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Friday, September 21, 2007

Construction Production Index July 2007

Eurostat has just published the monthly construction production index. For our purposes here is what is perhaps the most significant extract:

Annual comparison

Among those Member States for which data are available for July 2007, construction output rose in seven and fell in seven. The highest increases were recorded in Romania (+26.3%), Slovenia (+17.9%) and Poland (+17.0%). The largest decreases were recorded in Hungary (-14.6%), the United Kingdom (-6.6%) and Belgium (-4.9%).

Here's the construction output index for the most recent months:

What we can see is that the rate of expansion has slowed noticeably over the last three months. Now here's the quaterly index going back to 2002:

and here's a chart of the monthly year-on-year changes going back to the start of 2005. As we can see there was a massive rate of increase which seems to have peaked in April of this year, since which time it has been slowing down.

The result of all this frantic construction activity in an economy with constrained capacity is, of course, completely to be expected: the price of construction surges upwards:

The effect of this on wages and salaries should not surprise us too much either, and here is the index of salaries to confirm our worst suspicions:

As we have noted, and despite the inability of the Romanian government to face up to this at either the official statistical level, or at the level of beginning to grasp the implications, there are currently nearly half a million Romanians working in Spain, and logically these Romanians are not available to work in construction in Romania, so it is hardly surprising if wage inflation in construction has been enormous, as again can be seen in the year on year quarterly increase chart:


Anonymous said...

there are about 400.000 Rumanians that resided in Spain during the last few years, which does not mean all of them are still there, and some of those 400.000 are children and dependent elders: those who planned to settle in Spain brought their families there.

Want to find some of the Rumanians the government cannot find in it's statistics ? Look to Bucharest and check out how many "in transit" voters were during the 2004 elections. The Rumanian registration system is so damn cumbersome that almost nobody cares to register when moving to work in another city, and they "disappear" from the statistics for their official residence so they "must be working in Spain".

Another rant: check out the money going in as "investments" and you'll see that it balances the trade deficit quite nicely: most of those money were spent on industrial machinery, trucks, cars, computers, optic fiber and whatever is not manufactured within the borders. Add to that the money that goes in in exchange for services, that the .eu and .ro statistics somehow forget to include in the "trade balance", and it does not look that bad.

Labour shortage in Rumania ? This is a chronic issue: the Brits were complaining about it since the 1840 and were doing their best to divert some of the emigrants from the boats to USA to the railways to the Lower Danube (had some success, even some Scots took the bait) so they won't miss their indian corn and wheat shipments. There was a labour surplus when the planned economy went down during the 1990s, but now it's back to normal.

A few posts back you were ranting about the economy that falters when the weather is bad: well, the issue is not lack of production, since there was constant overproduction since all the juicy contracts with Iraq, Libya and other "friendly" countries went down the drain (the drains of our Western European or American betters) in the early 1990s. The price of foodstuff went up because of the bio-fuel craze, and went up everywhere in the world.

Edward Hugh said...

Hi Anonymous,

And thanks for the comments. In the first place I wish to underline that my work here on this blog is NOT an attempt to attack or undermine Romania. Quite the contrary. I am concerned. I feel all the Easter European countries have had a very hard deal from history, and what may now be about to come may be the unkindest cut of all. But we will best address these issues if we don't try to hide from them, but rather look them full in the face and try to see what can be done to salvage what is, I'm afraid, a very difficult situation.

Basically the core of this whole problem in the East of Europe lies in the fertility decline which took place following the fall of the Berlin Wall. Ironically, initially fertility in Romania declined less than elsewhere (I will put demographic data up in a post this weekend).

The point however is that this event happened about 18 years ago now, and the impact is just begining to be felt with very reduced cohorts arriving at the labour market entry ages, just at the time that these economies need "catch up" growth to bring themselves into line with living standards elsewhere in europe.

I will produce data on the demographic profile of Romania in some coming posts but what, we might ask ourselves, evidence is there that low fertility is hurting economies like Romania's?

Well this is a very big question, and really to get an idea for yourself you'll have to read around the posts on the demography matters blog and elsewhere to form your own opinion. However...

My guess is that low fertility hasn't been hurting Romania too much yet. It is a phenomenon which really needs about 20 years to start to have an impact.

