Looking beyond the financial crisis

by Stubborn Mule on 13 June 2011 · 2 comments

The IMF has been busy of late, what with their attempts to stave off European sovereign defaults and shenanigans of its erstwhile managing director, Dominic Strauss-Kahn. I have been busy too (for rather different reasons I hasten to add) and so it has taken me a while to get to looking at the IMF’s most recent World Economic Outlook (WEO) report, which was released back in April.

The WEO is prepared twice a year and, whatever one’s views of the merits of the economic ideas of the IMF and their role on the world stage, the report provides a rich source of data and includes both historical data and five-year forecasts.

I was interested to compare the effect of the global financial crisis on the most challenged euro nations, the so-called “PIIGS”, Portugal, Ireland, Italy, Greece and Spain, to a few other countries. To account for differences in population and currencies, I chose Gross Domestic Product per capita expressed in US dollars as the measure for this comparison*. Even so, care needs to be taken in interpreting the results. Exchange rates do introduce a fair degree of volatility as is evident in the chart below: the trajectory of US GDP per capita is quite steady, although the downward dip over recent years is clearly evident, while the paths for every other country wiggle up and down with the vagaries of currency markets. Nevertheless, it is striking to see the IMF projecting that Australia will dramatically outpace the other countries in this group, thanks to the combination of a resources boom and escaping relatively unscathed from the financial crisis of the last few years. I should point out that, while taking the gold medal in this group, Australia is not the overall winner in the IMF 2016 forecast stakes. That honor goes to the small nation of Luxembourg, and Qatar is not far behind.

GDP per capita (II)

History and IMF forecasts of GDP per capita (in US$)

An alternative approach that seeks to eliminate exchange rate effects is to work in local currencies and make these comparable by scaling to a common base at some point in the past. Somewhat arbitrarily, I have chosen to base this comparison on 1996, which gives a 20 year span including the forecasts out to 2016. This time I have used inflation adjusted figures**. Interestingly, this approach sees Ireland coming out on top, which reflects the strength of their economic boom over the period immediately up to the start of the crisis.

Real GDP per capita Indices

History and IMF forecasts of GDP per capita (local currency index)

This chart shows even more clearly how unaffected Australia was by the financial crisis compared to other countries. Once again, these results should be treated with caution. Any comparison like this will be very dependent on the year chosen to base the indices. If only I had chosen the year 2000, Australia would be in the lead again!

* This is the IMF series NGDPDPC.
** This is the IMF series NGDPRPC, rebased to 100 in 1996.

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{ 2 comments… read them below or add one }

1 Magpie June 13, 2011 at 8:28 am

Stubborn

Glad to see you posting again!

That is a bit of a coincidence: of late, I’ve been having a look at GDP per capita, in Australia (I’ve used the ABS series, chain GDP, grouped by years, from ABS catalogue number 3102.0).

I’m comparing the Hawke/Keating period with the Howard one (didn’t include the Rudd/Gillard time, because the data is incomplete).

I do think the rise of the Aussie buck, in relation to its Yank cousin, might be having an effect similar to the one suggested by the first chart. Something like magnifying the positive effects of growth, as perceived by consumers.

This could be a bit misleading, because in chain GDP terms, per capita growth is slower, and recessions lead to larger percent falls of GDP per capita.

And recently, a speech by one of the RBA’s big wigs treated a related subject: terms of exchange, unit labour costs and productivity. My reading of this guy’s data is concurrent.

2 Stubborn Mule June 13, 2011 at 10:29 am

Magpie I think you are spot on about the strength of the Australian dollar giving Australia’s US$ GDP per capita a real boost. This contention is certainly support by the fact that trend for Australia in the second chart is not nearly as impressive.

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