Vicious cycle of austerity and unemployment

Updated 05 June 2013
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Vicious cycle of austerity and unemployment

Weak growth and rising unemployment in the euro zone is prompting a change in policy direction away from budget austerity, according to QNB Group. The euro zone economy has now been in recession for the last six quarters, contracting by 1.5 percent in real terms over this period. The contracting economy is providing fewer opportunities for job creation and pushing up unemployment, which reached 12.1 percent of the labour force in March 2013. Amongst under-25s, joblessness is even higher at 24 percent. Both measures of unemployment are now the highest on record.
A primary policy response to the 2008 financial crisis and the European sovereign debt crisis (which reached peak intensity in summer 2012) was to implement budget austerity measures across the euro zone. This involved a sharp drop in public expenditure growth, which fell from an annual average of 4.5 percent in 2007-09 to 1.2 percent in 2010-12. This meant that only 170 billion euros was added to euro zone budgets in 2010-12 compared with 570 billion euros in 2007-09, an overall slowdown of 400 billion euros.
The main areas targeted by governments to slow expenditure growth have been social benefits, public sector jobs and wages, and capital investment. Cutting government jobs and investment has a direct impact on growth and unemployment. Meanwhile, reducing social benefits at a time of hardship is leading to widespread dissatisfaction and protests. The high levels of sovereign debt in Europe have discouraged the counter-cyclical spending that government usually uses to rebalance their economies during recessions. Debt interest and capital repayments, which are not supportive of growth, were the only areas with higher growth in 2010-12 than in 2007-09.
Therefore, euro zone countries policy response has done little to tackle the unprecedented level of unemployment and weak growth, according to QNB Group. Officials increasingly appear to be considering a policy reversal. The target dates for reducing budget deficits below certain thresholds have already been pushed back in France, Spain and the Netherlands. In April, the president of the European Commission, José Barroso, said that Europe might have reached the politically acceptable limits of austerity, although he said he still believed cuts in budget deficits were needed. His comments were more in line with the view of the IMF, which has warned euro zone policy makers against adhering too strictly to budget deficit targets as this risks deepening Europe’s recession.
Budget deficits have fallen from 6.4 percent of GDP in 2009 to 3.7 percent in 2012. Government debt in the Eurozone has now risen from 80 percent of GDP in 2009 to 91 percent in 2012. Although debt levels are rising, there may still be room for manoeuvre. Increased debt-funded spending in growth-supportive areas, such as investment or intermediate consumption could potentially increase revenue and trigger further investment, helping to reduce debt in the longer term.

Heavily-indebted countries have, in the past, increased spending and exhibited strong growth as a means to repaying debt. The US and the UK in the 1950s both had debt in excess of 100 percent but high spending drove strong growth and enabled them to reduce debt to sustainable levels.
Reduced austerity in some of the larger countries could also help tackle unemployment across the region, especially if coupled with reforms to increase labour force mobility around the EU.
However, the overall debt levels in the Eurozone cloud a more nuanced picture among individual countries as both unemployment and debt vary considerably. Unemployment in non-core euro zone countries (Italy, Spain, Greece, Ireland, Portugal Cyprus, Estonia, Slovakia and Slovenia) is 17.7 percent while unemployment in core countries (Germany, France, Austria, Belgium, Finland, Luxembourg, Malta and Netherlands) is 7.6 percent.
Greece, Italy, Portugal and Ireland, each have debt levels of around 120 percent of GDP or greater, leaving them with little room to ease back on austerity. Greece is in the worst position with unemployment at 27 percent and 66 percent for under-25s while debt is 157 percent of GDP (although it is falling). Conversely, Spain, the other country with particularly chronic unemployment (27 percent and 56 percent among under-25s), may have room to borrow more to provide additional government support to the economy.
In addition to more growth focused policies, QNB Group argues that structural labour market reforms are still required. Investment in programs to get people back to work, adjustments in labor costs and greater labor market flexibility should all help. These policies are most needed in countries with high unemployment, such as Greece and Spain.


