Wednesday 6 July 2011

Growth and Employment "Trackers"

The growth and employment "trackers" (see footnote for technical details) give a sense of the dramatic decline in economic activity and employment following the last economic crisis and its tepid recovery (particularly in the labour market) in Portugal between 2000-Q1 and 2011-Q1 (from here up to 2015-Q1 the trackers are based on forecasts - grey shade).

The profile of GDP growth forecasts are somewhat in line with what the new Minister of Finance (Vitor Gaspar) has recently said: “Portugal is expected to have 9 terms of consecutive negative growth” (see here).

Source: author’s calculations based on OECD data.

According to these estimates we shall have “contraction at a moderating rate” until around mid 2013 and only then we should begin growing below trend at a moderate rate. Perhaps we won’t go through another “lost decade”, but we are certainly expected to experience at least half a decade of negative, stagnant or moderate growth (at best). More reassuring, might be the case of employment if the “right” structural policies are enacted and put into action such that the “job-destruction” process is reversed and productivity and competitiveness improved. (Note, however, that projections shouldn't be viewed as an exact science but solely as an indication as to where the economy is expected to move based on a number of mathematical and statistical assumptions.)

Footnote: The trackers are constructed using a univariate fitted Structural Time Series Model with unobserved components over the period 1970Q1:2011Q1 allowing for a stochastic trend, cycle and seasonal and estimated by maximum-likelihood via the Kalman filter. Forecasts are then obtained up to 16 periods ahead and the classifications represented in the figure are based on the behavior of a centered 4-quarter moving average.


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  3. I'm not entirely sure I follow the logic of showing 6 consequitive quarters of "employment growth above trend" starting in Q2 of 2013, and then the very next quarter (Q4 2014) GDP shows up as an accelerating contraction [red]. How can so much new hiring not contribute to higher GDP?

    One might also wonder what the projection accuracy record of the OECD is for Portugal, and just how many ever increasing influential macro-economic factors are considered in these projection models.

    For instance, how does the OECD account for a strong likelihood of Peak Oil inducing another global recession around 2013? Or a Chinese hard landing in 2012 leading to further global stock market sell-offs as the commodity indexes crash? Or further Euro instability due to the uncertainty with Greece and its contagion effect? Or major global currency instabilities as G20 countries "race to the bottom" via money printing debasement policies? Or for that matter, what about black swans like the recent Japanese Nuclear meltdown? Or what about the probability of civil unrest in Portugal (after 17 consecutive quarters of less than favorable employment outlooks , I'd certainly expect people to hit the streets) forcing the hand of planned government austerity/economic policies?

    I'm all for detailed analysis and trying to create models to assist in anticipating problems; however, economics is far from an exact science. So putting so much faith in far out projections is a recipe for disappointment.