Q2 2010 European GDP grows faster than the US

I predicted this about 2 months ago.

Here's what the Eurostat release says:

GDP increased by 1.0% in both the euro area (EA16) and the EU27 during the second quarter of 2010, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the first quarter of 2010, growth rates were +0.2% in both zones.

Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 1.7% in both the euro area and the EU27 in the second quarter of 2010, after +0.6% and +0.5% respectively in the previous quarter.

During the second quarter of 2010, US GDP increased by 0.6% compared with the previous quarter, after +0.9% in the first quarter of 2010. US GDP rose by 3.2% compared with the same quarter of the previous year (+2.4% in the previous quarter).

Actually I love it how people like to report GDP figures differently. 1.0% doesn't sound too much and anyone who read the latest US GDP figures would say "But US GDP grew by 2.4%". Here's two examples:

Example one (Bloomberg, 2010-07-31):

Gross domestic product grew at a 2.4 percent annual pace, less than forecast, after a 3.7 percent first-quarter gain that was larger than previously estimated, according to Commerce Department data issued today in Washington.

Example two (Bloomberg, 2010-08-13):

Gross domestic product in the 16-nation euro area increased 1 percent from the first quarter, when it rose 0.2 percent, the European Union’s statistics office in Luxembourg said today. That’s the fastest in four years and the first time the euro region has outpaced the U.S. since the second quarter of 2009.

As anyone who has been trying to decipher GDP reporting over the years knows, there are three (and possibly four) basic ways to measure GDP growth:

1. Measure the growth from one quarter to the next.
2. Measure the growth from one quarter to the next, and then "annualize it" by multiplying it by four.
3. Measure the growth from the latest quarter to what it was 12 months ago, giving an "annual" (but not annualized) figure.
   

Confusing isn't it? The thing is, when the media reports US figures, it gives the 2nd measurement; when they report EU figures, they use the first measurement. What ends up happening is that the US looks "better". So how do the US and EU really compare?

Of course the recovery has hit Europe one quarter after it has hit the US, which is why the annual figure for the US exceeds that of the EU. Q3 2010 should look interesting, as should further revisions of these GDP numbers for both Europe and the US.

Correct prediction on Ireland

Time to bang my own drum, blow my own trumpet and announce to the world that I'm not as stupid as they think I am:

Me 2010-05-10: Of these nations, Ireland is the only one with a contracting economy experiencing deflation, so it is likely that Ireland will experience only moderate contraction and more stable prices in the coming months.

Today: The latest figures released by the Central Statistics Office show that Ireland’s Gross Domestic Product (GDP) rose by 2.7% in the first three months of this year.

Of course, year on year GDP has Ireland still at -0.7%, which is what I would define as "moderate contraction", especially in regards to previous GDP results.

More correct prognostications

From my 25 Predictions of 2009:

Prediction #4: "Gold will exceed $1000 per ounce as a result of the dollar drop too."

Bloomberg, 2009-09-08:

Gold climbed above $1,000 an ounce for the first time in six months.

Prediction #15: "Australia will lose The Ashes to England in the middle of 2009."

Cricinfo, 2009-08-23:

Australia's 2-1 Ashes defeat, confirmed with a heavy 197-run loss at The Oval on Sunday, has cost them their No. 1 spot in the ICC Test rankings. They have slipped to fourth, with South Africa now the No. 1 Test team in the world, followed by Sri Lanka and India.

Another prediction

From my list of predictions for 2009 comes #7:

Two quarters of 2009 GDP will be negative. The NBER will not announce an end to the recession at all in 2009.

Bloomberg today:

The U.S. economy shrank at a better- than-forecast 1 percent annual pace in the second quarter as a jump in government spending masked a deeper retrenchment by consumers.

The drop in gross domestic product followed a 6.4 percent contraction in the prior three months, the worst in 27 years, Commerce Department figures showed today in Washington. Revisions showed the economic downturn last year was even deeper than previously estimated.

Two quarters are now officially negative, thus half fulfilling my prediction. We have to wait until 2010, though, for the other half of the prediction to be fulfilled (the NBER not announcing an end to the recession).

