Tuesday, 29 April 2008

A very confusing statement.

The highly competent minister of economics held a press conference on the health of the economy today. This is odd; you only have a press conference to tell people that the economy is sound if:

1) You are worried of a speculative attack on your currency (not the case due to the euro)

2) You have elections coming up (we just had elections)

3) You know that the economy is showing signs of weakness and you are trying to shore up business confidence.

I found the whole press clip confusing: unless we are talking about real growth rates (which is probably the case) the rate of inflation is higher than the nominal rate growth – so we are not growing at all. But probably the rate of growth of ~ 3% is correct. The funny thing is that historically a 3.5% growth rate is much closer to the trend of the economy from the 1950s onwards. So I would not celebrate yet: we are just getting back to our trend rate of growth and it will still take around 40 years to reach German GDP levels at the present growth differential.

But I think the press conference was a bit dishonest – the interest rate dropped with out entry to the Euro just four months ago. This resulted to higher liquidity based on new loans that is creating an upward surge of business activity. The interest rate fall is the reason behind the property proto-bubble we are seeing in the house market. So it easy to say that the economy is doing well today: but the experience of Spain shows that if mismanaged the building boom can have severe repercussions on the economy in the future.

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