Monday, 10 September 2012

The new GDP figures

Statistics Iceland issued new figures on GDP growth three days ago. As I've been flat chat in finishing my PhD I haven't had the time to dig into them properly until now. They tell us pretty much the same as the last figures: the economy is fragile and a wolf would not have to huff and puff much to blow it down.

First of all, the GDP growth of first six months of 2012 was estimated to have been 2.4%. The previously posted 3.1% growth of 2011 was reevaluated downwards to 2.6% - there goes any reason for the central bank to up the policy rates further! GDP per person is still way below what it was before the crash happened: five years later we are still only getting 91% of the GDP per person we had.

Still long way to go! Although the economy is slowly bouncing back the GDP levels per person are still meagre 91% of what they were 5 years ago.

Furthermore, and what is most important, the investment levels are still laughable in historical context. Total investment has still not gone up above 15% of GDP when the normal ratio should be close to 19-20% or thereabouts. Industry investment is only slowly coughing its way upwards when in fact a lot more investment is exactly what the economy needs! But no need to be surprised about that: the offshore krona problem is still around and interest rates are too high. Is it any wonder that the economy is not bouncing back properly!

A very severe problem is in fact arising due to the low investment levels: we are not keeping up with amortisation! The machines we use to produce whatever we are producing are breaking down faster than we can replace and fix them. To expect a proper economic recovery with reducing capital stock is like expecting to be able to run faster when you're 80 years old than when you were 25.

Investment, especially industrial investment, is still only a shadow of itself. Categorised figures only stretch back to 1997 but next graph shows how slowly total investment is recovering.

Total investment (blue line) is still insufficient. Investment is in fact so low in fact that we are not managing to keep up with the amortisation of capital with the obvious consequence that the stock of capital is reducing (red line, right axis). How exactly are we going to improve productivity for the longer run if investment is not even enough to keep up with the amortisation? Red dot is 1H2012.

As expected, when investment is low the level of employment is as well. A break in the correlation between total investment and unemployment seems to be visible after the 2008 crash. The effects of emigration on the employment figures should not be taken lightly. Employment will not bounce back until the level of investment recovers.

A structural break seems to be present in the data on unemployment and investment levels after 2008. A likely explanation is the emigration to e.g. Norway and other popular post crisis destinations of the Icelandic worker. 

A reposted figure from Unemployment in Iceland. Don't expect the total number of worked hours per worker to grow much while the level of investment is as low as it is. The GDP growth is a froth! 


  1. Sæll Ólafur. Ég hef verið að lesa pislana þína á pressunni. Síðasti pistill var um íbúðalánasjóð og lífeyrisstjóðina.

    Það væri gaman að leika sér með þá hugmynd um að losa / greiða upp skuldabref lífeyrissjóðanna hjá 'ibúðalánasjóði.

    Hugmyndin er sú að fá eigendur aflandsskróna og þeirra sem sitja fastir v/ gjaldeyrishafta, til að endurfjármagna stóran hluta af skuldabréfaeign lífeyrissjóða sem hvíla á heimilum landsmanna. Bjóða þeim 1-2% vexti og verðbætur með 3-4% þaki. Þeir fá vexti og verðbætur greiddar í gjaldeyri fyrstu 3-5 árin og og uppgreiðslu lána á nnæstu 6-10 ár. Við þessa aðgerð væri hægt að afnema gjaldeyrishöft að mínu mati.

    Gaman væri að þú skoðaðir þessa hugmynd.
    Eggert Guðmundsson

  2. Sæll Eggert,

    Ég er hræddur um að þessi hugmynd strandi strax í upphafi á þeirri staðreynd að skuldabréf Íbúðalánasjóðs eru óuppgreiðanleg. Það verður að bíða þartil þau lenda á gjalddaga að greiða þau upp, það er ekki hægt að borga inn á þau.

    Staðreyndin er sú að ÍLS verður alltaf gjaldþrota, sama hvað gert verður. Skemmtilegur bakreikningur það sem ríkissjóður fær, þ.e. ef það er í raun ríkisábyrgð á ÍLS.

  3. Hello Olafur
    I've been reading your blogs from time to time and you advocate for a low interest rate policy. Will this not create malinvestment and ultimately bubbles?

  4. Olafur Margeirsson14 September 2012 at 10:27

    You're referring to the Austrian argument, no? They were spot on! Low rate of interest would create malinvestment and ultimately bubbles IF the funding - the bank credit - would be coming forward. Given the profit incentive of banks to finance speculation and even Ponzi financing (Minsky and history teach us that) I'm not in doubt that speculation bubbles would take place!

    Credit creation limitations would help stopping that - Werner (New Paradigm of Macroeconomics) gets into both the pros and cons of credit limitations amongst other things (good book, highly recommended!) Another way would be to limit banks' credit creation through their holdings of net foreign reserves (or assets) as credit is purchasing power and is partially spent on imports, which again need foreign currency receipts. Banks would channel investments into export industries and import-substitution ones, fuelling international trade and not local speculation bubbles with existing assets. Low rate of interest would help real capital investments. Creative destruction would of course be allowed to work its magic instead of bailing out the whole industries with state interferences.

    The main thing that banks need are profit incentive to channel bank credit creation into real capital investments. Today, they have the incentive to create speculation bubbles and malinvestments. But yes, low rate of interest and unlimited capabilities of banks to create credit is bad cocktail! But that's not because of the low rate of interest.

  5. Hello again Olafur
    Thank you for the detailed answer and book recommendation.
    But I do worry tho, if the banks have such low interest rates won't they look into safer options like the housing market, as well as people won't find the incentive to save, but rather spend recklessly.

    The FED recently introduced QE3 and this time open ended. Is the low interest rate policy helping the US?

  6. Olafur Margeirsson16 September 2012 at 11:07

    Well, the housing market is only safer while it doesn't pop. And I'm going to say that people should not have the "incentive to save" but the "financial safety to spend". We save money because we are in doubt that we will have income in the future to cover our wants and needs. I certainly agree with you that spending should in itself not be encouraged (too bad the consumer-based capitalistic system sometimes does too much of that) but as long as people are not accumulating excessive debts, hurtful for both themselves and the financial stability of the system in the longer run, they will save according to the uncertainty about future income and spending they are dealing with.

    The QE3 is a mistake, at least the way they do it. Sure, the QEs probably kept asset prices inflated (and therefore postponed the much-needed purging of the system) but they hardly did much for the unemployed American; record number (45 million) of Americans are now receiving food stamps.

    And if they want to get unemployment down, why are they creating and spending the 40billion per month on MBS? Why don't they give the money (credit) to the State or local governments with the proviso that they build roads, bridges, improve schools, set up a New Energy project or anything like that (general real capital investments, generating both monetary demand and pushing the supply constraint out)? Why do want to go through the securities market?