a lot of new investments will be made and a lot of demand will be created. People will save to buy cars and governments will hopefully invest in new infrastructure and create incentives for people to make the change and also, countries will trade different models with each other just as they do today. Let us see, consumption, demand, saving, private and public investment and trade; this should equal Y. Growth. And it would be a consumption and a growth we all could live with and which in the best of worlds could spread to more parts of the economy.

I believe (a bit cynical, I know) that the best and most effective way to obtain sustainable growth is not to force people to change their way they live their lives but to make their way of living more sustainable. That should be the goal for technology and innovation. It may sound as a gamble but considering how negotiations in Copenhagen ended last year I think its pretty safe to say that people will not change until they are standing with both their feet on the precipice.

This means that a lot is depending on how governments will act to help people make this vital transistion. And let us just be clear. This, like everything else will always be an economic question and a question of making it easy for people. If people view it as something difficult and time consuming, nothing, or too little to have an impact, will happen.

It is election year in Sweden and I think it is pretty clear that there is one side who seems more commited to this transistion than the other. Still, I do not hear anyone talking about electric cars or the infrastructure needed. There is talk about trains, which is great, but cars affect almost everybody's everyday living in a much bigger way than trains do. If we really want change, we need to help people live better not make them. That never works. Like Keynes pointed out, governments should be there to create and help demand when there is none.

And yes, it is possible.






Pictures taken from: http://ampera.opel.info/photography.html

More info: www.opel-ampera.com

Images of debt

"Paint a perfect picture

Bring to life, a vision in one's mind

The beautiful ones

Always smash the picture

Always, every time" - Prince

The NY Times has published a couple of interesting article accompanied by some very illustrative graphics on Europe's debt situation. The first one is pentagram-looking map showing the PIIGS-countries web of debt and to whom they owe the most. You can see that Greece has a realtively small debt if you compare it to Italy and Spain. The shear size of Italy's and Spain's debt is almost difficult to grasp and when you consider that Italy owes France a sum equivalent to 20 % of french GDP you start to understand the danger of unstable economies with debts of these sizes.

Just imagine how much the U.S owes China.

The other disturbing thing which the map points out is that almost a third of Portugal's debt is owed to Spain, a very strong connection, which would make contagion alot worse if Portugal starts to experience something to similar to Greece. And if Spain's $1,1 trillion (!) starts to be questioned?

Source: Bill Marsh/NYTimes

The second graphic I recommend everybody to take a look at is this interactive debt map. It shows the development of national debt in the EU and also the EU-countries' relative size according to their GDP and finally the different interest rate spreads from Germany, where Sweden is the only one being able to borrow to the same cost as the germans. The most striking thing is that you clearly see that in 2000, before Greece was allowed to enter the Euro, it already had the same debt to GDP ratio it has today. Almost all the other countries held it under the limits set by the Growth and Stability Pact. The start to today's problems maybe?

Once again, the EU's lack of control and monitoring is really disconcerting.

Paul Krugman is right/wrong

"Whatever which way they go (right/wrong)
Whatever which way they go (right/wrong)
Whatever which way they go
They know they gonna owe
They soul to the road they choose
It don't matter if you win or loose
You still gotta pay them dues" -DMX

Greece certainly got to pay them dues.

I just read the article in El País that Paul Krugman wrote in the NY Times april 29th. In this article (which goes under the headline “The Euro Trap”) he is ones again bashing the “euro-mess”. Now, I am not saying that I know better than a Nobel Prize winner, I am just saying he is wrong. And when I say he is wrong I mean that he is wrong to keep blaming the euro as a currency for Europe’s current problems.

Krugman’s argument lies in that by entering the monetary, and by doing so giving up the monetary weapon of being able to adjust the exchange rate, the countries entered a trap. Well, by putting that way it sounds as if Krugman thinks countries was lured into entering the monetary union and then suddenly when crisis hit went like “Oh god, we can’t devalue our currency?!”.

To me the problem does not lie in having a common currency and giving up the ability to adjust the exchange rate. The problem is rather that the countries now being questioned by the markets, the best example of course being Greece, but also Portugal, Spain and in a lesser extent Ireland and Italy have not behaved according to what you could expect and the EU has not monitored sufficiently the development of its member countries.
   

Let us be honest, this would not have happened had Greece not lied and covered up their real deficit. Greece would not even have been allowed to enter the euro had their real statistics been known. The EU did the stupid thing to be ingenuous enough not to let Eurostat do a back up check on Greece’s statistics. In the best of worlds you would be able to trust Greece, but we all know this is not the best of worlds.

And now there are riots in Greece and their unions are protesting against the conditions that EU and the IMF has put on the 110 billion euros they are making available? Please, if you have a corrupt system that tinkers with official national accounts, you let people retire at 63 and give them very generous pensions (with borrowed money), you enter the Euro and take advantage of the good terms in the bond market it gives you and then you do nothing to reform your economy, to battle corruption or to raise productivity and then you are surprised that when the markets discover this they do NOT want to keep lending to you?
    

Equally surprising is that Spain seems surprised that their construction boom did not last and that basing almost all your growth on cheap and un qualified labor will lead to a fall in productivity.

