The crisis, from Wall Street to Main Street Francesco Daveri 1

The year-to-year variation in Gdp growth is substantial. The growth rate of world Gdp averaged 3.4 ppts (dotted line), with a standard deviation of 1.4 ppts Plenty of business cycle fluctuations in the world economy

Actual GDP data mix up two parts, potential and transient  GDP n = potential Gdp or output (dotted line, goes up over time thanks to innovation and technical change)  Transient part (excess/shortfall of actual Gdp with respect to Gdp n ) is the business cycle component of Gdp Macroeconomic definition of Business Cycles t Gdp n Gdp Trough, “pavimento” Expansion From trough to next peak Recession From peak to next trough Peak, “tetto”

Statistical definition of a “recession” Business cycle: alternating expansions and recessions. What is a “recession”? Often cited definition: GDP growth <0 over two consecutive quarters.  Not very useful;  Sequence of quarterly GDP growth of -2%, +0.01%, -2%, would not be a recession, although the yearly number would be sharply negative Common practice: Business cycle dating committees look at broad set of variables (GDP but also industrial production and turnover, total employment, retail sales) with varying time frequency.

5 Gdp = C +I+G+ Exp – Imp: what the yearly data show 1) C often fluctuates less than Gdp (not in 2012) 2) Gdp more stable than I, Exp e Imp 3) G is “countercyclical” item Source: ISTAT Data unit: Billions of €, constant (chained) prices Growth ratesGdpcigxm Mean ,4-1,3-5,0-0,70,0-2,2 Std. deviation2,52,04,51,39,98,8

Questions on Gdp and consumption Question: Why does Gdp (often) fluctuate more than C? Answer 1) C is a function of disposable income (Gdp – taxes + transfers), not of Gdp as such. Disposable income has more stable trend than Gdp, hence C is also more stable 2) C is also a function of wealth. Wealth fluctuates less than Gdp. Question: Why has C fallen more than Gdp in Italy in ? Answer 1) In maxi increase in taxes (Imu, excise taxation) 2) Also: fall in housing market made people feel poorer than in the past

Nota di aggiornamento al Documento di Economia e Finanza (DEF), ottobre Real Gdp growth+0,4-2,4-1,7-0,3+0,5 Gdp at current prices (bn €)1638,91628,01618,91626,51642,8 Deficit / Gdp (“quadro tendenziale”) 3,83,02,83,02,2 Deficit / Gdp (“quadro programmatico”) 3,83,02,83,02,9 Public debt /Gdp (“quadro programmatico”) 120,8127,0127,9131,6133,4 Tax revenue / Gdp (“a legislazione vigente”) 46,648,148,3 48,5 Govt spending / Gdp (net of interests on public debt)45,6 46,346,646,2 Total Govt spending / Gdp50,451,1 51,350,7 The tax revenue hike in 2012 (and projections)

Quarterly data give more details Qualitative picture is the same as for yearly data: C less volatile than Gdp (but for 2012); Exports, Imports, I more volatile than Gdp; G is countercyclical. Source: Eurostat

Problem: data comparability across quarters Question: How do we compare q with q4 2012? Q did have Christmas, q doesn’t. Sales (and Gdp) shoot up in q4 every year, then down in January. August sales and production drop and then they automatically recover in September. Yet economy may still be depressed in September. How do we measure this? Answer: data must be “de-seasonalised” to be made comparable across quarters. Link to the Istat websiteIstat website

10 De-seasonalised QoQ data on Gdp indicate end of recession for the EZ17 (Eurozone) and the US between q2 and q Quarterly Gdp data ItaEuroUsaGerFraUKSpa Q1 08 vs Q Q2 08 vs Q Q3 08 vs Q Q4 08 vs Q Q1 09 vs Q Q2 09 vs Q Q3 09 vs Q Q4 09 vs Q Q1 10 vs Q Gdp loss during recession

