Sunday, October 11, 2009

Observations on the Business Cycle and EU Countries

Stefan Karlsson has again done some great empirical work. This time showing economic trends in EU countries, and overlaying Austrian Business Cycle Theory on top of the data he has observed. Karlsson writes:

Having studied the detailed data over movements of components in the GDP of different EU countries some observations can be made:

1) In all countries, investment spending was weaker than private consumption and GDP. If durable goods consumption had been included in investments, the relative weakness of investments would likely have been even greater.

2) In all countries except Poland, government consumption was stronger than GDP. And in all countries except Poland, Malta and Austria, government consumption was stronger than private consumption.

3) In all countries foreign trade activity dropped dramatically(especially if we exclude Ireland, whose trade statistics is distorted by internal corporate pricing encouraged for tax reasons).

4) All countries except Poland experienced a reduction in GDP.
The weakness in investment spending relative to consumption spending dovetails with ABCT, which states that a downturn in the business cycle is a period when the old savings/consumption ratio re-establishes itself in favor of consumption, and away from the central bank money manipulated diversion towards capital spending.

Karlsson also explains why Poland is no joke when it comes to having a better performing economy during the current crisis:
What about the Polish exception noted in observations number two and four? Well, as I noted here, this likely in part reflects that Poland's economy has a less cyclical sectoral composition than most other countries (and unlike many other countries it never had a housing bubble), and also the fact that the Polish government focused on reducing tax rates as a way to fight the crisis.

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