Gulf airlines Emirates, Etihad, Qatar Airways seen flying under radar at Farnborough Airshow

Updated 34 min 51 sec ago
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Gulf airlines Emirates, Etihad, Qatar Airways seen flying under radar at Farnborough Airshow

  • Over 1,500 exhibitors and 100,000 trade visitors are expected to attend this week’s airshow
  • Farnborough and the Paris Airshow — held on alternate years — have accounted for around 30 percent of annual commercial business

LONDON: The aviation industry heads to the UK’s Farnborough International Airshow on Monday in rude health, with higher oil prices and a strong global economy leading to predictions of a large number of orders at the week-long show.
But this time around, significant orders from Gulf carriers such as Etihad, Emirates and Qatar Airways are unlikely to materialize, as the region’s carriers continue to take stock after a period of bruising losses.
Over 1,500 exhibitors and 100,000 trade visitors are expected to attend this week’s airshow, one of the most important events for the global aviation industry.
Farnborough and the Paris Airshow — held on alternate years — have accounted for around 30 percent of annual commercial business for manufacturers like Boeing and Airbus since 2012, according to aviation consultancy IBA Group.
Some $124 billion worth of orders and commitments were placed at the 2016 show, according to organizers.
The aviation industry is in rude health in 2018, with passenger numbers and load factors rising internationally thanks to global economic growth.
Plane makers bagged around 900 firm or provisional orders in Paris last year, the consultancy said. And while the international order backlog is high, a similar number of orders is expected next week on the back of recent rises in the price of oil.
“The trend between oil price and annualized orders has been uncannily strong,” said IBA’s Chief Executive Officer Stuart Hatcher in a report issued July 9.
“This is not surprising given that most orders have been placed for new fuel-efficient technology, but even with such large backlogs in play, orders continue to come in as oil rises.”
This time around however, the big three Gulf carriers — Etihad Airways, Emirates and Qatar Airways — are unlikely to feature too heavily among the big spenders next week, analysts predict.
Etihad Airways made headlines in Farnborough in 2008, when it made $20 billion worth of orders from Boeing and Airbus.
Fast forward 10 years though, and the Abu Dhabi carrier is in consolidation and restructuring mode, its international expansion plan on hold following the insolvency of its European partners Air Berlin and Alitalia.
After posting an annual loss of $1.5 billion for 2017 (albeit an improvement on the previous year), Etihad earlier this month announced a reorganization into seven business units to be accompanied by further job cuts, significantly scaling back its international ambitions.
The main deals the carrier is reportedly working on with manufacturers are attempted price reductions for previously placed orders.
“It’s not the done thing to cancel existing orders at airshows,” said Saj Ahmad, chief analyst at Strategic Aero Research.
Etihad did not respond to a request for comment.
John Strickland, director of JLS Consulting, said the other two big Gulf carriers were also unlikely to splash significant cash at Farnborough.
“It’s probable that any statements by Emirates and Qatar Airways will be more modest,” he told Arab News.
Dubai’s Emirates has fared better than its Abu Dhabi counterpart, reporting a $1.1 billion profit for the year ending March 2018.
Despite the airline’s continuing recovery, recent headline orders from both Boeing and Airbus are tempering the expectations for what will be announced at Farnborough.
“Emirates has placed recent orders for Boeing 787s and more Airbus A380s so large headline orders are unlikely,” said Strickland.
Emirates declined to comment.
Qatar Airways has been hit hard by the boycott of its home market by the Anti-Terror Quartet — Saudi Arabia, the UAE, Bahrain and Egypt — last year, with the group’s CEO Akbar Al-Baker admitting the airline is likely to report a large loss for the past year.
But the company has been in acquisition mode, acquiring a 9.6 percent stake in Cathay Pacific in November for $662 million, and has expanded a number of its routes in recent months.
“Qatar Airways may plump up for more (Boeing) 777Fs as it looks to build its freight capacity in the wake of the (boycott) to alleviate import pressures on goods and services,” Ahmad told Arab News.
IBA forecasts that aircraft leasing firms may dominate Farnborough orders, accounting for between 30 and 50 percent of orders.
Ahmad told Arab News that Dubai-based DAE Capital may be one of the firms preparing to place large orders, with rumors of 100 jets apiece for Airbus and Boeing.
DAE, Airbus and Boeing did not respond to requests for comment.