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! 

Unemployment in Iceland

Two weeks ago, the Minister of Economy, Business and Industry (yes, he's all three!) Mr. Steingrimur J. Sigfusson wrote an article with the headline (translated) "Unemployment dropping fast". The reason: registered unemployment in Iceland had dropped down to 4.8%. That's pretty fine for an economy whose banking system collapsed in less than a week four years ago! Well done guys!

Not so fast! Sorry, but I'm constantly the pessimistic guy digging a bit deeper than just repeating what the headline data told us.

OK, so three weeks ago the registered unemployment rate in Iceland registered at 4.8%. That was the data for June. This column graph is copy-pasted from the monthly report by Directorate of Labour. "Atvinnuleysi" is "unemployment" in Icelandic. Click to enlarge.

The DoL data is based on how many people receive unemployment benefits. That can be pretty limited if a) the rules regarding unemployment benefits do not apply to those who want the benefits, b) there are people who have given up on looking for a job and left the labour market and e.g. went studying, c) people have left the country or d) people want to work more but cannot because there isn't a job available.

Another data source for unemployment is the data bank of Statistics Iceland. The monthly data there tell a bit different story than the ones from the DoL. They are after all better, yet not truly adequately, defined than data from the DoL. Important definitions by the Statistics Iceland include:

Employed. People are classified as working (employed) if they worked one hour or more in the reference week or were absent from the work they usually carry out. Individuals on birth leave are considered absent from work if they went on leave from a paid job, even if they have no intentions of returning to the same job.

Unemployment. Persons are classified as unemployed who have no employment and satisfy one of the following criteria:
1. Have been seeking work for the previous four weeks and are ready to start working within two weeks from when the survey is conducted
2. Have found a job which will begin within three months but could start working within two weeks. (Until 2002 the criterion was that it sufficed for the job to start within four weeks without it being investigated whether the person involved could begin within two weeks.)
3. Await being called to work and are able to start working within two weeks
4. Have given up seeking work but wish to work and could start working within two weeks.
Students, including those looking for an apprenticeship in a trade, are only considered unemployed if they have been seeking a job along with their studies or a permanent job for the past four weeks and are available to start work within two weeks of the surveys occurrence.

Outside the work force. People are termed outside the work force if they are neither employed nor fulfil the conditions for being unemployed. The labour force is considered to consist of employed and unemployed persons.

The graph below shows the unemployment according to the Statistics Iceland data. The data has been smoothed with a 12 month moving average. 

OK, so unemployment is coming down. But is that enough?

No, it isn't. What counts must be the total hours worked in the economy. And that dropped like a stone in the crash and isn't coming back up, at least not seriously.

Total weekly worked hours in the Icelandic economy. Although unemployment is slowly coming down, total worked hours isn't steaming upwards.

We can use these data on total worked hours and divide them on the total number of people in working age and the total labour force.

Total worked hours has dropped significantly as previous graph showed, down to 2004 levels. But since the labour and man force have grown since 2004, the average working hours per individual in the workforce has taken a considerable dive. And on the bottom it stays.

Suddenly, the 4.8% unemployment according to the unemployment benefits estimate isn't that impressive anymore. Weekly worked hours per individual in the labour force is damn stagnant and has in fact dropped significantly after the October 2008 crash and stayed down. Realise that if weekly worked hours drop by around 4.6 hours, as they have done, the total monthly worked hours drop by around 19.8 hours.

Give yourself that the average person earns perhaps 10-15 pounds per hour (2000 - 3000 ISK or so) and the total lost monthly wage income is around 200-300 pounds. That's around 38,000 - 57,000 ISK per month if the pound is 190 krona.

So what happened? Why is the unemployment coming down?
We can see on the two first graphs above that the unemployment, even according to the Statistic Iceland methodology, is coming down. Yet, the total worked hours per person is lingering at levels that can hardly be present in an economy that is returning from a bust. So what happened?

Emigration happened. And despair about getting a job, resulting in a huge number of people outside the labour force, happened.

First, emigration was quite noticeable after the collapse. Droves of people, both immigrated travel workers that moved to Iceland during the boom years and Icelanders, left the country. Of course, they are then neither registered as unemployed nor are they in the man or labour force. That drives down the rate of unemployment. Many of those people left simply because they couldn't get a job.

Immigrated minus emigrated people, in thousands. After the collapse in 2008, a noticeable part of the workforce has simply left the country. That has had positive impact on the data on unemployment.

