Meanwhile in Europe…(6). (De-)construction
from Merijn Knibbe
A chronicle of recovery, decline and structural shifts
Much has been written about housing booms and busts in Europe and the United States. How bad were these busts? And have these bust bottomed out? The USA, Spain and Ireland were not the only countries witnessing booms and subsequent busts. Bulgaria, Estonia, Latvia and Lithuania also witnessed epic booms as well as slumps of over 40%. No country comes however anywhere near Ireland, which saw construction decline a whopping 73%. In Eastern Europe, the slump seems to have bottomed out while the level of construction is not much below pre-slump levels. Considering the shortage of good housing in countries like the Baltics or Bulgaria, this is a good thing and an (conservatively financed) increase of building activity might not be a bad thing, also as wages, which make up a large part of building costs, are at the moment still low and can be expected to rise in the future. In Euroland, steep decreases can however still be witnessed and except for Belgium and Germany there are not yet any signs of recovery. In Greece, Spain and Portugal, construction is still declining. The high level of construction in Greater Germany is the average of a high level in Germany and Finland (130) and much lower levels in the other countries (about 85).
|The development of construction|
|peak to present||2005 = 100|
|Euro or Euro peg|
|Italy and France||-12||90||-|
Greater Germany: Germany, Austria, Belgium, The Netherlands, Finland. GIPSD: Greece, Ireland, Portugal, Spain, Denmark. Baltics: Estonia, Lithuania, Latvia. Other Transition: Bulgaria, Czech Republic, Slovenia, Slovakia, Hungary, Romania.
Cherry picking: inflation in the UK edged up to 3,7% in December. VAT increases, steep increases in train fares and rising energy prices may cause inflation to increase to 5% in January. As total wages are increasing with about 2%, this implicates a decrease of spending power of about 3%. The employment ratio in the three months to December went down with 0,3% to 70,3% – quite a decline for one month.
Economic theory: the Philips curve doesn’t work at the moment, in Europe. In countries with high or increasing unemployment, inflation edges up while some countries with low unemployment know low inflation. The reason: rising energy prices and ‘government inflation’: indirect taxes are increased everywhere. According to my common sense you can’t battle government inflation with higher interest rates. Higher interest rates will just increase the interest burden of governments – and cause even more government inflation, while it is to be expected that indirect taxes won’t be increased every year. The same for high energy prices (for non-oil or non-natural gas countries). As these decrease spending power, they will already tend to decrease other prices in a situation as the present, which witnesses ever lower increases of wages and declining real wages: worsening terms of trade are deflationary.