Five years, six property markets, mixed fortunes

Last week, there was a brief discussion on thepropertypin of an interesting piece of economic history – in the 60 years following their construction in the late 1780s and early 1790s, the Georgian houses of Mountjoy Square fell in value by almost 94%. By comparison, nominal wages fell about 40%-50% during the same period, while the price of food – if bread is anything to go by – stayed largely the same (8 pence for a loaf of bread in the 1790s and in 1848). While I can’t claim to speak for anyone else reading, I would imagine the general perception was: “So property prices can adjust downward by percentages scarily close to 100% – but it probably takes a unique set of circumstances (Act of Union and all that).”

Yesterday, however, I read on Carpe Diem about the latest property price statistics from Detroit. Houses in Detroit are selling for an average of $11,500 at the moment, down an astonishing 88% from their peak values. That translates into a monthly mortgage payment of $50! And this happened not in 60 years of steady economic decline but in less than five years.

It got me thinking about Ireland’s property market in a global context, so I decided to do a little comparison of 2005-2009 for a smattering of cities. The cities were chosen in no particular way other than to give some global coverage, hence two Asian and one American cities, as well as two Western European and an Eastern European city. The figures refer to the start of the year concerned, with Jan 2005 set at 100 for all cities.

Property prices in six cities around the world, Jan 2005-Jan 2009

Property prices in six cities around the world, Jan 2005-Jan 2009

It was a slight surprise to see that, of the cities shown, none apart from Detroit had yet fallen below their Jan 2005 levels by the start of 2009. Indeed, some cities almost 50% above their 2005 levels. Dublin was closest – and more than likely has already fallen back to mid-2004 levels since the start of the year. Tallinn seems to be like an excess version of Dublin – rising and now falling faster. For Singapore and Hong Kong, 2007 seems to have been easily the craziest year, but the correction in 2008 was nowhere near as large. Meanwhile, Detroit props them all up.

For a view on how much more of a correction is needed for five economies, including the US, Ireland and Spain, you can have a look at property yields over the medium term here.

Taxpayers in Baltics, UK and Ireland facing the toughest questions

Two weeks ago, I examined the IMF’s estimates for growth prospects in 2009 and came to the conclusion that in a year where countries such as Afghanistan, Ethiopia and Laos are among the world’s fastest growing economies, more open economies are being hit by a collapse in the globalized consumer’s demand.

The temptation may be to regard this as a somewhat academic question but a closer examination of eurostat figures and the latest European Commission estimates for 2009-2010 shows why this has practical fiscal implications. Eurostat figures show that the EU’s budget deficit between 2000 and 2007 averaged just over 2%. Faster-growing countries such as Bulgaria, Estonia, Ireland and Sweden ran surpluses (Finland ran quite large surpluses in fact), while most of the Old Europe stalwarts, such as Germany, Italy and the UK, ran what would until recently have been termed sizeable budget deficits (i.e. greater than 2% on average).

The EU’s budget deficit grew from 0.8% in 2007 to 2.3% in 2008 and, according to the Commission, is set to almost treble this year to 6%. Next year, that deficit could increase even further to about 7% of EU GDP. Four countries face the prospect of their government balance undergoing a double-digit swing from what they were used to up to 2007 and what they will have to face in 2010 – Spain, the UK, Latvia and Ireland.

Given that foursome, I thought it might be worthwhile to see what groups there are within the EU – when it’s clear that the global trough has been reached, unanimity of purpose may pass, so these groups could have a political as well as economic relevance. The graph below shows mean budget deficits across seven relatively self-explanatory regions in the EU (GAF = Germany, Austria, France; PIGS = Portugal, Italy, Greece, Spain; CEE = Central & Eastern Europe). The regions are ordered from left to right by how ‘in balance’ the economies were from 2001 to 2007. What’s worth noting is that the ordering of the regions will have changed by next year – the Baltics and the British Isles (if I may call them that!) face significant budgetary deficits.