I have a hard time seeing that this is happening because the Euro is a trap. It is happening because of european governments being populist and not making the decisions and chages that their respective countries really needs. The monetary union is not a federal state, it does not share a common fiscal system and I think that, although that is what you keep hearing the euro needs these days, it never will. The member states are too different and a common fiscal system would not be able to be that common anyway.

What the euro needs is more control and monitoring and governments willing to swallow their pride and do the hard work.
   

Will the euro last? Yes. Or to sound more like an economist; it depends (on the above).

Time keeps ticking

"Refuse to give up, your mistakes don't define you

They don't dictate where you're heading, they remind you

That time keeps ticking"

I think T.I. was talking more about personal growth than GDP growth, but you will soon see the importance of the last sentence "Time keeps ticking" for GDP.

Take for example two countries such as Sweden and Spain. In 1950 Sweden had a GDP/capita of $11316 and Spain's GDP/capita was $4012. That's a relation of 4012/11316 = 0,35, in other words, Spain's GDP back in 1950 was only 35 % of Sweden's. Now let us look at the GDP in 2009 of both countries. Sweden's GDP is $39488 and Spain's is $34769, that gives us a relation of 34769/39488 = 0,88 = 88%. From being 1/3 the size of Sweden's economy Spain's GDP is now 9/10 of Sweden's.

The interesting thing is what is behind this development. Let us look at the growth of GDP for both countries during this period. Using this equation and solving for g or by using the rate function of an excel spreadsheet this gives you a anual growth of 2,14% for Sweden and 3,73% for Spain between 1950 and 2009. Comparing the two economies' GDP in 1950 with 2009 shows that 1,5% more growth makes Spain's economy almost nine times larger in 50 year when 1,5% less growth makes Sweden's economy only about three times larger. That is the power of the time that keeps ticking.

I'm going to take advantage of some work from my Growth Theory class here and first show some very interesting but sad facts and then some equally interesting but a bit more positive facts.

First. Let us look at this graph that shows how world GDP/capita has converged over time the last 50 years.

This graph shows that during the last 50 years the GDP/capita for Western Europe, North America and Oceania has indeed converged, that is the standard deviance between these countries' GDP has become smaller. The graph also shows however that GPD/capita, if we count all countries, has not converged but rather, the standard deviance, which is the measure used here, has become larger with time. This sadly means that measured in GDP/capita the world is a more inequal place today than 60 years ago and that it has  gotten a lot worse in only the last 30 years.

Now the positive facts. If you look closer at the graph you can see that the standard deviance has become smaller in last couple of years, let us hope that is just not something tendency but that it will keep on falling.

If, by using the same formula as above, you compare World GDP/capita growth the between 1950-2009 with growth the last ten years, between 1999-2009, you can see that between 1950-2009 it was 1,59% and that in the last ten years it has been 2,37%. Add to that the fact that most rich countries has had slower average growth the last ten years than they had the last 60 years this must mean that there are other economies growing more than before.

This second graph shows GDP/capita growth of some countries the last ten years and there you can see that fortunately growth is now occuring in other places than the rich part of the world. You can also  see, a bit surprisingly, that some of the VISTA-countries have not had very high growth in the last ten years.

 

Hopefully this will mean that the blue line in the first graph will take a dive towards the red on in the coming decades.

Although. Keep in mind that even if Angola in future can keep the same incredible growth as the last ten years it would still take them more than 20 years to reach the same GDP/capita as Sweden has today!

Source: Groeningen Growth and Development Centre, The Conference Board: Total Economy Database

DJ:ing Economics' VISTA-series

”I know that we have to take it to the goal 'cause everyone's depending on we
See we ain't got nowhere to go but up, it's our destiny”

The financial crisis started in the USA, a country considered to be world’s most developed economy. We got pulled out of the crisis partly by China, a country with a dubious leadership, limited freedom of speech and a weak democracy. China’s economic growth on the other hand barely slowed down and instead it is getting closer to something looking like overheating. The chinese stimulus package was huge, but very efficient and in contrast to the western world where it is questionable how many bridges you really need to build just to keep the economy going, China is still in great need of infrastructure, which means that the stimulus package will give great ROI and a more efficient economy in the future and lead to even more growth.

So, where am I going with this and what does it has to do with the title of the post. Well, in the footsteps of China and the other BRIC-countries (Brazil, Russia and India) several other economies are on the rise, all with great growth potential. These economies are often named the VISTA-countries. VISTA is an acronym for Vietnam, Indonesia, South Africa, Turkey and Argentina. They are economies with all the natural requirements you need to be a rich and developed country, for example an abundance of relatively cheap labor and plenty of natural resources, but where corruption and decades of politic and economic instability has hampered their development. With the situation now getting better, so is their economic growth.

That is why DJ:ing Economics will begin a series with posts about the five VISTA-countries, their possibilities, pros and cons and their macroeconomic and political situation. We are going to follow the order of acronym, which means that the first post will be about Vietnam.

The comparison with the US and China is to show that you should never underestimate nor overestimate any country and to me it is clear that the VISTA-countries so far are underestimated, something we soon may have to reconsider.



So, don’t sleep on these countries.



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The VISTA countries also offers great investments oportunities for those who are interested. If you look at the development of the BRIC-countries in the last years you get an idea of the enormous potential of the VISTA-countries. You can read an interesting article by Claes Hemberg about investing in the VISTA-countries here.