A worker in a scientific laboratory.PACO PUENTES (EL PAÍS)
We live in turbulent times, and this turbulence manifests itself in the complexity of predicting and assessing events. The economic analyst faces the challenge of analysis using tools that, although varying in sophistication, require a certain stability of economic relationships to extract the relevant signals. When this stability is missing, analyst errors are compounded, effectively leaving us waiting and trusting that things will return to normal.
In a recent column, I addressed the difficulties associated with analyzing the third quarter, which ended just over a month ago. In the context of an economic slowdown, indicators react at different times, sending information that might seem contradictory. The challenge here is to interpret this apparent contradiction and to place each indicator in its proper context. This phenomenon is not so much due to indicators pointing to divergent realities, but rather to a process inherent in the business cycle.
However, sometimes we find that certain indicators have numbers that represent significant surprises and are unexpected for the majority. For example, although we cannot classify the latest data as atypical or overly surprising, there is no denying that last October’s Labor Force Survey (EPA) gave us employment figures that were above expectations (and this was not the first time). As a result, numerous gross domestic product (GDP) growth forecasts for the same quarter fell short of the final data released by the National Statistics Institute (INE) just a day later.
This was no exception. In recent quarters, anticipating economic developments has become an unusual challenge. Changes that may be barely noticeable to the short-term analyst influence the development of various time series, be it in certain sectors, prices or the labor market, complicating the analysis process. Although it is not necessary to go into all of them in detail, some deserve mention due to their relevance.
Let’s get back to the job market. The increase in interest rates, and therefore the economy in general, is expected to lead to a significant and negative adjustment in the labor market. The Phillips curve, which illustrates the trade-off between inflation and unemployment, suggests that in order to reduce inflation there would have to be an increase in unemployment. This is because raising interest rates would lead to an economic slowdown, discouraging wage increases, margins and ultimately prices.
Although this hypothesis has been supported by empirical evidence over time, we have successfully worked to understand it and provide a theoretical framework. However, the conditions for this chain of events to occur are diverse and currently of considerable importance. In Spain, as in many other countries, rising interest rates and disinflation are not (as expected) having a significant impact on a remarkably resilient labor market. On the other hand, Spain’s export performance, clearly influenced by the international situation in this second half of the year, nevertheless showed a remarkable development in the last two years, with the significant increases partly concentrated in sectors that were previously less prominent, at least in terms of the media Attention concerns: He talked about business services. Although its particular influence on the range of Spanish exports was not overwhelming, it did enough to give this development a minimally atypical nuance.
Both phenomena could be associated with profound changes in what I would call “structural foundations” that influence the behavior of business cycles in sometimes unpredictable ways. And since the start of the pandemic, there have been important shifts in certain behaviors that are difficult to predict and fit into current models. For example, the transition from the use of cash to cards, which makes it difficult to analyze consumption based on this data; the increase in non-working hours due to illness, a relevant phenomenon not only in Spain but in many parts of Europe; or the above-mentioned behavior of the labor market itself in relation to occupation and activity.
Suggestive analyzes are presented in the documents accompanying the general budget plans of the State. In the “Budget”, in particular when assessing the macroeconomic situation, a box stands out that examines one of those fundamental changes that could be behind the difficulties in forecasting the short-term development of the labor market and, moreover, the increase in activity and exports in the business services sector.
This box points out that the significant increase in immigration is the main cause of the increase in the labor force (due to the arrival of workers) and, as a result, of the increase in employment. This phenomenon is a response to the incentives of a labor market that is experiencing serious difficulties in filling certain positions, a problem that affects the whole of Europe, although with particular peculiarities in Spain, to which is added the decline in real wages, which is affecting the hiring of workers promotes so much. and the activation of the workforce.
Immigration is causing a population increase that is well above the average of previous years. If a large proportion of this immigration arrives with the intention of working, this will have two significant consequences: employment and activity growth that will be stronger than initially expected. The increase in the number of citizenships granted supports the perception that this phenomenon is taking place.
Furthermore, contrary to what happened at the beginning of the 21st century, the sectoral fate of this immigration does not seem to be concentrated in a few sectors (as was the case in construction at the time), but extends to many others, in particular in the area of services. Can you guess which one? Exactly, in the business services sector. This would also partly justify the development of this sector and its prominent role in export growth.
Thus, there are numerous underlying factors in the evolution of the economy that can explain the changes we observe in its fundamentals and that impact economic analysis. Since we emerged from the pandemic, we have experienced a continuous series of these changes, meaning analytical models need to be constantly adjusted. We will continue to strive to isolate short-term dynamics to provide more common explanations for what happened, rather than having to explain why we were wrong.
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