October 2010

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/5640]

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Professor Harald Uhlig from the University of Chicago. Harald is chairman of CEPR's Euro Area Business Cycle Dating Committee, which seeks to establish the chronology of recessions and expansions in the euro area, in a similar way to the NBER's Dating Committee for the US business cycle.

Harald's committee recently declared that the latest recession in the euro area came to an end in the second quarter of 2009. When we spoke during a telephone press conference in early October 2010, I began by asking him about the value of identifying turning points in the business cycle.

Harald Uhlig: It's an exercise in data reduction, and there's a lot of particular data obviously in principle, you know, anybody could just get on the website of Eurostat or the European Central Bank, and download lots of data. But, nonetheless, dating the business cycle often makes headline news, because it tells people, "OK, here's an important point that we crossed." People want to know, when did the recession begin, when did the recession end. I think it's also important as a signal to policy makers, you know, that often use the data of business cycle in their own deliberations, in certain speeches, and so forth.

So, it's simply, you know, sets markers, important markers, I feel, on the plethora of data that is out there.

Romesh: Perhaps you could explain in a little more detail how you go about identifying a peak or a trough in the data.

Harald: You look, you know, in the first place, at GDP in the Eurozone, but we also look at a variety of other data, so we look at GDP in the member countries, we look at components of GDP, we look at the industrial production, investment, consumption. Then we look at employment, unemployment. So, really, we try to take an overall picture of the economy. It's not just GDP alone, although GDP is clearly the overriding indicator.

And the recent declaration of the trough that was, you know, relatively easy, since all these indicators, you know, point in the same direction. You know, it was just clear that all the, more or less, all the Eurozone countries went into the trough in the second quarter of 2009.

That was much more difficult when you originally declared the peak, because it was more dispersed evidence across the various indicators.

One thing that we have seen, though, coming out of the recession now, is that employment still is not recovering, right? So, employment still remains flat, and unemployment as well…. That’s not unusual coming out of a recession, though. So, we thought should we disregard that evidence as saying, maybe the recession has been going on for longer. But, we'd rather say no, the recession ended now, and employment may or may not return to its original level.

Romesh: Now, you pinpoint the quarter at which the trough of the recession is, and you also pinpoint a month. Can you explain those distinctions?

Harald: The NBER traditionally has always stated the month, and that's due to them having, you know, monthly data that they can very well rely on. For the Eurozone, that's a little bit more tricky. We have quarterly GDP data, and that's our main indicator, so, we can usually, fairly quickly see the quarter in which the trough occurred, or the peak occurred. But, for the month, you know, it's less clear what data, precisely, to look at.

We look at industrial production, which, this time, at least, showed a very clear trough. You look at, say, we look at some country individual data, sometimes two. That's a little bit more tenuous, but, since the NBER does monthly business cycle dating, we feel that we should do that too, and we're confident about our announcement that it has been April 2009.

Romesh: Can we make some comparisons of recessions, both over time and across countries? From your decision or your finding that the euro area recession ended in quarter two of 2009. That's coming out of recession sooner than the United States, and the United Kingdom.

Harald: That's correct. So, the recession started slightly later, and we came out of the recession slightly earlier. It's remarkable that this has been the recession that is almost worldwide. You know, the main drive of the recession was at the United States, maybe it's not all that unsurprising that Europe got in it slightly later and got out of it slightly earlier. It caught the bug that originated in the United States, maybe, more than, you know, it being the cause of that worldwide business cycle.

It is also true that the business cycles in Europe tend to be flatter than those in the United States. We have seen that when we dated the business cycle, historically, there's a document on the CEPR website where we did this in 2003. Often times, business cycles in the United States are fairly sharp, whereas for Europe, we struggle in that it's a very flat business cycle where the GDP was barely budging, and was barely going up and barely going down.

I think we had one cycle, actually, where GDP, at the end, is higher than what is at the beginning. You know, it's very unusual for a business cycle, simply because, you know, GDP didn't do anything during that time.

So, European business cycles, Eurozone business cycles, from what we can tell, tend to be flatter than those in the United States. And there are a variety of reasons one can think of.

One may be that, simply because we have a diverse set of countries, we have more dispersion of economic activity. So, it may be that one decline in one country may be slightly compensated for by less of a decline in another country, might have less homogeneity.

The other thing is, also, that the government sector seems to be larger in the Eurozone. And government spending tends to be considerably smoother.

Romesh: Let's talk about the depth of this recession. How does it compare with previous recessions in the euro area, and in Europe, more broadly?

Harald: We haven't made that comparison, but from what I can tell, from what I recall, I mean, this is, this seems to be the deepest recession that we had, so far.

Romesh: So, you’re speaking of anything post-1970s, I guess, which is when you started, when your data goes back to.

Harald: That's right. For example, the 1982 recession that was a big deal in the United States really wasn't all that deep in Europe, right? So, that's usually the recession that everybody compares this recession to in the United States. And there almost was no recession, and GDP was just flat at the time in the countries that now make up the Eurozone.

Romesh: And do you have a feel yet for how the speed of recovery, coming out of the recession, compares with previous recessions?