11 The takeaway from previous table on the recession 1. The recession started a couple of quarters before the financial crisis has precipitated. 2. In the US and the euro area the Great Recession of has ended by mid In Germany and France starting from 2009 Q2. In Italy, the euro area and the US from 2009 Q3. 3. In the UK and Spain the recession lasted longer (UK, until 2009 Q4 and Spain until 2010 Q1) 4. Italy, Germany and the UK showed the highest cumulated Gdp losses in France and the US showed the lowest cumulated loss. Spain in between. Reminder: If an economy exhibits a “+4%” in the wake of a “-4%”, its GDP has not come back to where it was, but stays below the previous level

12 2° half of ° half of 2011: gradual recovery. NOT for Germany & Usa, where recovery was fast  Pil, quarterly ItaEuroUsaGerFraUKSpa q209 vs q q309 vs q q409 vs q q110 vs q q210 vs q q310 vs q q410 vs q q111 vs q q211 vs q  Gdp during recovery

Compared to end 2007: Germany +3%, France about the same, Spain - 5%, Italy -9% Where do growth differences leave us in terms of real GDP levels? Source: Eurostat

14 Gdp only at quarterly frequencies. Need other indices to learn how the economy fares between Gdp releases Monthly indicators of the business cycles are either coincident or forward or backward with respect to Gdp.  Total employment or unemployment  Backward-looking indicator  Depends on past Gdp  Industrial production and turnover  Coincident indicator  Quarterly IP and turnover highly correlated with same-quarter Gdp growth  Orders  Forward looking variable  Predicts what is going to happen to industrial production and turnover (and Gdp)  Retail sales  Coincident.

Not all retail sales fell equally abruptly Food sales resilient, durables and semi-durables fell… Fonte: Elaborazioni su Istat

Crisis not equally there for everybody. 1) Small shops, dramatic fall 2) A «new normal» for Big Box retail formats (GDO)? Fonte: elaborazione su dati Istat

Even within the GDO, quite a bit of action Fonte: elaborazione su dati Istat

One indicator, not many that’s what we go for … This is the Oecd CLI (Composite Leading Indicator) superindex! indicators/

19 What’s in the Oecd super-index for Italy today? The Oecd super-index is a summary of six sub-indices (for Italy): Component Series (Unit)Source Consumer confidence indicator (% balance) Institute for Studies and Economic Analyses (ISAE) Production: future tendency (manufacturing) (% balance) ISAE Deflated net new orders (2005 = 100)ISTAT Order books level (manufacturing) (% balance)ISAE CPI All items (2005=10) invertedISTAT Imports from Germany Cif (USD)ISTAT Source: Oecd

20 The Oecd super-index is a summary forward looking indicator. In 2009 it has shown “signs of recovery” since early Press cut, Sep 12, 2009 “OECD composite leading indicators (CLIs) for July 2009 show stronger signs of recovery in most of the OECD economies. Clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia” The minimum of the super-index for Italy in 2009 was reached around the beginning of 2009.

21 What the CLIs used to say for Italy early on in 2009?

What the super-index shows today? In 2013 the Oecd super-index showed signs of recovery everywhere, with an acceleration in the EZ, Germany, Italy and consolidation (“growth firming”) in the US. Instead, EZ struggling not to fall in recession for the 3 rd time Release: Oecd, October 2014

23 Another summary indicator: PMI Markit Purchasing Managers' Index™ (PMI™) series compiled by Markit are key benchmark indicators for measuring the business and economic conditions in any given economy. In particular:  Eurozone Complete PMI data collected from 5,000 manufacturing and services firms;  Eurozone Services PMI data collected from a 2,000 private service sector firms. There are two parts to the monthly PMI releases;  the first is the headline PMI number, designed to provide a snapshot of the health of the economy;  the second is the sub-indices, or component level data. These sub-indices provide insight into key economic drivers such as inflation, exports, employment and inventories

24 PMI Markit: benefits and functions Benefits:  Reliable guide to future official economic data releases such as GDP;  Data are produced very rapidly, and far faster than equivalent official data, often providing the first indication of economic trends each month;  Represent the most comprehensive global economic survey available to professional investors (more than companies are in the panel). Functions:  Provide a snapshot of the health of the economy;  Data are comprehensive and cover private sector economic activity in all of the world’s (major developed and emerging economies);  Data are produced using the same methodology, including all main developed economies and key emerging markets, offering uniquely accurate international comparisons.

