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.

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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.

Lopping the top half off & Ireland’s property market in a global perspective

On Monday the latest daft.ie report came out, showing that asking prices had fallen just over 4% in the first three months of the year. Yesterday, I changed focus on the blog a little, as it was Budget day, and tried instead  to put some numbers on what a potential property tax could raise.

Today, I hope to give a little more detail on the findings from the report itself, in particular regional trends, and then give an international perspective also – or at least start to give one, which I think is always instructive. Below is a graph showing the quarter-on-quarter change in asking prices for the last two quarters, i.e. Q4 2008 and Q1 2009, in each county.  The most obvious finding – probably not a surprise to anyone – is that asking prices fell in almost all counties in both quarters. A second clear finding is that there does not appear to have been one or two counties more affected in the last six months than elsewhere (although one could make the argument that Munster has got off relatively unscathed since September).

Quarter-on-quarter changes in house prices, 2008q4-2008q1

Quarter-on-quarter changes in house prices, 2008q4-2008q1

What also jumps out is that the two quarters saw very different patterns. In the final three months of 2008, a few counties – such as Galway, Westmeath and to a lesser extent Donegal and Leitrim – saw the largest downward adjustments in asking prices. Two counties, Mayo and Tipperary actually saw no fall in their asking prices. This quarter, Mayo and Tipperary actually had slightly larger falls than average – perhaps a sign that sellers there had been holding for the start of the year before acceding to the realities of the market. On the flip side, sellers in Galway and Westmeath believed in Q1 that their large adjustments in late 2008 did not need to be followed up with more adjustments straight away.

Sligo has been the worst hit county in terms of falling house prices, with a fall in the region of 10%in three months alone. (Dublin city centre and Waterford city actually saw bigger falls but they are lessened by other parts of their counties.) Aside from that, it seems that Dublin generally and the counties around it were among those with larger adjustments since the start of the year.

This leads on to perhaps a more interesting question – how have counties fared since their property prices peaked? To do that, I’ve set up another Manyeyes dataset (which anyone can access) with the percentage gap between house prices in a given quarter and the peak, for each county. Where a county is sandy coloured, that means it has peaked. The deeper the blue, the bigger the fall. (One little trick with these figures is that for a county’s earlier “blues”, prices are still going up. By the second row, that’s no longer an issue.)

Change in asking prices from the peak, 2007-2009

Change in asking prices from the peak, 2007-2009

A couple of findings emerge, based interestingly on alternate axes of the country:

  • East peaked before west, on average, and by almost six months. If you draw a line from Cavan down to Wexford, 10 of the 13 counties peaked in the first half of 2008, more than half the country in population terms, including all of Dublin and its offshoots. Cork, Galway, Limerick and a few other counties actually peaked in the second half of 2007, while a couple of stragglers – Tipperary and Westmeath to be precise – only peaked in early 2008. (Interesting to note, in passing, their sellers’ totally different reactions to conditions in late 2008, as per the first chart above.)
  • North is falling faster than south, on average. If you draw a line from Dublin over to Galway, 9 of the 10 worst affected counties so far come from that half of the island. The top half of the property market – literally! – has been lopped off more than the bottom half. This means that the north-east – essentially Dublin-plus – fell first and is falling hardest, while the south-west – Munster – was last to fall and has fallen least so far. It will be interesting to compare these emerging trends, two years into the property crash, with the final statistics on Ireland’s property readjustment/crash/Armageddon/return to sanity/fill in name here.

Speaking of writing the history books, perhaps it’s no harm to have a quick look to our left and our right and see how other property markets are faring. Below is a chart of about 20 countries (with two different measures in there for the US, the first is the OFHEO measure, while US* is the Case-Shiller national index). I’ve based this on data posted on the Economist’s website, but have surreptitiously replaced the 2007/2008 ESRI data, about which there is a lot of scepticism currently, with daft.ie data. The bars show the annual rate of change in house prices, including a 1997-2008 average, and figures for 2007 and 2008. (As per the Economist website, some of the Q4 08 figures are actually Q3 08 while a couple, including Ireland, are Q1 09.)

International comparison of property markets, 1997-2009

International comparison of property markets, 1997-2009

Replacing the ESRI data with the daft.ie had the effect of moving Ireland from the “Club of Moderates” such as Denmark and the Netherlands, to the “Bleeding Edge” group with Hong Kong, the UK and the US (at least one measure for the US at any rate). I will do my best to try and track down the original data for this series so that a change-from-peak measure can be contructed as again that may be more instructive than a year-on-year change, particularly in six months time.

In the meantime, though, I’ll leave this up here and ask for any insights, comments or queries, as per usual! Fire away…