Initially my guess is that the problems starts with the labour supply shortages as low fertility economies hit growth capacity more rapidly than others. Claus and I are putting out a lot of posts on this issue right now (this one from Claus is a good place to start since the labour shortage question is THE big problem among the EU 10 Accession countries (Hungary is the only real exception, and Hungary only doesn't have a problem since it is already hurtling off into a serious recession. Basically the fertility generated shortage of labour is subsequently only made worse by large scale out-migration, which - as we are seeing - produces rapid wage inflation in some key sectors as these economies hit their capacity limits. This would be the biggest initial problem with low fertility, as with inflation it is difficult to export. Thus then tend to we get large current account deficits. These deficits are sustainable as long as the remittances come back to cover the deficit. But a lot of the money then goes into construction in the home country, while, on the other hand, there are few construction workers available, and hence the inflation really becomes a bonfire. The Baltic states are a very good example of this.

The thing is this frenetic activity which is produced is also funded by money which enters the banking system from abroad to finance the mortgages. All this then become very vulnerable to a "correction" such as the one which is setting in on the backs of the sub-prime lending problem in the US. Effectively the fertility issue means that most of Eastern Europe has become "sub-prime" in the sense that the construction and other economic activity is unsustainable, since there is a huge population shortage in the longer term. So we are now at the start of a big correction here. It is begining NOW in Romania since the currency, the Leu, can float, and is thus open to attack. Consequently the speculators are attacking. The Baltics and Bulgaria are temporarily protected by the euro-peg, but this preotection is only temporary, since if Romania and then Poland (yes, Poland, unfortunately is even more vulnerable to the change in risk appetite which is occuring right now as we speak, watch the development in the Leu) fall, then the rest will be DRIVEN off the pegs, and what we will have is one hell of a very big financial mess indeed. And all becuase of a fertility issue 20 years ago. Incredible isn't it.


You mention Spain. My point was only to raise the problem of DENIAL. If you look at the official stats, and you look at the relatively reliable ones we have Romanians here in Spain then there is a huge difference. This is my only point. If you don't identify a problem you aren't going to be able to address it, and my feeling is that if you really care about Romania - as I imagine you do - then you need to address this problem, and with very accurate and reliable data. I would say collecting this data, and acting on the findings should be the number one national priority in Romania right now (and doing something to address fertility related issues should be the number 2 national priority).

You mention rants. This blog is no place for rants. The issues are too serious. I am not a political person. I am an economist, and I deal in analysis and fact.

Also, if you don't mind me saying so, some of your points about Romanians in Spain are quibbles given the magnitude of the problem.

I know a little about this issue, as I have even done some research into migrants here. The numbers quoted by the Spanish INE are pretty reliable, since they come directly from the automated Padron Municipal, and your quibble seems to be that the padron municipal may be out of date. It may be, but on both sides of the data point, in the sense that the number quoted - which is 524,995 is for 1st January 2007, and we are now in September, and since the increase over 1 Jan 2006 was of 117,836 it is not unreasonable to assume that another 100,000 or so more Romanians may well be now living and working in Spain. Certainly all the anecdotal evidence points in this direction. Most of the dault migrants - male and female - are working according to the research I have seen, relatively few of them are content to stay at home as "housewives". I think the INE have data about how many old people and children there are in the total, and I will check that out, but the point is the vast majority are at prime working age and are missing from your labour force.

This is only the same situation as we are seeing in Poland, with the exception that there is less comment in the international press on the Romanian situation.

I am very sorry about all this. Really it is a big tragedy. But you are asking me what the problem is, and I'm telling you what I see.

Longer term there are all sorts of issues about sustainability in health care and pensions systems as populations both decline numerically, and age rapidly. But the most pressing one right now is the one I mention, labour shortage generated wage inflation, and if this produces an economic crack in the East the problem will only get worse since hundreds of thousands more will only be forced west to live and support their families. Sorry I cannot bring you better news.

Edward Hugh said...

Just to hammer the point home:

"there are about 400.000 Rumanians that resided in Spain during the last few years"

There were 524,995 Romanaians with active and valid id cards for the health care system as of 1 Jan 2007. These are not just Romanians who are simply passing through, or might be around somewhere. The municipal registration which lies behind the data is renewable regularly for those without resident permits, and renewing them is how you get the right to have residence later, so this data is VERY accurate.