25 Example of PMI Markit Release: February 2014 Flash Eurozone Composite Output Index: 52.7 (January 2014 was 52.9) Flash Eurozone Services Business Activity Index: 51.7 (January 2014 was 51.6)

26 Release: February 2014 PMI Markit for Core vs Periphery EZ countries The periphery (and France) lag behind Germany both in output and employment

Measuring the labor market implications of the crisis Two keywords: Output gap Okun’s law

Definition: the “output gap” Output gap - a synthetic measure of fluctuations = (GDP-GDP potential ) / GDP potential  If output gap positive, economy overheated & inflation mounting;  if output gap negative, economy working at less than full capacity & inflation cooling down. Yet formula above not very useful: who knows the value of Gdp or GDP potential in $ or €? See useful substitute in the next slide.

Computing the output gap on the flip side of your business card Previous formula: Output gap = (GDP-GDP n ) / GDP n may be replaced with something simpler and measurable: Output gap t  output gap t-1 + (actual growth t – potential growth t ), where “actual Gdp growth” is a known number and “potential growth” = avg. growth of recent years Euro area Actual GDP growth Potential GDP growth Output gap Source: Oecd Statistics website

Definition: Okun’s law Over the cycle: GDP and unemployment co-vary negatively. Need rule of thumb to translate U rate above or below its natural rate in terms of output gap. Okun’s law is such rule of thumb. Okun’s law: Any extra % point of actual unemployment corresponds to 2% points of output gap (Okun’s coefficient = (negative) 0.5). An empirical regularity. With exceptions (see next slides) Rationale for Okun’s law? Why does GDP fluctuate more than U?  As GDP falls, labor hoarding; as GDP rises, overtime  In both cases, changes in U lag behind changes in GDP  For about six to nine months if employment very protected, less so in the US

Okun’s law in excess of 1 in the US economy in … Source: International Monetary Fund, World Economic Outlook, 2010

... And closer to zero for Germany … Source: Eurostat

.. And Italy still in Then in the years closer to us, Okun’s law back in business Source: Eurostat

Come erano le previsioni nei primi mesi del 2014 Le slide dal corso …

Nel tornerà (dovrebbe) il segno più … +pil, +consumi, +export, +import. Pil a prezzi correnti su del 2 per cento. Ma effetto zero su disoccupazione. Consumi 2014 (variazione %, volumi) Governo Nota di Aggiornamento al DEF, settembre ,5 (previsione Pil: +1,0) Istat Previsioni per l’economia italiana, ottobre ,2 (previsione Pil: +0,5) Commissione Europea Autumn Economic Forecasts, novembre ,3 (previsione Pil: +0,7) 35

Il segno più del 2014 viene dalla ripresa (oscillante) degli ordini industriali … 36 GENNAIO-DICEMBRE 2013: -1,5% SU GEN-DIC 2012, IN MIGLIORAMENTO RISPETTO AL 1 O SEMESTRE 2013 RISPETTO A 1°SEMESTRE 2012 (ERA -3,2%) Fonte: Elaborazione su dati Istat

La ripresa 2014 è poi trainata dal recupero della fiducia di imprese e famiglie nel 2013 (la ripresa della fiducia delle famiglie si è però incrinata negli ultimi mesi dell’anno) 37 Fonte: Istat

… E da ordini e fiducia si va ai fatturati, con una marcata differenza tra interni ed esteri … Fatturato, industria (dati destagionalizzati) TotaleNazionaleEstero Aprile Aprile Aprile Aprile Gennaio I L FATTURATO ESTERO DELL ’ INDUSTRIA GIÀ NELL ’ APRILE 2013 ERA RITORNATO AI LIVELLI PRE - CRISI I L FATTURATO INTERNO È MOLTO SOTTO, MA È IN LIEVE RIPRESA Fonte: elaborazione su dati Istat

Secondo la Confindustria c’era anche uno «scenario B» più pessimistico. Lo scenario B si è rivelato più ottimistico di quello che è accaduto, soprattutto per il peggioramento della congiuntura internazionale (Ucraina) 39

Il peggioramento della fiducia dei consumatori, un problema comune a tutti i governi italiani 40 Fonte: Elaborazione su dati Istat