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Why Is Zero Economic Growth 'Unexpected' ?

Economics / Global Economy Jul 14, 2014 - 06:29 PM GMT

By: Andrew_McKillop


Always Unexpected
Each monthly decline in leading economic indicators, when it happens in the Eurozone, as in the US or Japan, China, Brazil, India or elsewhere, is always “unexpected”. Why is this?

For example the March, April, May and June declines for the Eurozone were each time titled “unexpected” by newswires and mainstream media the month following each “surprise”. Taking the case of Reuters, it reported April 14  that Eurozone industrial output had fallen in March “for the first time since August” so this was able to be called unexpected. Then the decline continued in April.

And in May.

By June it was still no surprise to read newswire claims that the decline of indicators in May was “surprising”, despite this decline now being three-in-a-row. We could call it something like German goal scoring against Brazil in the world football cup. Why not four more “unexpected” goals?

Learning nothing and forgetting nothing, on July 14 the same newswires said: “Industrial production in the euro zone fell unexpectedly in June, as drops in French and German output suggested the currency area's economic recovery slowed at the end of the second quarter”.

It only “suggested' that, of course. It didnt give hard-edged, impossible-to-disprove data on the decline!

Not at all surprising but outright shocking, the US bank Citigroup, publishing data on what it calls its “Citigroup Economic Surprise Index” for May 2014 (published June 7) had an anonymous staff journalist say: “I hold a view that the so called “Leading Indicators” are not actually leading anything or anyone. The market does not pay too much attention to last month's data, but instead focuses and anticipates the future events, most likely 6 to 12 months ahead”.

Basically, the “leading indicators” are useless when they turn down. But in 6 or 12 months they could or might become useful – if they turn upward - so keep buying stocks, keep talking down the price of gold, and keep talking up oil prices! You know it makes sense.

Everybody's Doing It
The UK business site Markit in a 10 July comment on UK leading indicators firstly said the growth of the trade deficit was “unexpected”. Using strange logic it then said: “A modest rise in exports in May was offset by a stronger increase in imports, causing the deficit to widen suggesting that UK trade acted as a drag on the economy during the second quarter”. This is Unexpected Logic! The Markit site and similar sites have for months peddled the government-origin claim that the UK economy “is on track for 4% annual growth of GDP in 2014”. Despite that being impossible, a build in imports and a decline in exports, shifted to domestic consumption, looks uber-rational when or if we swallow the storyline of 4% GDP growth for 2014!

Using that economic fairy story, rising imports and declining exports look good. If we don't share that core belief, however, being “surprised” at economic stagnation and decline will take a big hit. Two days before, on 8 July the same Markit said: “Britain’s factories saw a surprise drop in output in May, which will add to arguments that the recovery remains too fragile for policymakers to be considering any tightening of policy. However, the weakness sits in stark contrast to buoyant business surveys, which show the sector to be in rude health”. Rude Boys as we might expect, are economical with the truth.

Rather than calling it straight lying, we can use Rude Boy newspeak and call it massive Cognitive Dissonance.

US “dissonanters” are frankly far ahead of anything the Europeans or Japanese can do. Massive and constant, but maybe not permanent lying about economic decline is business-normal. In a January 15 article, Bloomberg journalists first gave it the telling title “Surprising Jobless Decline Gives Bernanke Little Cheer”. Then we got the real surprise. The journalists told us, back-to-back, that “Employers in December expanded payrolls at the slowest pace in three years, and workers leaving the labor force accounted for much of the plunge in the jobless rate to 6.7 percent from 7 percent.”, after saying that: “The surprising drop in unemployment to the lowest level in more than five years gives Federal Reserve Chairman Ben Bernanke little cheer”.

So unemployment rose while it dropped but under any analysis the jobless rate wasn't high enough for Ben Bernanke! What he wanted, and other identified and named US Fed Open Market Committee members wanted, was for unemployment in the US to stick at 7%, justifying QE Forever. Nice logic but “unexpected” logic was needed to keep the fairy story limping along - of course.

