Has the Great Recession harmed the long-term growth prospects of the Eurozone economy?

Philippe Weil interviewed by Viv Davies, 20 Jun 2014

The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a 'prolonged pause' in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the 'new normal'.

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CEPR Business Cycle Dating Committee (2014), "Eurozone mired in recession pause", VoxEU.org, 17 June.

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Topics: Europe's nations and regions, Global crisis
Tags: business cycle dating, business cycles, CEPR, eurozone, expansion, GDP, growth, peak, recession, trough

Eurozone mired in recession pause

CEPR Business Cycle Dating Committee, 17 June 2014

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The CEPR Business Cycle Dating Committee met on 11 June 2014 to determine whether the Eurozone is out of the recession that started after 2011Q3.

Topics: Europe's nations and regions, Global crisis
Tags: business cycle dating, business cycles, CEPR, eurozone, expansion, GDP, growth, peak, recession, trough

Eurozone in recession since 3rd quarter 2011

Philippe Weil interviewed by Viv Davies, 19 Nov 2012

Philippe Weil, newly appointed Chair of CEPR’s Euro Area Business Cycle Dating Committee, talks to Viv Davies about the Committee’s recent announcement of a peak in economic activity in the Eurozone in the third quarter of 2011 and that the Eurozone has been in recession since then. They discuss the issue of heterogeneity of business cycles of Eurozone countries, the likely impact of subsequent data revisions, and future plans for the Dating Committee. The interview was recorded on 16 November 2012. [Also read the transcript]

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Viv Davies: Hello and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I’m Viv Davies from the Centre for Economic Policy Research, it’s 16 November 2012 and I’m speaking with Philippe Weil, president of the OFCE in Paris and newly appointed chair of CEPR’s Euro Area Business Cycle Dating Committee. The dating committee has recently determined that economic activity in the euro area peaked in the third quarter of 2011, and that the euro area as a whole has been in recession since then. I began the interview by asking Philippe to explain the conclusions of the committee in a little more detail.

Philippe Weil: We determined that the euro area business cycle experienced a peak in the third quarter of 2011, so that means that economic activity in the quarters that preceded the third quarter of 2011 was actually lower than at the peak, and that since then economic activity in the euro area has been in decline.

VD: How does the committee define a recession? Does it differ from, for example, the NBER’s definition of a recession?

PW: The general principle is the same. The idea is to try to date the business cycles in the euro area, but when we say ‘business cycles’ we don’t necessarily mean the evolution of GDP. What we do does not boil down simply to the usual two-quarter decline or two-quarter increase in GDP that could be applied mechanically and for which no committee would be needed. We need to have, for reasons that we might get in to later if you wish, a wider view of what’s going on both in terms of components in GDP and, very importantly, in terms of labour markets, to have a feel of what actually is the evolution of economic activity. The recession from our point of view is a prolonged slowdown of economic activity interpreted widely.

VD: Employment is generally a lagging variable of output, and was a lagging variable in the previous recession. Are you saying it’s not lagging this time around?

PW: This time what’s very striking is that, although we date the start of the decline of economic activity at the third quarter of 2011, employment started to decline a little bit ahead of that time. We don’t necessarily have an explanation of that but we have a deep suspicion that this recession started late in 2011, before the labour market had time to recover from the previous recession. This is probably what has caused employment to turn down so quickly and slightly ahead of time of the current peak that took place in the third quarter of 2011.

VD: To an extent you’re dealing with imperfect information. What’s the potential impact of future data revisions on your interpretation of the current recession in the euro area?

PW: It’s not like meteorology so we know what the weather is in London at a given time and a given day. We have only very imperfect knowledge of what’s going on at a given time and a given date. Data are published with a lag, and on top of that they are revised for long periods of time, sometimes for years afterwards. What we want to do, most importantly, so that we don’t later have to revise that dates that we’ve announced, we want to protect ourselves against data revisions and the fact that they might beat us later on and change the picture that we paint of economic activity. We try to protect against these data revisions, which could come from the fact that more information arrives from statistical agencies, corrections of measurement errors and things of that nature. To protect against that, we try to look not only at GDP but at a wide array of statistical series, because it’s unlikely that we’ll be unable to detect the true turning point if we look at more series than just at GDP. That’s why we look at the labour market, and that’s why we look at the components of GDP. There’s another way, and it’s actually a novel component of this dating exercise both with respect to our past experience and to what the NBER has been doing.