Harald: Well, again, the previous recessions, they looked mild compared to this one. It's fast going down, but it also seems to be fast going up. So, I get the sense that the recovery, at least as GDP and industrial production is concerned, it seems to be a reasonably quick turnaround for now. Growth has certainly been strong, maybe not so in the last quarter, but since coming out in the second quarter of 2009. With employment, we have to wait and see. That seems to be, again, a lagging indicator.

Romesh: Of course, that's the big concern in the United States, about what they call the "jobless recovery," isn't it? And you're not certain that we're seeing a similar picture in Europe.

Harald: That's true. That was a concern in the previous recession in the United States, which, by the way, was not a recession in Europe, and it's a concern again now. This is an analysis of the economic situation, which, at the Business Cycle Committee, we refrain from doing, really, right? Our job is more of an accounting job, of just announcing, "This was the beginning. This was the end." My own personal sense here is that Europe is better prepared for getting out of this recession in good shape as far as unemployment numbers, simply because some of the welfare state excesses that have been there in the past that led to certain rigidity in employment and not much recovering, they have been removed. So Europe, in particular Germany, has set some considerable reforms in the labor market. Not pleasant for those that are unemployed, but it makes a recovery quicker in the end, I would tend to think and hope.

Romesh: Can we talk about the differences across countries? Because, of course, you're drawing on data from individual countries as well as cross euro area data. Could you give us a picture of the different experiences of different countries within the euro area?

Harald: Sure. So Germany, for example, came out a little earlier. Spain came out later. But, overall, I would say there was a remarkable degree of synchronization among the countries. Some of the smaller countries, like Ireland, particularly Greece, they clearly are at a different point altogether. But France, Germany, Italy, Spain, they all had that trough in the first or the second quarter of 2009.

Romesh: Can we talk about the components of GDP growth and which ones are making a contribution, I guess, both to the downturn and to the recovery, the traditional breakdown between consumption and government spending and investment and trade?

Harald: We looked into this. It turns out to be tricky. Despite the fact that we put this in the press release, we want to be careful in interpreting these numbers. Some of these numbers and we noticed that, too, in dating the business cycles they keep on changing during the various releases from Eurostat. As they have to, right? Eurostat keeps getting new numbers in, and so they constantly revise the data. So then, when you try to decompose how to decode and pose certain changes, you're taking difference of some numbers that tend to be noisy, and so one has to take this with a grain of salt and with some caution.

What we did is we took the nominal growth in output from 2009 in the second quarter, through 2010, the second quarter, since that's sort of the recent recovery phase, and we looked how that decomposes nominally into its various components.

Now, there are actually various ways of doing that. You could also take the real GDP, you could take the real components, and then the picture actually turns out to look slightly different.

If you take the nominal components, it looks like private consumption accounted for about half of that recovery, inventory investment accounted for about a third, and government consumption maybe for about a quarter, give or take. The contribution of investment firms in the form of growth, fixed capital formation, was rather negligible, so the building of factories and so forth.

And the contribution of China was actually slightly negative. That was slightly surprising to us because, personally, I had the feeling that maybe Germany was partly drawn out of the recession by increased Asian demand for German cars and German goods and so forth, and that would give us a big component in trade. And we also know that trade overall has recovered to a considerable degree in the world. But, nonetheless, if you look at these four quarters, it doesn't seem that trade contributed all that much to the Eurozone recovery, in any case. It even seemed negative.

Romesh: So, this doesn't look very encouraging so far for the balanced recovery that many policymakers are hoping for that's driven by investment and exporting rather than by private consumption or by government spending.

Harald: Well, it may be that firms didn't reduce their investment plans all that much, so they may still be waiting a little bit more for business to pick up sufficiently much to really then go out and do business plans and so forth. That's a possibility. But, consumption tends to be very a forward looking piece. So, people assess: will they have jobs in the future, can they afford this amount of consumption, and so forth. So, given that private consumption picks up, I think that gives me a sense that there's a certain feeling of a healthy recovery, at least in the minds of European consumers, one would hope. It may also be that this is due to government stimulus. You put hands in the people that are credit constrained, they go out and spend it. It's possible that that was accounting for some fraction of that as well. And that would be less healthy, obviously.

Romesh: We talked at the beginning about the value of this kind of work in identifying the turning points, and you mentioned their value to policymakers. How would policymakers react, do you think, to this kind of interpretation, that the recession ended second quarter of 2009 and we're in a slow recovery? What could they take away from it, do you think?

Harald: We will have to wait and see. We have to ask the politicians, I guess. And judging from the United States, different politicians interpreted it differently, depending on whether they're in government or not. Usually, the people in government take credit for the end of the recession, whereas the ones outside will blame them for the end of the recession not being strong enough. But, looking forward, it's clear that there are still clouds on the horizon for Europe. I think the debt problem, the recession may still be fragile, to some degree, in the United States and in Europe. It may be too early to go out and pop the bottles of champagne and saying everything is back to normal.

I think politicians will probably breathe a sigh of relief that at least this recession is over, that we have gone through the worst, and that there's no Great Depression, maybe it's at least back to potential recovery, but we have to be vigilant that we're not sliding into another one.