Budget deficits, 2001-2010, by EU region

Budget deficits, 2001-2010, by EU region

With more open economies being harder hit, their governments are facing pressure from all fronts. Alarming statistics are still coming in from places like Latvia, where output is down 30%, and Ireland, where tax revenues are down 24%. If exporters are being hit, their workers are likely to be hit – and the longer the recession goes on, the more workers will hold their consumption in check (not to mention unemployment).

The problem is that government deficits are the last point in the cycle – increasing taxes may have to wait unless the government wants to be responsible for second-round effects. This leaves Ireland in quite a conundrum, as its 2001-2007 tax base will not be coming back any time soon.

Are more open countries being hit harder in the recession?

This morning, the ESRI has published its latest Quarterly Economic Commentary, which led to George Lee being pushed on Morning Ireland into saying Ireland was the “worst in the developed world” when it came to economic contraction. Fortunately, within the last week, the IMF has produced its latest World Economic Outlook, “Crisis & Recovery“. This contains the latest predictions by the Washington-based organisation on economic output for all countries for this year out to 2014… although to be fair, the focus from most people is understandably on 2009, rather than 2014.

The map below – fully available on Manyeyes – shows estimated GDP growth (or not) by country in 2009, the worst year for the world economy since World War II. Speaking of war, while 27 countries are predicted to have strong growth in 2009, many of them are post-conflict countries, presumably with a lot of spare capacity and/or natural resources, such as Afghanistan, Congo, Ethiopia, Iraq, Laos, Myanmar and Timor Leste. A couple more are simple cases of natural resource-driven economies, such as Qatar and potentially Turkmenistan and Uzbekistan.

GDP growth, 2009 (Source: IMF)

GDP growth, 2009 (Source: IMF)

Large swathes of the world, almost 70 countries in total, are blue, meaning GDP contraction in 2009. These are concentrated particularly in developed and transition markets, as well as the larger economies of Latin America. A dozen economies face GDP contractions of greater than 5% this year. While Ireland is on the list, it is not a sore thumb, particularly when one looks at countries such as Iceland, Estonia and Singapore, also small open economies. In fact, the whole list of those worst affected this year reads, unfortunately, like a Who’s Who of Washington Consensus poster boys from earlier in the decade:

  • Botswana – one of Africa’s few success stories over the past two decades, growing at more than 8% a year until recently
  • Estonia, Latvia and Lithuania – three small open economies that had bought heavily into the dream of European integration
  • Iceland – no explanation needed, unfortunately
  • Ireland – end of the exporting good days… or end of the domestic boom?
  • Japan – one of two large economies on the list, facing collapsing export values
  • Russia – the other giant on the list, hit more heavily than other resource economies
  • Seychelles – a relatively successful and open economy, coming down from a heady 2006/2007 boom
  • Singapore and Taiwan –  two of Asia’s most successful exporters in the good days
  • Ukraine – again, a very strong economic performance since 2000, with natural resources playing their part

Largely speaking, these, the worst hit economies of the 2009 recession, are open economies and in many cases small ones too. I thought it would be worth investigating across the entire pool of almost 200 economies whether there was a correlation between 2009 performance and (1) openness and (2) 2001-2007 ‘trend’ growth. The full visualization is here (you can play with the axes, highlight your own country – Ireland highlighted below, flip the chart, etc..), but for the overall story, see below.

Openness & Growth, 2001-2009

Openness & Growth, 2001-2009

A quick guide to how to read it:

  • The further down a country is, the greater its GDP contraction this year. (Qatar’s expected phenomenal 20% growth this year – oh, to have gas reserves! – actually stretches out the axes a little more than ideal.)
  • The further to the right a country is, the more open it is, as measured by World Bank trade-GDP ratios. (The three trade-a-holics, Singapore, Hong Kong and Luxembourg, again stretch this out a little – closely followed, incidentally, by the Seychelles.)
  • And if two dimensions weren’t enough, the size of the bubble represents average growth between 2001 and 2007.