Oil $60

Another one of my predictions for 2009 has been fulfilled - though technically the rise has more to speculation than with a falling dollar (which was my predicted reason for the rise - though the dollar has been dropping a bit lately).

Oil above $60 on US economy hopes.

Two more predictions fulfilled

The Independent:

Dr Church said that the most recent satellite and in situ data showed seas were now rising by more than 3mm a year – more than 50 per cent faster than the average for the 20th century.

My prediction:

Sea levels will rise by more than 3mm in 2009.

The Independent:

Sea levels are predicted to rise twice as fast as was forecast by the United Nations only two years ago, threatening hundreds of millions of people with catastrophe, scientists said yesterday in a dramatic new warning about climate change.

My prediction:

More climate scientists will admit that global warming is occurring faster than they thought it would.

Dow 7062.93 - another prediction

From the beating my own drum department.

Bloomberg:

The Dow Jones Industrial Average fell 119.15 points, or 1.7 percent, to 7,062.93, leaving it 50 percent below its 2007 record and at its lowest level since May 1997.

OSO's 25 predictions for 2009:

The Dow Jones Industrial Average will drop below 7082.26.

Ledger gets Oscar

SMH:

Late Australian actor Heath Ledger has won the Oscar for best supporting actor at the 81st Academy Awards in Hollywood.

Ledger, nominated in the best supporting actor category for his performance as The Joker in The Dark Knight, was favourite to win.

That's one of my 25 predictions for 2009 fulfilled, though pedants would point out that I predicted a Best Actor Oscar, not best supporting Oscar.

There is no point in trying

I challenged T. Boone Pickens to a wager about the price of oil and won.

Where's my money Mr. Pickens? Maybe you could give me a job?

Reflections on the Ashes

5-0. It has been 86 years since Australia humiliated England in a similar way. Australia's team was probably one of the best in its history - one in which a good England team could not hope to challenge.

Yet there are some very worrying signs that all will not be well for Australian cricket by the time the next Ashes series comes around in 2009. The retirements of McGrath, Warne, Langer and Martyn will not easily be covered. Moreover, the England team which lost to Australia has some very good talent that will learn from their experiences.

My argument is based upon the experience of the 1986-87 Australian team which were unable to wrest back the Ashes from Mike Gatting's England team. Consider the Australian players who were in that series: Steve Waugh, Allan Border, Craig McDermott, Bruce Reid, Merv Hughes, David Boon, Dean Jones, Geoff Lawson. The next Ashes series - the famous 1989 tour - contained most of these top notch players who had lost to England previously, and managed to overcome them. The lesson? Even players who have experienced the worst of losses can manage, over time, to develop into high-class cricketers.

Think of the current England line-up. Pietersen will certainly be around in 2009 and will score heavily in the meantime. He is, based upon his batting average, the best England batsmen since Ken Barrington retired in 1968. The openers - Strauss and Cook - still boast enviable first class records and still have Test batting averages in the 40s. Once back in England and facing Test teams boasting attacks two notches below Australia, their form and confidence will return. Bell can also be put into this category.

I'm not sure that Paul Collingwood can really hack it as a Test player in the long term - and this is based upon his first class form alone. Collingwood averages around 35 with the bat and has done so for ten years. His recent bout of good form will probably be mixed up with future failures, and he will probably leave Test cricket with a sub-40 batting average.

Flintoff is of concern. His performances during the 2005 series were nothing short of inspiring but he was unable to reproduce that form - with either bat or ball - in the series just finished. Flintoff's figures show that his bowling is not as penetrative as people think. On average Flintoff bowls 19 overs every first class match he plays, compare this to 28 for James Anderson, 33 for Steve Harmison, 36 for Glenn McGrath and 42 for Shane Warne. Flintoff's first class figures indicate that he averages 35 with the bat and 32 with the ball - neither of which would, by themselves, be considered excellent. Ian Botham, the player he is often compared to, averaged 34 with the bat and 27 with the ball - and averaged 26 overs in each first class match. On figures alone Botham appears to be the superior player - however Freddie still has time on his side and players may often perform well as they age.

