Is Finland’s Economy Suffering From Secular Stagnation?

After the Great Depression, secular stagnation turned out to be a figment of economists’ imaginations……..it is still too soon to tell if this will also be the case after the Great Recession. However, the risks of secular stagnation are much greater in depressed Eurozone economies than in the US, due to less favourable demographics, lower productivity growth, the burden of fiscal consolidation, and the ECB’s strict focus on low inflation.”
Nick Crafts – Secular stagnation: US hypochondria, European disease? – In Secular Stagnation: Facts, Causes and Cures, Edited by Coen Teulings and Richard Baldwin

 Finland’s economy has been attracting a lot of interest of late. And not for the right reasons, unfortunately. The economy in a country previously renowned for being highly placed in the World Bank’s “Ease of Doing Business Index” has just contracted for the third consecutive year. Once famous for being a symbol of “ultra competitiveness” (it came number 4 in the latest edition of the WEF Global Competitiveness Index) the country is now fast becoming the flagship example of another, less commendable, phenomenon: secular stagnation.The origins of the theory of secular stagnation go back to the US economist Alvin Hansen (see here) who first used the expression in the 1930s. The hallmark of secular stagnation, he said, was a series of sick “recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” This seems to fit the Finish case to a T. Continue reading

Why Is Spain’s Population Loss An Economic Problem?

“Growth theory was invented to provide a systematic way to talk about and to compare equilibrium paths for the economy. In that task it succeeded reasonably well. In doing so, however, it failed to come to grips adequately with an equally important and interesting problem: the right way to deal with deviations from equilibrium growth……..if one looks at substantial more-than-quarterly departures from equilibrium growth……….. it is impossible to believe that the equilibrium growth path itself is unaffected by the short- to medium-run experience…….So a simultaneous analysis of trend and fluctuations really does involve an integration of long-run and short-run, or equilibrium and disequilibrium.
Robert Solow, Nobel Acceptance Speech

When the IMF said last year that Spain’s unemployment level was unacceptably high, I was pretty critical of the fact that they didn’t spell out the consequences of this, or offer any substantial policy alternative. The most obvious impact of this failure to find an alternative is being seen right now, with the emergence of political movements which could well turn the country’s two party system completely upside down, and the steady flow of talented young people out of the country in search of work.

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Spain’s “Good” Deflation?

Spain’s domestic economy is booming, or so the story goes, and in no small part this boom comes thanks to the arrival of what is being termed the “good kind of deflation”, the sort everyone would like to have, a world where prices fall, real incomes rise, jobs are created, and everyone gets to live happily ever after. Let’s not worry that in the process the boom is steadily transforming an export lead recovery into a domestic consumption – or import driven – one. Continue reading

It’s Baaack: Looming Greek Elections Threaten To Re-ignite the Euro Crisis

If at first you don’t succeed, try, try again……  aka third time unlucky.

The Euro crisis has all the signs of being back amongst us, and this time it may be here to stay. After two earlier false alerts – one in July around the collapse of the Portuguese Banco Espirito Santo, and another in October over the state of the Greek bailout negotiations – the announcement this week that the Greek presidential decision was being brought forward to December has sent the markets reeling off into a complete tizzy. Continue reading

Abenomics 2.0 – Just What Are They Trying To Achieve?

The recent move by the Bank of Japan to take further measures to accelerate the rate at which it ramps up its balance sheet took almost everyone – market watchers included – completely by surprise. The consequence was reasonably predictable – the yen has once more fallen strongly against almost all major currencies – and most notably against the USD – and Japan’s main stock indexes are sharply up. Continue reading

Eurocrisis Round Two, Blame the Germans Edition

“What strikes me, also, is the extent of intellectual confusion that remains.” – Paul Krugman, Europanic 2.0

“The problem is that Germany has continued to maintain highly competitive labor costs and run huge surpluses since the bubble burst — and that in a depressed world economy, this makes Germany a significant part of the problem.” – Paul Krugman, German Surpluses: This Time Is Different

According to one fairly widespread (and recently much in vogue) theory about the Euro crisis, Germany bears a large part of the responsibility for the current mess. The view is met with a variety of responses inside the country, ranging from horror to amazement. Naturally, if the argument were simply about the way Angela Merkel has handled the crisis – no Eurobonds, no debt forgiveness, systematic fiscal austerity – then possibly some of it could be understood. But no, things go beyond that, Germany has been too successful, too competitive, and this has presented a big problem for its partners who simply haven’t been able to keep up. Continue reading

Is Japan Back In Recession?

“People should seriously consider that Japan’s economy may have fallen into recession despite the weaker yen and a stock rally from the BOJ’s easing and the flexible fiscal policy by Abe’s administration,” said Maiko Noguchi, senior economist at Daiwa Securities. “Initial expectations that the economy could withstand the negative effects of a sales tax hike through a virtuous circle seem to be collapsing.”

“the risks are rising that the economy will later be determined to be in recession,” said Yuji Shimanaka,  chief economist at Mitsubishi UFJ Morgan Stanley Securities Co.

Worsening Picture

As noted in my post – Does Abenomics Work? -  (published 19 September) the tide of media opinion finally seems to be turning against Shinzo Abe and his economic reform plan for Japan known as “Abenomics”. The degree of skepticism being shown only seems to have grown on the back of a slew of recent data confirming the impression that the recovery of economic activity from the post sales-tax slump isn’t going to be as easy as either the Japanese government or the Bank of Japan initially thought it would be. As the authors of the Bloomberg report from which the above quotes are taken – Oops Japan Did It Again? Sales-Tax Spurs Recession Debate – put it: “Weak industrial production data from Japan today raises concern that the world’s third-largest economy may be back in recession, challenging Prime Minister Shinzo Abe’s growth strategy.” In fact, output which was down 1.5% between July and August (and down 2.9% over August 2013) has fallen in three of the past five months.

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Does Abenomics Work? – The Doubts Grow

Is something in the air? Do I detect a change in consensus on the way things are going in Japan? Certainly a slew of articles have been published in the financial press over the last month questioning where the Abenomics experiment is headed for. The general conclusion seems to be that wherever it is it is certainly not the originally designated endpoint. Continue reading

The Catalan Vote: Why It’s Time To Start Getting Worried About Complacency In Madrid

When Barack Obama told a CNBC interviewer last autumn that Wall Street ought to be “genuinely worried about what is going on in Washington” in reference to the US government shutdown he raised more than a few eyebrows. Normally political leaders try to calm and reassure markets, so this attempt to stir them up on the part of the US President was, in its way, something of a first.

Last May the Financial Times issued a similar warning in an editorial with a clear message: right now you should be more worried than you are about what is happening in Madrid. According to the newspaper, “secessionist demands have created a rolling crisis involving Catalonia and the national government in Madrid,” a crisis which it warns could end in a “head on collision” if the issues being raised are not addressed. Continue reading

Secular Stagnation Part III – The Expectations Fairy

“So what’s going on here? Well, it might sound like a hokey religion, but central banking is really a Jedi mind trick. Just saying something can be enough to make it happen. That’s because the power of the printing press gives their words a distinct power. Well, that and the fact that the economy is already one big self-fulfilling prophecy.” – Matt O’brien,  “Abenomics has only worked because foreigners think it willContinue reading