While not a perfect correlation, it’s pretty clear that more open economies are facing into tougher economic times. Two quick and related concluding remarks. Firstly, a second glance back at the map shows that Africa and Asia are the best performing continental economies this year. I doubt it’s a coincidence that the vast bulk of population growth over the coming two decades will be from these two regions. The slow but steady formalization of markets continues under the radar in both.

The second point builds on this. The story we were all sold in 2007 was one of decoupling. “No matter if the US and Europe go into recession,” went the story, “because the BRICs will rescue us.” Brazil and Russia in particular did not pass that test, but China and India have fared better. Both economies do look like coming in about 5 percentage points below 2001-2007 trend growth this year, which may certainly feel recession-esque, particular with global euphoria and expansion a thing of the past. Nonetheless, they are still among the fastest growing economies in the world, forecast at above 5% in 2009. China and India are also by the largest of the BRIC countries, with almost 30% of the world’s population, suggesting that they have a critical mass of domestic demand that Brazil and Russia lack.

Protectionist backlash or falling consumer demand: Is the world in danger of deglobalization?

What if unemployment in Ireland reaches 25% next year? What if GDP falls a quarter between 2007 and 2012? The spectre of the Great Depression looms over us large at the moment and there has been much commentary of late – see for example Robert Samuelson’s recent blog post – on whether and how our current global recession/depression compares with the last one of similar scale, that of the 1930s.

Is it pointless spooking of the public or is it a relevant comparison worth exploring further? Recently, Kevin O’Rourke and Barry Eichengreen make the case that the comparison is at least worthy of further investigation in an analysis of some key global indicators, including output, stock markets and interest rates, comparing ‘now’ and ‘then’. Their conclusion was that “world industrial production, trade, and stock markets are diving faster now than during 1929-30” – something that previous US-centric comparisons hadn’t concluded. One thing that worried me as a student of the history of globalization was the inclusion of trade in that set of statistics. Here is O’Rourke and Eichengreen’s Figure 3, Trade Then and Now, which worried me so much:

World trade then and now - Source O'Rourke/Eichengreen 2009

World trade then and now - Source: O'Rourke/Eichengreen 2009

Are things that bad? Is the world going to “deglobalize”? Is trade going to collapse and bring us – in a trade-dependent Ireland and a trade-dependent world – unemployment, poverty and misery along similar lines as the world saw in the 1930s?

The first thing to know is whether or not the world is more globalized in trade terms now than it was in the 1920s and 1930s. This may seem like a dumb question at first: just as the world is more urbanized and more industrialized on a totally different scale now compared to a century ago, surely it’s more globalized too, right? But those who research globalization have shown that it’s rowed back and forth over the decades and centuries, whether one looks at trade, migration or capital markets.

For example, as Kevin O’Rourke writes elsewhere with two co-authors, the globalization of international investment was greater in 1914 than it was at any point later until the early 1970s. “Deglobalization” of capital markets meant that while foreign assets accounted for nearly 20% of world GDP during 1900-14, the 1930-1960 figure was just 5-8%, similar to levels in 1870.

A table in the same paper outlines trade and the integration of goods markets in the pre-1914 period. The best estimate for Europe is that the trade-output ratio – how much of what was produced was traded – increased from 30% in 1870 to 37% in 1914. What happened next? In particular, what happened in the Great Depression and how does that compare with now? The graph below shows two lines, the orange line being the world trade-output ratio from 1991 to 2013, as estimated by the IMF’s World Economic Outlook. The blue line is my own estimate, based on Mitchell’s Historical Statistics and research I did while in Trinity, of the global trade-GDP ratio in the 1920s and 1930s, using 25 prominent economies (not dissimilar to a proto-OECD).* The shaded part shows the future, for the orange line – i.e. 2009 on.