As far as bowling is concerned England probably did a good job in picking who they picked - except Giles of course... the King of Spain should've been dropped from the England side years ago. Who would've guessed that Harmison and Flintoff would have lost form so drastically? Hoggard played well and should remain as part of the side for years - however players like Mahmood and Anderson did not take the opportunities that were handed to them and were treated as cannon fodder by the Aussie batsmen. I can't understand why players like Jon Lewis, Dimitri Mascarenhas or Kabir Ali keep getting overlooked.

England have not produced a world-class paceman (a sub-25 bowler) since Bob Willis. Plenty of bowlers since Willis' time have been good pacemen (such as Ian Botham, Andy Caddick, Darren Gough, Matthew Hoggard, Steve Harmison, Angus Fraser, Phil DeFreitas, Graham Dilley, Dominic Cork, Devon Malcom and Simon Jones) but none of these has been as effective as a McGrath, an Ambrose, a Malcolm, an Akram and so on. World-class pacemen do not come around often but England, it seems, has had to wait longer than most.

Like many I love Monty Panesar - but wickets mean success and I am not yet convinced that Monty won't turn out like other third-rate England spinners of times past. Left arm finger spinners have not been turning the world upside down since the days of Derek Underwood - but Warne certainly revived Leg Spin so it would be great if Monty could do a similar revival in England.

England should stick with Read behind the stumps. Unless a player like Gilchrist can come along, the man behind the stumps should be the best in the country.

So, that's England. What about Australia?

Australia have lost Martyn, Langer, McGrath and Warne during this last Ashes series. In the next 12 months they will likely lose Gilchrist and Hayden as well.

Ponting, I believe, will continue to score heavily for Australia. He will pass 10,000 runs and, for a time, be the world's highest run scorer. It would be great if he could average in excess of 60 as well, which would show beyond doubt that he is actually a head above the rest of the best.

I've never been a fan of Clarke. Maybe I'm getting old and crabby but Clarke still looks like a kid. Nevertheless I think that runs will talk loudest and Clarke has scored well this season. He didn't do too well in England in 2005, but neither did many Aussie players. Clarke will have to develop into a serior player in a shorter time frame than he would like. Time will tell whether he will make it or not.

Brett Lee, I believe, will not cope without McGrath around. As an unabashed critic of Lee I think he will lose a number of tests in the future and watch his bowling average blow out beyond the already unacceptable 32 that it is already. Without Lee spearheading the attack, who can Australia turn to?

Stuart Clark has had a great 12 months but I am not convinced that he will end his career with a bolwing average of 17. At some point in the future his performances will even out and he will find it difficult to accept the tag of being the "new McGrath".

Stuart McGill may get a run as Australia's leg spinner but he is quite expensive on occasion. He probably won't make it to 2009.

Nathan Bracken is one of my favourite players, and I'm hoping that he will be picked to replace either McGrath or Lee in the future.

But who else is there we can rely upon? Cameron White's Legspin is not as wonderful as many had hoped - even when one takes account of his young age. Jason Gillespie may make a comeback but I can't see him winning tests in the same way as McGrath has done. Then we have the promise of Mitchell Johnson and maybe Shaun "Eric Bana" Tait. But the bowling cupboard is looking increasingly bare.

Batting is looking good, however. I'm reasonably sure that Jaques will be an adequate replacement for Langer. Voges is a good player as well. Katich is waiting in the wings for another chance. Cosgrove is exciting. Love may yet return to the test side, as may Brad Hodge. Symonds will find it difficult to maintain good form. Dominic Thornley is a dark horse, as is Carl Rogers.

Haddin will be able to replace Gilchrist, and maybe even be a better batter than Ian Healy. A return to a traditional keeper will be hard to handle - but players like Gilchrist come around only once in a generation.

So what are my predictions for Ashes 2009?

I wouldn't be surprised if England wins, but I wouldn't be surprised if it turns into a batting fest. England and Australia are strong on batting depth but not as strong in bowling depth. Simon Jones or Stuart Clarke may turn into world-class pacemen but it is way too early to tell. I think a scoreline of 2-1 (from either side) or 1-1 is likely.