One of the committee members, Domenico Giannone, has done something quite original, which is to try to look at the statistical properties of past data revisions for GDP in the euro area. On the basis of these past statistical revisions what he’s done is compute the probability that, three years from now, we might regret the date that we’ve set – 2011 third quarter – for the peak in euro area economic activity. What Domenico Giannone has computed for us is that there is a very small probability that, for instance, we would conclude that economic activity in 2012’s second quarter might be higher than 2011 Q3 levels that we dated as the peak. There’s only a 5% probability that this might occur based on data that will be available three years from now, so that’s very tiny. It’s unlikely that the peak was later than what we determined, so it’s probably not in the beginning of 2012 but at the end of 2011. On top of this Domenico has computed that in fact, based again on the data that will be available to us in three years, meaning revisions of the data that we did consider and had available when we did our dating, we will still determine, with a 75% probability, that 2011 Q3 was the peak of euro area GDP. So based on data that will be available in September 2015, there’s a 75% probability that we will still date the peak as we did. That gives us a high degree of confidence that we did the right thing, and should protect us against the risk that we might have to change our minds later on. Of course there’s no certainty, but I must insist that in the past this committee has a very good track record.

There was an episode in 2001 where the data at the time when the committee met pointed to negative GDP growth for a while, and if we had simply had a computer do the dating for us based on a mechanical rule just looking at GDP we would then, in 2001 and 2002, have decided that there had been a recession in 2001. However the data that we had at the time, particularly employment data, did not accord with the picture that the GDP gave, and therefore we did not decide that there had been a recession. And indeed the data got revised substantially later on, and what looked in April 2002 to be negative growth of GDP turned out in April 2009, so seven years later, to be actually very modest but nevertheless positive growth in GDP. From that point of view this method, the first method that involves looking at a wide array of data, has proved itself. And the method that Domenico Giannone implemented in this committee, trying to estimate the probability of data revisions, is more novel – time will test it – but we have a high degree of confidence that we will not have to modify the chronology that we established of euro area business cycles.

VD: I guess it’s an obvious question to ask, given the nature of the euro area: how does the committee deal with the issue of heterogeneity in the euro area?

PW: This is actually a very important question, because heterogeneity has increased substantially in the past. When we first started this exercise there was a factual element that heterogeneity across euro area countries was not very big, and there was also the hope that it would not increase too much. In the past, meaning from 2002 when the committee met, it used to define recession as a significant decline in the level of economic activity spread across the economy of the euro area. We had a clause inserted that actually required that the turnaround in euro area economic activity be visible in most countries of the euro area. With hindsight we thought that inserting this requirement was not a very felicitous one. First of all, it’s very vague: what does ‘most countries’ mean? Do we mean most countries in terms of number of countries or in terms of weight of euro area GDP? That’s not very clear. Second, when we reflect on the meaning of the task that has been given to us by CEPR, we see that we have to make a statement and establish a chronology of economic activity in the euro area as a whole. We decided to make it clear that this is what to do: to simply define a recession, for instance, as a significant decline in the level of economic activity in the whole euro area at the aggregate level. And to drop the requirement that this turnaround be visible in most countries.

One question is whether we would have dated business cycles as we have done had the requirement that the turnaround be visible in most countries not been imposed in the past. What we did is revisited the decisions of the Euro Area Business Cycle Dating Committee since 2002 to check whether the requirement that the turnaround be visible in most countries made a difference or not. And Binnur Balkan, who is a research assistant of Refet Gürkaynak, did a very nice piece revisiting the decisions of the committee in the past. From what she did I think we can be confident that the past decisions would not have been affected had we never had that requirement that we’ve now dropped that the turnaround be visible in most countries. What we do observe, now that we have dated this peak in 2011 Q3, is that there has been a substantial increase in heterogeneity in business cycles in euro area countries in the last few quarters. We don’t date turning points of individual countries but, looking at the data that we have released in our findings, it’s obvious that some countries, and actually these are large countries, have done better than others. Germany has been doing quite well since 2011 Q3, actually much better than the average of the euro area. France has been muddling through. Netherlands is not doing so well but still better than the average, at least at the beginning of 2012. It’s countries like Spain and Italy that are dragging down the euro area as a whole.

