Category Archives: Economic growth

17/1/19: Eurocoin December 2018 Reading Indicates a Structural Problem in the Euro Area Economy


December 2018 reading for Eurocoin, a lead growth indicator for euro area posted a second consecutive monthly decline, falling from 0.47 in November to 0.42 in December. December reading now puts Eurocoin at its lowest levels since October 2016.

Charts below show dynamics of Eurocoin, set against actual and forecast growth rates in the euro area GDP and  inflation:



Per last chart above, the pick up in inflation, measured by the ECB’s target rate of HICP, from 1.4% at the end of 3Q 2017 to 1.7% in 3Q 2018 has been associated with decreasing growth momentum (Eurocoin falling from 0.67 q/q to 0.48, and growth falling from the recorded 0.7% q/q in 3Q 2017 to 0.2% q/q in 3Q 2018).

With this significant downward pressure on growth happening even before any material monetary tightening by the ECB, Which suggests that euro area growth problem is structural, rather than policy-induced. While QE did boost growth from the crisis period-lows, it failed to provide a sustainable momentum for significantly expanding potential growth. Thus, even a gradual slowdown in monetary easing has been associated with a combination of subdued, but accelerating inflation and falling growth.


19/10/18: IMF’s Woeful Record in Forecasting: Denying Secular Stagnation Hypothesis


A recent MarketWatch post by Ashoka Mody, @AshokaMody, detailing the absurdities of the IMF growth forecasts is a great read (see https://www.marketwatch.com/story/the-imf-is-still-too-optimistic-about-global-growth-and-thats-bad-news-for-investors-2018-10-15?mod=mw_share_twitter).  Mody's explanation for the IMF forecasters' failures is also spot on, linking these errors to the Fund's staunch desire not to see the declining productivity growth rates (aka, supply side secular stagnation).

So, to add to Mody's analysis, here are two charts showing the IMF's persistent forecasting errors over the last four years (first chart), set against the trend and the cumulative over-estimate of global economic activity by the Fund since mid-2008 (second chart):




While the first chart simply plots IMF forecasting errors, the second chart paints the picture fully consistent with Mody's analysis: the IMF forecasts have missed global economic activity by a whooping cumulative USD10 trillion or full 1/8th of the size of the global economy, between 2008 and 2018. These errors did not occur because of the Global Financial Crisis and the high degree of uncertainty associated with it. Firstly, the forecasting errors relating to the GFC have occurred during the period when the crisis extent was becoming more visible. Secondly, post GFC, the hit rates of IMF forecasts have deteriorated even more than during the GFC. As Mody correctly points out, Fund's forecasts got progressively more and more detached from reality.

At this stage, looking at April and October 2018 forecasts from the Fund's WEO updates implies virtually zero credibility in the core IMF's thesis of a 'soft landing' for the global economy over 2019-2021 time horizon.

19/10/18: IMF’s Woeful Record in Forecasting: Denying Secular Stagnation Hypothesis


A recent MarketWatch post by Ashoka Mody, @AshokaMody, detailing the absurdities of the IMF growth forecasts is a great read (see https://www.marketwatch.com/story/the-imf-is-still-too-optimistic-about-global-growth-and-thats-bad-news-for-investors-2018-10-15?mod=mw_share_twitter).  Mody's explanation for the IMF forecasters' failures is also spot on, linking these errors to the Fund's staunch desire not to see the declining productivity growth rates (aka, supply side secular stagnation).

So, to add to Mody's analysis, here are two charts showing the IMF's persistent forecasting errors over the last four years (first chart), set against the trend and the cumulative over-estimate of global economic activity by the Fund since mid-2008 (second chart):




While the first chart simply plots IMF forecasting errors, the second chart paints the picture fully consistent with Mody's analysis: the IMF forecasts have missed global economic activity by a whooping cumulative USD10 trillion or full 1/8th of the size of the global economy, between 2008 and 2018. These errors did not occur because of the Global Financial Crisis and the high degree of uncertainty associated with it. Firstly, the forecasting errors relating to the GFC have occurred during the period when the crisis extent was becoming more visible. Secondly, post GFC, the hit rates of IMF forecasts have deteriorated even more than during the GFC. As Mody correctly points out, Fund's forecasts got progressively more and more detached from reality.

At this stage, looking at April and October 2018 forecasts from the Fund's WEO updates implies virtually zero credibility in the core IMF's thesis of a 'soft landing' for the global economy over 2019-2021 time horizon.

23/5/17: Eurocoin: Growth Momentum Slips Marginally in April


A quick update to the old-running series: Eurocoin, the leading economic growth indicator for the euro area, published by CEPR and Banca d'Italia posted another (second in a row) moderation, falling from 0.7 in March 2017 to 0.67 in April. The indicator remains at the upper range of growth for the current upside cycle, and within lower range of growth compared to previous upside cycle:


On the drivers side, stock markets valuations helped to push growth forecast higher, while a slowdown in industrial activity pushed growth expectations lower. In other words, absent the financial assets impact, growth indicator would be much lower.

While euro area overall HICP was at 1.9% in April (bang at the upper range of ECB's target), 12mo trailing average inflation rose to 0.8% from 0.7% in March. Which means the ECB has moved out of the 'policy corner' and is now positioned to start unwinding assets purchasing programs. It will proceed gradually and at a later date, due to political, not monetary reasons.

Meanwhile, although Eurocoin averaged 0.72 in 1Q 2017, actual growth came in at (first estimate) 0.5%. This marks the largest gap between Eurocoin and actual growth since 2Q 2014. This is hardly surprising. In general, the gap between leading indicator-implied growth forecast and actual growth outrun is usually wider during periods of elevated uncertainty about the economy, and especially when financial economy takes over as a major contributor to overall economic growth outlook.

11/10/15: Tax Code Simplification and Deadweight Loss of Taxation


In a recent speech (see notes here), I discussed the need for tax reforms in Ireland and, specifically, for flattening of the income tax system.

Here is an interesting, albeit dated, paper on the subject of tax codes simplification as the tool for reducing the Deadweight Loss of compliance and improving tax compliance and enforcement: http://www.columbia.edu/~wk2110/bin/epi.pdf.

H/T to @brianmlucey for the link.