We live in tumultuous times, and this turmoil manifests itself in the complexity of foreseeing and estimating events. The economic analyst faces the challenge of analysis, using tools that, although varied in sophistication, require a certain stability in economic relationships to extract the relevant signals. When this stability is missing, the errors made by analysts are magnified, leaving us practically at the mercy of waiting, trusting that the waters will return to normal.
Recently, I addressed in a column the difficulty inherent in analyzing the third quarter, which concluded a little over a month ago. In a context of economic slowdown, indicators react at different times, sending information that could seem, apparently, contradictory. The challenge here lies in interpreting this apparent contradiction and placing each indicator in its proper context. This phenomenon does not arise so much from indicators that point to divergent realities, but rather from a process that is inherent to the economic cycle.
However, sometimes we find that certain indicators show figures that constitute significant surprises, unexpected for the majority. For example, and although we cannot classify the latest data as atypical or excessively surprising, it is undeniable that last October’s Labor Force Survey (EPA) provided us with employment figures that were higher than expectations (and it was not the first time). As a consequence, numerous projections on the growth of the Gross Domestic Product (GDP) for that same quarter lagged behind the final data published by the National Institute of Statistics (INE), just one day later.
This has not been an exception. In recent quarters, anticipating economic developments has become an unusual challenge. Changes, perhaps barely perceptible to the analyst focused on the short term, are influencing the trajectory of various series, whether in specific sectors, prices or the labor market, which complicates the analytical process. Although it is not necessary to dwell exhaustively on all of them, some, due to their relevance, deserve to be mentioned.
Let’s go back to the job market. The rise in interest rates and, therefore, in the economy in general, is expected to drive a significant and negative adjustment in the labor market. The Phillips Curve, which illustrates the trade-off between inflation and unemployment, suggests that, 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, show significant weight. In Spain as in many other countries, rising interest rates and disinflation are not significantly (as expected) affecting a remarkably resilient labor market. On the other hand, the performance of exports in Spain, clearly affected by the international situation in this second half of the year, has nevertheless exhibited notable behavior in the last two years, with significant increases concentrated, in part, in sectors previously less prominent, at least in terms of media attention: he talked about business services. Although its particular impact on the series of Spanish exports has not been overwhelming, it has contributed enough to give this evolution a minimally atypical nuance.
Both phenomena could be linked to profound transformations in what I would call “structural fundamentals”, which influence the behavior of conjunctural series in a way that is sometimes unpredictable. And since the beginning of the pandemic, there have been important changes in certain behaviors that are difficult to anticipate and fit into current models. For example, the transition from the use of cash to cards, which complicates the analysis of consumption based on this data; the increase in hours not worked due to illness, a relevant phenomenon not only in Spain but also in much of Europe; or the behavior of the labor market itself in terms of occupation and activity, mentioned above.
In the documents that accompany the general budgets of the State, suggestive analyzes are presented. In the “Budget Plan”, specifically in its evaluation of the macroeconomic situation, a box stands out that examines one of these fundamental changes that could be behind the difficulties in forecasting the short-term evolution of the labor market and, additionally, the increase in activity and exports in the business services sector.
This box points to the significant increase in immigration as the main explanation for the increase in the active population (due to the arrival of people to work) and, as a consequence, the increase in employment. This phenomenon responds to the incentives of a labor market that faces serious difficulties in filling certain positions, a problem that affects all of Europe, although with particular peculiarities in Spain, which would be added to the drop in real salaries that encourages hiring so much. as well as the activation of the workforce.
Immigration is generating an increase in the population that considerably exceeds the average of previous years. If a large part of this immigration arrives with the purpose of working, two significant consequences are triggered: a growth in employment and activity at rates higher than initially anticipated. The increase in nationalities granted supports the perception that this phenomenon is taking place.
Furthermore, unlike what happened at the beginning of the 21st century, it seems that the sectoral destiny of this immigration is not focused on a few sectors (as was the case of construction at that time), but extends to many others, especially in the field of services. Can you guess which ones? Exactly, in business services. This would also justify, in part, the evolution of this sector and its prominent role in the growth of exports.
Thus, there are numerous underlying factors in the evolution of the economy that can explain the changes that we observe in its fundamentals and that have an impact on the conjunctural analysis. Since we overcame the pandemic, we have witnessed a continuous succession of these changes, which means that analysis models must be constantly adjusted. We will continue to strive to delineate short-term dynamics to offer more frequent explanations for what has happened, rather than having to explain why we were wrong.
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