Reversing the Bush tax cuts

Paul Krugman, columnist for The New York Times, has written an op-ed piece (click here) arguing that the various Tax cuts that George Bush instigated will eventually come back and bite America, hard. I agree with him.

The US Republican party is heavily influenced by a number of economics and political philosophies that has guided them into making certain decisions - including the Bush tax cuts. Libertarianism, along with Economic Neoliberalism, sees the role of the government in the free market as a necessary evil, but one which must be continually reined back to prevent it from exercising too much influence within the marketplace. The tax cutting that Bush and Reagan have achieved is now seen as a long term way of achieving such a goal. Taxes are cut, and the resulting deficits are handled by spending cuts. This sort of activity is known as "Starve the Beast". Political opponents to such actions are easily dealt with by accusing them of wanting to raise taxes, and to spend lots of government money on inefficient and bloated services that cannot produce any meaningful outcomes because they are not part of the natural marketplace.

The problem is that such an activity, while politically astute, is economically stupid. A government cannot keep running huge deficits without affecting the marketplace significantly. The larger a government's debt is in relation to GDP, the harder it will be for creditors to justify lending it any money.

Imagine a person who spends far more than they earn. Eventually they no longer have the means to sustain such a lifestyle, so they have a choice - either cut their spending or borrow the money. Let's say that our spendthrift decides to borrow the money from his friends and family. When the time comes for him to pay back this money, he simply borrows more to pay off that debt. Now let's imagine that his friends and family - his creditors - choose not to stop their lending. Who is going to suffer? Certainly not our spendthrift. The ones who suffer are his creditors, for they will have less and less money to invest and spend on other things. In other words, their decisions are "crowded out" by their desire to lend to our spendthrift.

Now let's apply this to the macro. Our spendthrift is the government, who spends beyond what it receives in taxation. The creditors are the marketplace, the various banks and investment companies who make decisions about where to invest money. So long as the US government deficit continues to grow (the deficit being the amount of money borrowed to fill the gap between spending and income), the more it "crowds out" the investment choices of the marketplace. In other words, although the aim is to "Starve the beast" and to reduce the size of government, tax cuts and big deficits will always have a major influence upon market behaviour.

The most obvious effect is in market interest rates. The more the government wants to borrow, the more expensive borrowing becomes - and the higher the interest rates for all borrowers. The government is fine - it can borrow as much as it likes because of its size - but the rest of the marketplace suffers from higher interest rates.

"Ah ha", you might say "Aren't these deficits reduced by spending cuts?". Theoretically the answer is yes - spending cuts that match tax cuts will put things back into balance. In practice, however, this has never occurred. George W. Bush, especially, has not made any attempt to rein in government spending because he needs all the money he can to pay for the war on Iraq, as well as trying to stimulate economic activity.

Eventually, deficits will come back to bite nations. If we consider the reign of Bill Clinton, we can see that controlling government deficits can, over the long term, bring many economic benefits. From 1992-2000, Clinton, a Democrat, along with many Republicans in congress and the senate, worked together to erase the Reagan deficits. The result was an unprecedented period of economic growth.

But, of course, don't assume that I think that Clinton did it all. He didn't. I think he just happened to be the lucky guy in the White House at the time. And of course the economic growth that occurred alongside this deficit reducing period was shown to have feet of clay, as the 2001 recession showed. Nevertheless, it did have a positive impact upon the marketplace.

At this present moment in time, the US economy is heading for a huge fall. There is a growing Housing bubble in the US, and the value of the US dollar is only kept where it is by the kind activities of the Japanese and Chinese central banks. Moreover, there is a huge current account deficit that is over 5% of GDP. If the market corrects itself, the housing market will pop, the dollar will drop and you will find lots of people out of work. This situation will be made worse if the US government continues to run a budget deficit.

And through gritted teeth I admit that, for all the foibles and political butchery that typifies the Howard and Costello government in Australia, at least the budget is under control. Our housing market and current account are bad too, but at least we have built up some slack in the reduction of government debt.


From the Osostrian School Department.

© 2005 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/






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