Also, a very sad data point, your fellow countrymen were the largest non-Spanish national community to suffer in the Madrid March 11 terrorist bombing, they were the ones on the trains going to work. Many came here to work and will never go home, but in this case for very sad reasons.

By chance a friend of mine just made a documentary for the Romanian community in Castellón, and visited Targoviste to make it. I have the DVD here, and I can see before my eyes right now all these people explaining how their dream is to leave.

Actually the rate of entry may slow down rather now, since the construction sector - where many Romanians work - has been hit badly by the sub-prime banking system problems, and so there won't be so much work available. OTOH, if the Romanian economy hits blowout, we will have another massive exodus, work here, or no work here.

Emil Perhinschi said...

this is not about "attacking" or "undermining" Rumania: it's about you describing a permanent situation (failed extremes, labor shortage, vulnerable currency etc.) as a new situation.

What is new:
- more and more regulations, most of them aimed at protecting the established economic agents
- housing crisis, also created by stupid building regulation, not much different from what happens right now in UK, driving prices up
- general EU slumber: Rumania's prosperity depends on EU growth

"what may now be about to come may be the unkindest cut of all"

The "unkindest cut of all" was losing the cold war.

Anonymous said...

The "unkindest cut of all" was losing the cold war and getting the treatment befitting an unconditional surrender: closing down the "unprofitable factories" that suddenly start turning in a profit after being sold at scrap iron prices, having to fight subsidized ... pardon me, export compensated EU merchandise, being locked behind the visa curtain and now being blessed with regulations designed to protect the EU "partners" from any significant competition from our side (remember the scandal about the liberalization of services in EU ? or how was the Polish fish exports received ? can go on for a long time on this subject).

We could solve the labor shortage by raising further the minimum wage: we'll have soaring unemployment in an instant. The result of the last raise can already be felt.

You quote a number for Spain: most of them do not have permanent jobs, otherwise the Spanish trade unions would go berserk.

Fertility decline is not an issue: productivity and competition are. As long as EU will be a corporatist (corporatist as in Mussolini corporatism) welfare conglomerate with three tiered citizenship (Western European, Eastern European, guestarbeiters from outside of the union) run by bureaucrats and tax farmers, and not by competing entrepreneurs, I won't put my money on it.

Fertility decline is an issue only as far as the welfare state is concerned. Rumania's retirees learned how to manage on a small income, so they will not be much affected, and most of them have jobs in the gray areas of the economy. I wonder how will react the German or French retirees survive ...

Fertility decline in Rumania is an issue only if you regard Rumania as an autonomous entity, and as of January 1, 2007, it is no longer such thing, and a few days ago the EC talked us into letting Ukrainians and Moldavians "travel" to Rumania without a visa, so your labor issue is kind of solved. As soon as the building regulations will be relaxed my bet is we'll see Bulgarians, Turks and Serbians (already lots of them are here) lining up for jobs and cheap housing.

The only things that scare me right now are: EU regulations, building a corporatist welfare state and the AGW/GM hysterias not being quenched soon enough.

Edward Hugh said...

Hello again Anonymous and welcome Emil.

I see we are not in agreement. Well there is nothing new about this. I'm afraid there may be something a bit newer about what gets to happen next though. A totally modern and very global emerging markets crisis, centred on eastern Europe, and kicking-off in Romania.

We started working on this demographic situation when it became clear what was happening in Japan in the late 90s. The deflation they had WAS a new phenomenon, and it hasn't gone away, and it IS related to low fertility. We now understand some of the mechanisms which are at work. Which is new because we didn't before.

It isn't about institutions or institutional quality, that is the big surprise.

"the EC talked us into letting Ukrainians and Moldavians "travel" to Rumania without a visa, "

Look. This problem is much bigger than you are imagining. The working age population in Russia is already falling, according to the world bank estimates, Russia now needs to import about 1 million workers a year, the question is where they are going to come from (and this post here). The numbers just don't add up. Ukraine is nearly done itself, and will soon need to import. Uzbekistan won't be able to supply the whole of the CIS for much longer, Poland is out in India trying to find people
, and Moldova, poor little Moldova, they alone can't supply the whole labour market needs of both Eastern and Western Europe (incidentally, don't Moldovans have automatic rights to Romanian passports?). Moldova is obviously about to disappear right off the map, and I personally consider that a tragedy (Belarus will be the same story). Whole countries are going to go here. I wouldn't put much money Serbia will still be around 30 years from now as a legal entity. Curiously, Kosovo probably still will be.