Second, people lost hope. They simply left the labour market. Both the University of Reykjavik and University of Iceland said that record number of new students had been admitted into the universities. One can only speculate how many of those people got back in the classroom because they couldn't find anything else to do.

This actually shows in the data. A record number of people have left the labour force, simply because they cannot find anything to do. There are no jobs around, they lose hope about getting a job, stop looking and they are therefore unregistered from the labour force according to the Statistics Iceland methodology. And people outside the labour force are not unemployed according to the data - although in reality they may well be!

When the collapse in 2008 happened, the trend of people leaving the labour force had been going on for around a year already. After the October 2008 collapse, the trend has been all but upwards. At the same time, record number of people have registered themselves in tertiary education, quite likely because they have nothing else to do. 

Checking the number of people outside the labour force as a percentage of the total man force does not make much difference.

The lack of employment has pushed record number of people out of the labour market, no matter if one looks at the number itself or the ratio of labour force leavers to total man force. 

So I'm very very sorry. Although measured unemployment is coming down, the main reasons for it are not increased employment or increased number of employment opportunities - that would show itself in increased number of worked hours per individual in the labour force - but people giving up on looking for a job. They leave the labour force either by educating themselves or by leaving the country. Of those active in the labour force, the average income is in the meanwhile perhaps 200-300 pounds lower than it was in 2008.

Unemployment in Iceland is not 4.8%. That's lies, damned lies and statistics.

Living standards in Iceland: Collapse or not?

The international press has been rather predominantly positive when it comes to judging the extent of the economic recovery of Iceland. The 4.2% GPD growth (1Q11 to 1Q12) is prominent and the fact that unemployment is not measured in double digits, and actually even slowly coming down, is something that amazes the international press.

I've raised my concerns regarding this rosy picture before. This post however is to check if another "eye-brow raiser" from Iceland, Heidar Mar Gudjonsson who has amongst other things supported the idea of Iceland adopting the Canadian Loonie, is right or not.

Basically, Gudjonsson said that "living standards" (i. lífskjör, according to this source, I haven't read the original one) had moved back 20 years due to the collapse of the krona. We can argue what is meant by "living standards" but based on this opinion of his he said that the Central Bank of Iceland was basically not correct when it claimed that recovery was back and sound. Einarsson and Sigurdsson, two economists at the Central Bank, replied saying that although living standards had dropped in the crisis they had never gone down as far as Gudjonsson estimated. They claimed living standards in Iceland were back down to 2004 levels.

A month ago, I wrote on a similar topic. The data I used there were on a quarterly basis so they weren't really usable here. So I dug into the data bank of Statistics Iceland and OECD and came out with the figures below.

Basically, Icelandic GDP measured in SDR and deflated with the G7 inflation index that the OECD publishes - this is an estimate of the true SDR inflation, I know! - has collapsed from almost 170 in 2007 down to 100 in 2010 (data was missing for 2011). In the meantime, GDP measured in ISK (deflated with the Icelandic consumer price index) topped in 2008 and is beginning to come back up again, hence the 4.2% GDP growth figures.

GDP in Iceland. The idea of "The Icelandic Miracle" is based on GDP measured in the domestic currency. Data from OECD and Statistics Iceland. My estimates.

However, Gudjonsson on one hand and Einarsson and Sigurdsson at the Central Bank on the other were more referring to wages rather than GDP. And when it comes to Icelandic wages measured in deflated SDR, the data is rather clear: the purchasing power of Icelandic wages abroad bottomed out in 1993 and we were pretty close to reaching that bottom again in 2009. So Gudjonsson is very right when it comes to living standards measured in the foreign purchasing power of Icelandic wages: they have crashed!

Data shows that wages in Iceland measured in deflated SDRs are back down to 1997 levels or thereabouts. Gudjohnsson estimated they were back down to 1993 levels, probably using another currency basket than the SDRs. In the meanwhile, the wage index measured in deflated ISK is slowly making its way up again, just as the economists of the Central Bank of Iceland claim. 

So now we can start arguing which one is a better measurement of the living standards in Iceland, or in fact any other country: the domestic-CPI deflated purchasing power of domestic wages measured in the domestic currency or the foreign-CPI deflated purchasing power of domestic wages measured in the foreign currency?

And for pity's sake, is this really a wise definition: "the recession is over if GDP growth measured in CPI-deflated domestic currency is not negative for two consecutive quarters"?