Global trade-output ratios across the two Depressions

Global trade-output ratios across the two Depressions

Three things strike me:

  • The first thing to notice is that in 1991, one third of what was produced globally was traded. The world was about as globalized in 1991 as the OECD was in the mid-1920s and as Europe was in 1900. So we certainly not talking exponentially different levels of trade intensity now compared to a century ago – probably just greater geographical spread.
  • Protectionism, deglobalization and the destruction of trade kicked in in the early 1930s. The change was a steady four-year shift to a new lower level of trade intensity. For all intents and purposes, the Great Depression led to a halving of how integrated global trade markets were.
  • The world’s global trade intensity since 1991 has been marked – it has essentially doubled, meaning that almost two thirds of what is produced is now traded. Not only that, unlike in the 1930s when trade intensity almost halved, global integration of trade markets is likely to increase over the coming years of global recession and recovery, if the IMF’s latest statistics are to be believed.

Does this make any sense? How can trade in 2009 be falling faster than it did in 1929 – at the start of a period of dangerous protectionsim – and yet the world is still globalizing? Mathematically, the answer has to be that trade is contracting, but slower than output. Economically, the answer – I think – is that trade is much more integrated into daily life now than then. Or put another way, trade in the 1920s and 1930s was more easily substitutable than now. Globally integrated supply chains and consumer networks mean that when output falls now, trade falls – and vice-versa, as countries are trade-dependent. Just look at Japan’s exports – that to me tells a story of global consumers cutting back on buying new cars, not British or German consumers deciding to buy local rather than buy Japanese cars.

So, having looked at the stats, I’m a little less worried than before. Firstly, politicians seem much more acutely aware of the dangers of protectionism now (… although perhaps a historian can correct me on the political economy of the early 1930s). Secondly, while 1920 and 1990 were not dissimilar starting points, in terms of the level of trade intensity, we have entered our recession at a different level of trade intensity than our forebears 80 years ago. While the 1920s were a stuttering decade for global trade, the nineties and naughties have seen solid expansion of trade networks. The 20-year build-up before recession set in, coupled with the technologically-enabled disaggregation of value chains, has created global trade networks of a much more integrated nature than those of the 1930s. It would be much harder now – even if we all wanted to – to destroy our trading networks, as we’d be trimming our own consumption possibilities far more than consumers had to back in the 1930s. Hopefully, my optimism is not misplaced.

* For those interested in the details, the 25 counties were weighted by their non-agricultural labour force, to strike a balance between GDP and population weightings.

(PS. I still think a comparison of the real economy effects of the financial crisis of the early 1870s is worth a go… Here’s hoping I’ll find the time!)

A brand new scare graph – Japan’s collapsing exports

I have just discovered a set of global trade statistics updated monthly by the Dutch Bureau for Economic Policy Analysis (CPB). (Incidentally, this is not the first time I’ve come across excellent work by the CPB – their work on administrative burdens imposed by regulation is essentially the international pioneer on the topic and has informed EU thinking on how to cut red tape.)

Rather than hundreds of words of rapier-sharp analysis, I thought I would just post one graph that I thought was the single most shocking thing I’ve seen this recession yet: Japan’s trade figures.

Japan's exports and imports, Jan 2000-Jan 2009

Japan's exports and imports, Jan 2000-Jan 2009

While Japan may have been ‘over-exporting’ – or at least ‘under-importing’ if domestic demand is moribund – the 40% year-on-year collapse in exports cannot be written off as just another statistic. Presumably driven by exports of cars, this has to make for dismal reading. China is not far behind, it seems, with exports down almost 20% year-on-year in late 2008.

As far as I know, even open countries such as Estonia (down 10%), Singapore (down 20%) and Ireland (down just 1%) have seen falls in exports but nothing like 40%. (Interestingly, imports have collapsed in Ireland, down almost 30%, while exports are static – are multinationals just clearing their output?)