We can also see in the labour market data that we’ve considered that there’s actually a wide difference in the behaviour of employment across euro area countries over the business cycle, in particular when we compare what employment and GDP are now with what they were in 2011 Q3, which we’ve picked as the peak of the euro area’s business cycle. In short, we date on the basis of euro area aggregate data, we determined that there was a peak in 2011 Q3, but that does not mean that all members of the euro area have been in recession since then. We do not date the business cycles of individual countries, but we do observe that some countries, like France and Germany, have had an experience which is not exactly the same as that of the euro area as a whole. They are doing better, and heterogeneity in the euro area has increased, which is of course a matter of concern for policymakers in, for instance, monetary policy for the whole euro area. Not for individual countries, but nevertheless the impact is likely to be differentiated across countries as a function of where they sit in their business cycle.

VD: I was going to ask you, from a personal perspective, what you think the euro area needs to do as a whole to get itself out of recession.

PW: I express myself not in my capacity as chairman of this committee, but there is an increased awareness that fiscal multipliers are probably a lot bigger than many people would have liked to believe. That’s the first point. Second, their magnitude depends on where we are in the business cycle and the increased perception that at times of recession, in particular financial crisis, fiscal multipliers can be quite big, and the value of the multipliers depends on the place on the business cycle. Frontloading austerity is probably a recipe for disaster, and therefore the recent European institutional changes do provide some measure of ability for countries to commit to credibly delay austerity. There’s a strong case to be made for delaying austerity, because if multipliers are indeed higher in recessions than in expansions, postponing austerity enables you to reach, after a while, the same point in debt-to-GDP ratio with much less pain, especially in unemployment, along the way.

VD: Finally, Philippe, what are the future plans for the business cycle dating committee in terms of ways of working? Are you planning to introduce any changes in your approach and methods?

PW: Well, the current committee hopes fervently to have to reconvene soon to decide when we’ve gone through the trough and when the expansion started. So the committee hopes that it will soon have a lot of work to do. In the meantime it’s going to examine how to refine its diagnosis of business cycles in the euro area. Right now we are limited by data, in the sense that the euro area GDP is only available on a quarterly basis. So we cannot, for instance, in any rigorous way, date precisely the month of the turnaround. We can get some feel from looking at other data, but this is very judgemental and we would like to try to do things in a slightly better way, so we are probably going to try to produce a monthly GDP series. We’re not a statistical agency so we don’t produce the raw data, but using the published data we are going to construct, using statistical methods, a monthly GDP series that will try to guide us to date the turnaround points within the quarters that we are setting up as turnaround points. That’s one thing that we want to do.

The other thing we want to do is improve out treatment of the labour market. For conceptual and statistical reasons there is very little aggregate data on employment that we can use, and that’s a major drawback. So we want to explore how to do that. Those will probably we the two innovations that will be introduced by the time the committee meets again to date the next trough. Again, hopefully, very soon. But I must say that the committee is keen to arm itself with more and more tools to do its work. Judgement is important, but I think it’s much sounder when it’s based on methodological elements and, from that point of view, it is crucial that complement the work of this committee with a research effort to enable it to contribute to the policy debate in Europe and setting an improved chronology of business cycles.

VD: Philippe Weil, thanks very much.

Topics: Europe's nations and regions, Macroeconomic policy
Tags: business cycles, CEPR, eurozone

Trade, Competition, and the Pricing of Commodities

Simon J Evenett, Frédéric Jenny, 15 February 2012

Trade, Competition, and the Pricing of Commodities

Edited by Simon J. Evenett and Frédéric Jenny

15 February 2012

URL: www.cepr.org
Topics: International trade
Tags: Cartels, CEPR, Commodity prices, CUTS, food prices, WTO

Recession and recovery in the euro area

Harald Uhlig interviewed by Romesh Vaitilingam, 8 Oct 2010

CEPR’s Euro Area Business Cycle Dating Committee has announced that the recession that began in the first quarter of 2008 came to an end in the second quarter of 2009. Harald Uhlig of the University of Chicago, who chairs the committee, talks to Romesh Vaitilingam about how this recession compares with previous recessions and with the US recession, and about the components of GDP that are driving recovery. The interview was recorded in a telephone press conference on 4 October 2010.

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Romesh Vaitilingam interviews Harald Uhlig for Vox

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.

 

 

Topics: Macroeconomic policy
Tags: business cycle, CEPR, euro area, recession

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