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output
Clemente De Lucia
T
he eurozone economy has faced the worst The rest of the article is as follows. The first section
recession on record since the 1970s. After puts the last recession into context, comparing it with
collapsing at the end of 2008 and in the first other severe financial crises experienced by other
quarter of 2009, GDP has gradually recovered, returning OECD countries. Then the channels though which the
to growth in Q3 2009. Nevertheless there is still a long current crisis has affected potential output are analysed.
road to recovery. History suggests that recessions Lastly, some considerations regarding uncertainty about
caused by financial distress tend to last longer and are potential output estimates and the implications for policy
particularly severe. Moreover, the 2009 recession was makers are presented.
also synchronized, an element which exacerbated the Even though the crisis has likely affected potential
fall in output. output in the short run, the effects on the medium term
The recession is also likely to have affected are more uncertain. Should the eurozone fail to
potential output. In particular, the significant fall in implement structural reforms to enhance product and
investment is likely to lead to a reduction in capital labour market flexibility, then the most likely medium-
stock, with negative effects on potential output in the term scenario is one where the growth rate of eurozone
short run. Financial turbulence can also have an impact potential output comes back to pre-crisis values, while
on Total Factor Productivity (TFP), which measures the level of potential output remains below.
efficiency in the use of production factors. Facing
significant drops in demand and profits, firms may have
reduced investment in research and development
(R&D), one of the main drivers of TFP. Last, but not Severity of the 2008/09 recession
least, the crisis may affect potential output through the
labour factor. Unemployment has already increased
significantly, notably in Spain and Ireland, two countries Unprecedented contraction
hit hard by the effects of the crisis. A particular concern
is that a large part of the increase in unemployment In 2008 the eurozone economy entered a very deep
could be transferred into structural unemployment, as a and severe recession. From the end of 2008, output fell
result of what is called the “hysteresis” effect (Blanchard significantly, with GDP dropping by almost 2% q/q in
and Summers 1986). Higher structural unemployment Q4 2008 and by 2.4% q/q in Q1 2009. Eurostat’s figures
reduces potential output. Moreover, a long and severe showed that GDP returned to growth in the third quarter
recession may reduce the labour participation rate, as of 2009, signalling the end of the recession. From an
discouraged people reduce their efforts to seek a job. historical point of view, this has been the most severe
The combination of all these effects has pushed GDP contraction experienced by the eurozone economy
down significantly short term eurozone estimates of since the early 1970s (see chart 1)1. The level of output
potential output growth rate. It is worth noting, however, has decreased faster and more steeply than in previous
that it was already moderating due to unfavourable recessions and the pace of recovery seems much more
demographic trends. moderate. (see chart 2).
Chart 3 Sources: Eurostat, OECD, BNP Paribas calculations Chart 5 Sources: Eurostat, OECD, BNP Paribas calculations
2 Eurozone
-1
-2
(*) Spain 1978-79 Finland 1989-93 Sweden 1993
-3 Norway 1988 Japan 1993
-4
Q-8 Q-6 Q-4 Q-2 Q Q+2 Q+4 Q+6 Q+8 Q+10 Q+12 Q+14 Q+16
wN
productivity. In this case the GDP growth rate can be
The impact of demographic trends on growth
decomposed as:
'Y 'A 'K 'N Growth accounting analysis is also useful in
(1.2) (1 D ) D
Y A K N understanding how demographic trends affect growth. In
Equation (1.2) is the key tool in “growth accounting” particular, higher population growth rates will have a
which analyses the contribution of supply-side factors to positive impact on output. Moreover, changes in the
working age population rate, measured as the ratio of
GDP growth. 1 D of equation (1.2) is the capital
working age population over total population, provides
share in value added. In most industrialized economies
information regarding the age structure of the economy.
capital shares vary between 0.3% and 0.4%, while the
Intuitively, the higher this ratio, the higher the proportion
labour share varies between 0.6% and 0.7% (see
of people able to work. A growing labour force will have
among others Cahn and Saint-Guilhem (2007)). After
a positive impact on growth.
calibrating D and knowing the growth rate of capital
§ 'A · Defining y Y as GDP per capita, where
P
and labour, the growth rate of technology ¨ ¸ is
© A ¹ P means population and Y real GDP, the growth rate
derived from equation(1.2). This is what is called the of the latter can be approximated by the sum of the
“Solow Residual”, that is the part of actual output not population growth rate and per-capita GDP growth rate.
explained by capital and labour developments. This is This can be expressed as in the following formula:
the normal procedure for obtaining an estimate of factor (1.3) gY | g y g p
A in equation (1.1)4. In addition GDP in per capita terms can be written as:
Using this decomposition, chart 8 shows that the Y Wap N Y
GDP growth slowdown over recent decades among the (1.4) y
largest economies of the eurozone and for the eurozone P P Wap N
as a whole was due to a decrease in total factor where Wap means “working age population” and N is
productivity.
