The Once And Future Recovery: The Eurozone Staggers On

John Weeks

John Weeks

Perhaps you read the good news about the eurozone – the recession is over and recovery on the way.  Because it comes unexpectedly, I suggest a closer inspection of this brave new recovery than the credulous enthusiasm we find in the mainstream media (with the exception of the notable and laudable article by Martin Kettle, The Guardian, 14 August 2013).

The main substantive claim we find in the media is the end of recession, or, as one headline had it, “Eurozone hauled out of 18-month recession by Germany and France” (again, The Guardian, 15 August 2013).  This headline requires important corrections.  First, there is the definition of “recession”.

What The Guardian and almost every other media source calls “recession” is two consecutive quarter-to-quarter growth rates that are negative.  Therefore, any subsequent positive growth rate by definition signals the end of a recession.  This definition of recession is an out of context extraction from a 1974 New York Times article by US statistician Julius Shiskin (NYT, 1 December 1975).  For no obvious reason the UK Treasury and the euro authorities subsequently adopted the two quarter benchmark as their own.  The arbitrary and misleading character of the two-in-a-row (TIAR) definition is explained by Lakshman Achuthan and Anirvan Banerji of the US Economic Cycle Research Institute:

Ignorance about recessions has taken hold because of a simplistic idea that a recession is two successive quarterly declines in gross domestic product (GDP), a measure of the nation’s output.

Any trustworthy definition of recession needs to encompass the key elements of the recessionary vicious cycle – output, employment, income and sales…[S]imultaneous reliance on all four of these aspects of the economy produces judgments that can stand the test of time.

To appreciate why, we must first understand what a recession really is.  A recession is a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and thus jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production – in effect a vicious cycle.

That’s why the proper definition of recession cannot be limited to GDP and industrial production, but must also include jobs, income and spending, all spiraling down in concert.

This “ignorance about recessions” is nowhere more widespread and pernicious than in The Guardian article cited above, that does not get even its numbers right.  On a map of Europe are superimposed growth rates for each country, with the title of the map reporting that these are the growth rates for the second quarter of 2013 compared to the first.  However, a barely visible note at the bottom of the map tells us that the Greek and Irish rates are year on year (that is, the second quarter of 2013 compared to the second quarter of 2012).

While the person who compiled the map must have thought the difference between the quarter-to-quarter and year-on-year measures was of little importance, the distinction proves of more than minor substance.  Quite the contrary.  The year-on-year measure is a negative -0.5 compared to the quarter-on-quarter +0.7.  In other words, Eurozone output was lower in the second quarter of 2013 than one year before.

The chart below shows this non-recovery.  For six consecutive quarters Euro output has declined.  Even more, the year-on-year growth rate has declined for eight consecutive quarters until improving from -1.1 to -0.5 in the first half of this year.  In summary, Euro growth continues negative and we have no reason to infer that the smaller decline in the most recent quarter is anything other than momentary.

That decline is equally obvious when we count countries.  The chart shows the results for three groups, France and Germany averaged, the famous PIGS, and a collection of smaller countries that I identify as the ABFIN group (Austria, Belgium, Finland, Ireland and Netherlands).  Of these eleven countries, the number with positive growth rates declined from ten at the end of 2010 to one in the first quarter of this year.  The increase from one to four in the second quarter resulted from negative to positive switches for Germany, Austria and Finland, with unimpressive growth in each case (year-on-year rates of +0.4, +0.2 and +0.2, respectively).  Germany and France were minutely positive (+0.3 and + 0.2), while the PIGS average continued to fall.

This is recovery?

Year-on-year growth rates by quarter & number of countries with positive growth, 2008-2013

p1

Countries > 0, number of countries with positive growth out of 11

Eurozone (17), the Eurostat reported growth rate for the eurozone

PIGS (4), Portugal, Italy, Greece and Spain

ABFIN (5), Austria, Belgium, Finland, Ireland and Netherlands

Fr&Germ, France and Germany

Statistics from Eurostat and the Central Bank of Greece.

 

A closer look at the so-called PIGS further emphasizes non-recovery.  The year-on-year growth rates for Italy and Spain became more negative, and slightly less for Portugal and Greece while remaining dismally negative for both (-0.3 and -4.6).  In the case of Portugal, the smaller decline may or may not prove a harbinger of recovery, but that should not be assumed.

Greece is a more complicated case.  Several commentators suggest that the smaller contraction for the second quarter of 2013 indicates that “the worst may be over”.  A longer view casts this suggestion into doubt.  At the end of 2010 the bottom fell out of the Greek economy with a contraction of almost ten percent.  Quarterly declines of this size are highly unusual for market economies.  In Europe over the last three decades only wars and the collapse of the centrally planned countries reached this extreme.  After that near double digit decline at the end of 2010 some moderation of contraction was to be expected.

An optimist might infer that the Greek economy is slowly creeping towards positive growth.  Equally if not more credible is the possibility that under the current austerity policies Greek contraction is stuck in the -3 to -5 range with no end in sight.

So-called recovery of the so-called PIGS

Portugal, Italy, Greece and Spain, year-on-year growth rates by quarter, 2008-2013

 p2

 

The advocates of fiscal austerity have a dubious product to sell, the improbable argument that depressing an economy through contracting public spending will result in recovery by reducing fiscal deficits.  The argument is theoretically wrong and refuted by experience.  As a consequence, they seize on the slightest hint of improvement.  This should not surprise us because the austerity agenda has a clear sub-text – roll back the public sector except for that part directly useful to capital.  This agenda should not surprise us, nor should it surprise us that the media repeats the same argument as if it were fact rather than ideology.

John Weeks new book is forthcoming in October, The Economics of the 1%:  How mainstream economics serves the rich, obscures reality and distorts policy (Anthem). It can be order at http://jweeks.org

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  • yelik

    Refreshing to see someone being realistic and honest about recessions and so called recoveries

  • sanmartinian

    Hear! Hear! on the definition of recovery.

    I’m all for what’s written in the article.

    Just two unimportant notes:

    i)being emotionally very close to one of the PIGS I’ve naturally followed the complaints of some of them about the acronym.

    I don’t.

    I find it cute, amusing and harmless.

    Kudos for your courage to use it.after the controversy it generated elsewhere.

    ii) Portugal has just issued stats, from her almost comically cautious stats institute , that shows that, in the inadequate two quarters recession definition, she is out of it.

    Q2 quarter growth was over one point something versus Q1.

    Obviously, GDP is still well below pre crisis, say 2010.

  • Denis MacShane

    Excellent and thanks for sourcing the recession = 2 quarters no growth. Often wondered where that came from.

  • Paul

    Great post but am correct in saying the original i in Pigs was Ireland and not Italy