Is Economic Growth Surprising?
The story can be turned on its head. Economic growth is more surprising than “straight-line zero growth economics”. Veteran US economic Robert Gordon calls growth the Blip Economy, explaining that periods of fast and high economic growth are rare and special, needing nearly unique factors and favorable circumstances to last any length of time. He says the period of roughly 1948-1975 during which all the political elites of today were formed, educated and fed on welfare milk with no worries about their parents losing their jobs, was only an “add-on” to the last major long period of world economic growth. This, in total, he places at an all-out maximum of 1880-1980.

Previous to that and for hundreds of years, not decades, world and regional economic growth usually averaged as low as 0.25% a year. Long periods, we mean decades, had slight annual contractions of the economy. Recovery periods often featured “sustained economic growth” at 0.5% a year.

The most-classic claims for fast economic growth being “normal” are based on population growth and technological innovation being transformed into industrial output growth, by capital. For starters the population growth has to be employed population growth. Growing populations with nothing to do are simply cannon fodder and civil war fodder – nothing else. Capital has to be interested in the technology that can foster production growth – not Google or Whats App. Since the end of the last long period of world growth, about 1980, crony capitalism oozes forward on the fond belief that the zombies out there in the real economy can take a haircut, have their savings taxed, be wage slaves and ripped off on a permanent basis. Supposedly they are so stupid or desperate, they will be profit-fodder forever!

Then come the world wars which, initially at least, are not at all good for economic growth. Pretending that is “unexpected” is surprising. Surprisingly stupid, that is.

Declining population growth rates - and after that, declining population – are supposedly “unexpected” also, but one of the drivers for China's declining economic growth rates is “unexpected decline” in the population's leading indicators. No rocket scientists are needed to conclude that slower population growth matched by dramatically-fast ageing of the Chinese population surely and certainly helps explain why the country's economic leading indicators are declining.

In fact its possible to even ask if China has enough people? The question might seem absurd. China has long been famous both for having the world's largest population and for having taken draconian measures to restrain its growth, and its elites are now scared by the success of that action. What has happened, in simple figures, is that China's annual average population growth rate has been shrinking by a third, each time, since around 1995, at an accelerating pace now set at about 5 – 7 years for each 33% cut. Pre-1995, China was growing at about 1.1% a year. This fell to around 0.7% a year by the mid-decade after 2000. By 2013 it had shrunk to 0.5% a year. Average numbers of children borne by each female Chinese in her reproductive life – the fertility rate – are now at 1.4 children, about the European average and way, way below to population maintenance rate, about 2.2 to 2.3 children.

In time, quite soon, China's population should logically start shrinking from its current estimated 1.34 billion. The country will then join the ranks of outright-declining population countries, including Russia, Japan, Spain and Germany. None of these countries now use (they have in the past) the excuse of declining national population to explain away declining economic growth rates or outright contraction of the economy.

Decline Isn't Surprising
Lying about zero economic growth and economic contraction is surprising – why say the opposite of what is really happening?  The actual phenomenon of slow growth or outright contraction is not a surprise. To be sure, everybody knows why its necessary to cobble a fake picture of repeating “surprise declines” of leading economic indicators. How do “we” justify the massive amounts of debt our free-market-minded politicians continue to increase? Without economic growth, this is finished – exactly like the frenetic growth of equity indexes.

Facing up to reality is hard. Especially hard for fantasists who get an easy living from lies. At some stage and time however, they have to face reality and say “Gee, I guess we overreached”. Their boundless optimism – like cognitive dissonance - is just another nice term for lying.

All that the market riggers can hope for, now, is to cobble an ultra classic Suckers Rally. As Bloomberg reported in early July: “One senior equity manager warned that: "if Wall Street, after poring over all known data, comes up with a target and we’re already there, and you still see individual investors buying and they’re typically the ones that are late to the party, it would seem there is limited upside".

That is only suckers now bet their money on continued “exuberant growth” of equities – on the back of strictly nothing happening in the real economy. Backing that conclusion, the same Bloomberg article noted that: “ about $100 billion was added to (US) equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months”.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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