For those who think this whole post is just far too optimistic, to REALLY depress yourself, have a look at this global – rather than US – comparison of the 1930s and today, A Tale of Two Depressions, by Kevin O’Rourke and Barry Eichengreen. As they note in their conclusion:

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

The Pelosi scare-graph revisited: Private sector job losses and camel recessions

As some of you may know, Nancy Pelosi has been scaring people with graphs, recently. By her metric, namely the absolute numbers of jobs lost, the current recession is more severe – and faster – than the last couple of regressions.

Naturally, something that high profile gained a lot of attention and ultimately modification. The one people seemed to settle on was one by William Polley, who made some slight modifications and improvements. In particular, he made a greater number of comparisons all the way back to World War II, and also changing it from absolute number of jobs lost to percentage jobs lost, to give some idea of the scale of the recession.

Of course, I could hardly let a good graph pass me by. Below is a slightly different version, with three more tweaks, to tackle some remaining issues:

  • Firstly, I’ve averaged the four recessions between 1948 and 1961, calling them the “1950s recessions” in the absence of a more appropriate nickname. The reason for this is that the four recessions in that period were all remarkable similar. In particular, they all started in Autumn and ended almost two years later in Summer. They had similar length and similar severity, and there was a similar government response each time – increase the number of jobs in the public sector by about 6%.
  • Secondly, I’ve tried to further reduce the ‘clutter effect’ – or at least make the graph more intuitive – by using the colour scheme to indicate passage of time. The darker the colour, the more recent the recession.
  • Lastly, and most substantively, I’ve focussed just on private sector employment. Government employment tends to be acyclical and rising steadily (apart from the early 1980s – perhaps Reagan swinging the axe?), so the focus should be on total private sector (non-farm) employment.
% fall in US private sector employment during recessions, 1945-2009

% fall in US private sector employment during recessions, 1945-2009

It’s hopefully pretty self-explanatory – our recession looks like it’s going to be dead hard! Might as well get the discussion started with a few initial observations on the graph:

  • By this metric – arguably more down-to-earth than fuzzy GDP metrics – recessions have been getting longer, not shorter, since the war. 1950s recessions lasted two years, the last one (2000-2003) stretched to more than four years!
  • The worst point of the recession has been been getting milder and milder – at least until this recession. A good old-fashioned 1950s recession would wipe 6% or more off private sector jobs. The early 2000s recession never even reached 5%. Although it did come close twice, speaking of which…
  • Recessions are like camels. Just as camels can have one hump or more than one, it seems recessions can be Dromedary or Bactrian also and in fact are drifting towards the multi-humped latter species.

Unfortunately, we don’t have the monthly data to do the same for the 1930s recession – or indeed to collate data across a wide spectrum of countries. But, if the USA is a good bellwether for the downturn, whatever about it perhaps being more flexible in the upswing, then it seems that modern (i.e. post-1980) recessions hit a smaller number of workers for longer than their pre-1980 counterparts.

It looks like our current recession is going to mix the worst of old-time recessions, i.e. the 6%+ fall in private sector employment, with the worst of modern recessions, i.e. it’s going to last three years or more and probably come back with a vengeance a couple of times just when we think it’s getting better.

The Humpty Dumpty threat: Will the euro fall apart?

Ricky Gervais has a very funny sketch about how ludicrous the children’s rhyme, Humpty Dumpty, is. In particular, employing horses, who don’t even have thumbs let alone opposable ones, to put him back together again. Actually, it’s so good, I’m going to embed it here:

Anyway, spurious introduction aside, apparently according to the Financial Times (thank you irisheconomy.ie), the euro is in danger of becoming our very own Humpty Dumpty, thanks in no small part to the risks associated with Ireland (as well as Spain and Greece). The video is well worth a watch for the spreads he shows emerging for the triumvirate of risky eurozone members. He refers also to intrade prices of 30% for one country pulling out of the eurozone in the near future, which he rightly points out are amazing odds for what would seem to be such an extreme event.

And if that were to happen, would anything policymakers try to do in response to fix the euro as a viable reserve currency be just the equivalent of sending all the King’s horses to mend a broken egg? Interesting times…