The problem is the numbers just don't add up, you can't have rapid economic catch up growth, and massive outward migration, and half replacement fertility.

Incidentally, I am working on the demographic data right now, can either of you help me with what happened to deaths in Romania in the mid 60s? There is a huge spike. What the hell caused this? Presumeably this is why you then had the stupid pro-natality coercive programme of the Ceaucescu regime. I, of course, am not talking about that. You need something like they have in France, or in Sweden, where the support of the whole society enables those women who want to have children to actually have them, and in this way make the whole society sustainable in the longer run. Right now, only one thing is certain, you are going to crash, and bigtime.

I appreciate I may be talking to people who are not convincable with mere argument, in which case, I'm afraid reality itself will have to do the work, but I don't take any pleasure in that. OTOH if you are willing to read material from economists, this latest piece from Morgan Stanley currency specialist Stephen Jen on their GEF on ageing labour forces isn't far from the point.

Also, I am a keen Barça football supporter, and about to watch this afternoon's game. So long live Gheorghe Hagi! (especially after his resignation from Steaua Bucuresti, I am certainly NOT an admirer of Gigi Becali, or anything he seems to stand for).

And all the very best to Gica Popesku, he is very fondly remembered here.

Emil Perhinschi said...

"incidentally, don't Moldovans have automatic rights to Romanian passports?"

Never had that right: only, for a short time, right to reside legally and apply for citizenship, and it's gone now, too.

"Right now, only one thing is certain, you are going to crash, and bigtime."

My bet is: troubles we will see in about two years, but I doubt it will be bigtime ... my uninformed guess it will be we'll see lower growth for a while, until US settles the sub-prime mortgage issue.

"what was happening in Japan in the late 90s. The deflation they had WAS a new phenomenon, and it hasn't gone away, and it IS related to low fertility"

how about "internal market not developed enough, protectionism, low flexibility, corporatism" ?

I don't doubt your numbers, only doubt what they mean.

I don't know where you get your "fertility" numbers, but mine, from the INSEE, show that it's not very far from the replacement rate: some month have negative growth, some positive, and the total decrease is not that scary. My guess is that in the 1990s most of the couples delayed having children: instead of starting having children at 20, they are having the first child at 30+.

"Retired" means a completely different thing in Rumania: most retirees do not stop working, and the real retirement age is between 70 and 75, which means most retirees work until they drop dead. Retirement means only getting a small guaranteed income from the state on top of what one can get on the gray market.

An "emigrant to Spain or Italy" did not vanish from Rumania completely: his money are behind small repair shops in small towns, small building companies, shops, farms, workshops etc. operated by their spouses, parents or children.

Rumania still has a lot of growth space just by optimizing whatever goes on inside (mostly in retail and government) and by raising productivity. Most of the sky-high growth from the last years was due to productivity increases, and then from activities from the gray economy moving to the light because of the flat tax, the low minimum wage and the weakness of the trade unions. My guess is that most of those who could afford to go legal already did, hence the lower growth this year, and if the government will keep the promise to lower the "social solidarity" taxes, some of the others will move up, too.

Edward Hugh said...

Hi again Emil,

Thanks for taking the trouble to have a dialogue. Just a few points for the moment:

"my uninformed guess it will be we'll see lower growth for a while, until US settles the sub-prime mortgage issue."

First thing, I don't think the US has any major immediate economic issues. A recession perhaps, but that is normal in the course of events.

But the sub-prime thing is more complex than it seems since it concerns the attitude of the banking sector to loans. Basically the banks will pull back - everywhere I imagine - on the % of the surveyors valuation that they are prepared to put up as a lone. Many of the sub prime components of loans have involved "bridging" loans to cover the difference between the 80% or so that the traditional banks will offer, and the 110% or so (including furniture and notary fees) than young people with no savings need.

Well, I think all that just came to an end. Here in Spain it is now - since the middle of August - virtually impossible to get more than 80%, and so, of course, no flats at all are selling.