the number of employed persons. Therefore, the growth
The contribution of capital also eased, albeit by a
rate of GDP per capita can be approximated as
smaller amount. Lastly the contribution of labour has
been always particularly weak. Since the 1990s, (1.5) g y | g wap g er g NP
however, the contribution of labour has slightly The components on the right hand side of equation (1.5)
increased. German reunification and an increase in are:
immigrant flows since the 1990s might have been 1) g wap , that is the growth rate of the ratio of
behind this phenomenon, particularly in Spain and to a
lesser extent in Italy and France. working age population (15-64 years) to total population,
3 3
2 2
1 1
0 0
-1 -1
1961-1970 1971-1980 1981-1990 1991-2000 2001-2007 2001-2009 1961-1970 1971-1980 1981-1990 1991-2000 2001-2007 2001-2009
Chart 9 Sources: European Commission AMECO data set, BNP Paribas calculations Chart 11 Sources: European Commission AMECO data set, BNP Paribas calculations
Germany Italy
6 Population 8 Population
Labour productivity 7 Labour productivity
5
Employment Rate 6 Employment Rate
4 Working age Pop./Total Population Working age Pop./Total Population
5
GDP GDP
3 4
3
2
2
1 1
0
0
-1
-1 -2
1961-1970 1971-1980 1981-1990 1991-2000 2001-2007 2001-2009 1961-1970 1971-1980 1981-1990 1991-2000 2001-2007 2001-2009
Chart 10 Sources: European Commission AMECO data set, BNP Paribas calculations Chart 12 Sources: European Commission AMECO data set, BNP Paribas calculations
Spain
10 Population
Labour productivity
8 Employment Rate
6 Working age Pop./Total Population
GDP
4
-2
-4
1961-1970 1971-1980 1981-1990 1991-2000 2001-2007 2001-2009
Chart 13 Sources: European Commission AMECO data set, BNP Paribas calculations
4 Effects on labour
3
0.3
permanent unemployment shock, as many as 60% of 0.2
Benalal N. Diaz del Hoyo, J. L., Pierluigi B. Vidalis N. (2006) “Output Growth differentials across the Euro Area
Countries; Some Stylised Facts”, ECB Occasional Paper Series No. 45, May 2006
Blanchard, O. and Summers, L. (1986) “Hysteresis and the European Unemployment Problem” NBER Working
Paper Series, N. 1950
Caballero, R.J., T. Hoshi and A.K. Kashyap (2006), “Zombie lending and depressed restructuring in Japan”, NBER
Working Paper Series N. 12129
Cahn, C. and Saint-Guilhem, A. (2007) “Potential output growth in several industrialised countries: A comparison”
ECB Working Paper Series, N. 827, November
EC (2009b) “Impact of the current economic and financial crisis on potential output” Occasional Papers N. 49, June
ECB (2009) “The latest euro area recession in a historical context” Monthly Bulletin, November
ECB (2000) “Potential output growth and output gaps: concepts, uses and estimates”. Monthly Bulletin, October
Fagan, G. Henry, J. Mestre, R. (2001) “An Area-Wide Model (AWM) for the Euro Area” ECB Working Paper Series N.
42, January
IMF (2009a) “From Recession to Recovery: How Soon and How Strong?” Chapter 3, World Economic Outlook, April
Llaudes, R. (2005) “The Phillips Curve and Long-term Unemployment” ECB Working Paper Series, N. 441, February
OECD (2009a) “Beyond the Crisis: Medium-Term challenges relating to Potential Output, Unemployment and Fiscal
Positions”, Chapter 4, Economic Outlook N. 85
1 The Euro Area Business Cycle Dating Committee of the Centre for Economic Policy Research (CEPR) has
identified 3 recessions in the eruozone since the 1970s before the 2008/2009 recession. From peak to through the
periods are [1974Q3; 1975Q1]; [1980Q1; 1975Q1] [1992Q1; 1993Q1].
2 Five episodes of financial distress were considered: Spain (1978-79), Finland (1989-93); Sweden (1993), Norway
(1988), Japan (1993). See IMF (2009a) and or ECB (2009) for more details.
3 Statistical methods used to de-trend variables are subject to some uncertainty. Moreover these methods suffer from
end of period problems. Users normally add forecasts to the original series in order to avoid this problem. However,
this procedure adds uncertainty to the whole process (ECB 2000).
4 Once estimated the TFP as residual, the series is normally de-trended using the HP filter. To avoid end of period
evolves according to the equation(1.6). For investment, employment and the unemployment rate we used Eurostat
figures and BNP Paribas forecasts until the end of 2012. TFP series is derived as residual. Then the series has been
de-trended using the HP filter. To avoid end of period problems, forecasts have been added. D and G have been
parameterized as suggested by Fagan et all (2001). The production function used is a Cobb-Douglass as in
equation(1.1).
BANKING ECONOMICS
Laurent QUIGNON 01.42.98.56.54 laurent.quignon@bnpparibas.com
Head
Céline CHOULET 01.57.43.02.91 celine.choulet@bnpparibas.com
Philippe SABUCO 01.43.16.95.54 philippe.sabuco@bnpparibas.com
COUNTRY RISKS
Guy LONGUEVILLE
Head 01.43.16.95.40 guy.longueville@bnpparibas.com
François FAURE
Deputy Head 01 42 98 79 82 francois.faure@bnpparibas.com
Capital flows to emerging markets, Turkey
ASIA
Delphine CAVALIER 01.43.16.95.41 delphine.cavalier@bnpparibas.com
Christine PELTIER 01.42.98.56.27 christine.peltier@bnpparibas.com
LATIN AMERICA
Sylvain BELLEFONTAINE 01.42.98.26.77 sylvain.bellefontaine@bnpparibas.com
Thibault MERCIER 01.42.98.74.26 thibault.mercier@bnpparibas.com
AFRICA
Stéphane ALBY 01.42.98.02.04 stephane.alby@bnpparibas.com
Jean-Loïc GUIEZE 01.42.98.43.86 jeanloic.guieze@bnpparibas.com
EASTERN EUROPE
Central Europe, Baltic countries, Balkan countries
Alexandre VINCENT 01.43.16.95.44 alexandre.vincent@bnpparibas.com
RUSSIA, FORMER SOVIET REPUBLICS
Anna DORBEC 01.42.98.48.45 anna.dorbec@bnpparibas.com
MIDDLE EAST – SCORING
Pascal DEVAUX 01.43.16.95.51 pascal.devaux@bnpparibas.com
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