And this situation looks likely to continue for some time (possibly years) while either prices adjust down, or young people accumulate the deposits.

So while I don't expect any collapse in the eurozone (or US) I do expect sub par growth in the construction driven economies - Greece, Ireland, Spain (and of course the UK, although the UK isn't in the zone), and a major slowdown in Germany which is dependent these days on exports (this is all to do withg the ageing population problem in my view, but I don't expect to convince you on so many things at once).


we have a major inbalance at the currency level at the moment since the euro is rising and the dollar falling, while the fundamentals may well point to things going in the opposite direction, with the dollar trending up and the euro down as the impact of the excess construction activity produces sub par growth in the eurozone. Something like that.

But this is only a context, a background. With the exception of Hungary - which has its own special problems - (and maybe Czech Republic and Slovenia, in each case for different reasons) all the rest of the E10 economies have had serious overheating issues in recent months, and the labour supply story is, IMHO, a big part of this question. So I anticiapte a correction in Eastern Europe during the slowdown, and since Bulgaria and the Baltics are on pegs, and Poland is bigger than Romania, then it is not unreasonable to expect to see the issues surfacing first in Romania, although they may well then spread to Poland (maybe the political instability around the Polish elections will set things off, I have no idea). This problem can already be identified in the currency pressure the leu is under. At least that is my interpretation.

If demography isn't the big underlying issue then we should expect to see Turkey affected equally with Romania. I don't know whether you will grant me that much (I mean basically I am into testability issues). So I am tracking both Turkey and Romania to see if I can get a triangulation on the demographic thing during this downswing.

I did an extensive study of Turkey which you can find here.

I would like to thank you again for taking the trouble to comment. Of course I don't expect you to accept everything I am saying just because I am saying it, but if you stick around and keep firing the questions, then maybe I can convince you of something , or who knows, maybe you will convince me :).

I have the fertility material and other things organised and will post soon.

"I don't know where you get your "fertility" numbers, but mine, from the INSEE, show that it's not very far from the replacement rate"

First off the "efrtility" Tfr data I have comes from Eurostat (which comes indirectly from INSEE) and some for the earlier years from the US census bureau. But maybe you are simply talking about the numbers of life births and deaths, which, as you say, nearly meet at the moment, but this is very deceptive. Come to think of it maybe you haven't seen the very long piece I put up on demography matters over the weekend. I was really saving that to put up here bit by bit, but you can go and take a peek if you feel curious. I present quite detailed data.

""Retired" means a completely different thing in Rumania: most retirees do not stop working, and the real retirement age is between 70 and 75, which means most retirees work until they drop dead."

Yep, this is really what I feared. I feel so sorry for so many of these people. especially when you look at the life expectancy data - which I also present on DM - and think of the health issues.

"Rumania still has a lot of growth space just by optimizing whatever goes on inside (mostly in retail and government) and by raising productivity. Most of the sky-high growth from the last years was due to productivity increases, and then from activities from the gray economy moving to the light because of the flat tax, the low minimum wage and the weakness of the trade unions."

Thanks for this. This "whitening" (or greying as you call it) has been taking place across the EU10 and is as you say, an important part of the "growth spurt". And I agree about productivity, but unfortunately pushing up productivity means having largish younger cohorts (or at least a growing population in the 25 to 50 age range) and unfortunately Romania seems to have just about peaked out in this group as a % of total population (data to be presented).

"how about "internal market not developed enough, protectionism, low flexibility, corporatism" ?"

Well naturally there can be many explanations for the Japan phenomenon. I have been trying to make sense out of most of them, and try and see if they can do the work which is expected of them in theoretical terms. I think it is important to remember that Japan has undertaken very significant reforms over the last 10 years, and none of them have really changed the trajectory.

I have, of course, a Japan blog, and you can find some of my arguments about what is happening to internal consumption, wages and the labour market in Japan here.

OK, I think that will do for now.

Good luck with your efforts to give up smoking, and with your work with Linux.

Emil Perhinschi said...

my last comment for a while, since I think I am in danger of losing too much sleep over this :)

I put the answer on my web log because the interface is easier to use there ... there you can find some official info dug out of the Rumanian government site, too, with links and explanations.

I hope I have not misrepresented your position...