“You’ve Never Had it So Good” – And It Is About to End
Here is another proof of why parties cannot deliver on the prosperity front: there are some interesting computations I would like to share with you, regarding business cycles in the domestic economy.
In a nutshell, the economy has been experiencing since the early 2000s quite a robust expansion (one that has little to do with growth as we shall see later on) in a clear fashion (as the graph shows) and this is something to recognize as a sign of good economic health.
The macroeconomic aggregate of GDP growth is somewhat disconnected from these cycles, and that is so for a simple reason: these are short-term fluctuations, while growth is more of a deep, long-run variable. That’s where the “You’ve Never Had it So Good” line would not fully apply. Now that we know the present trend is on the upswing, it would perhaps prove to be a clearer evidence the next government, whatever their proposed manifesto, cannot do better. At best, they would smooth the expansion cycle, or more realistically, softly land the economy and engage in structural reforms whose benefits they are not likely to reap during their time in office; but nonetheless, these reforms are needed now.
A couple of procedural points to explain how the results are obtained: it is pretty standard procedure to take Real GDP to its logarithm -it makes computations easier- and then compute the long-term trend. the differences in observed GDP and long-term growth are mainly business cycle fluctuations. Data is as usual downloadable on the World Bank’s Open Data website (Variable Code: NY.GDP.PCAP.KN)
The expansion cycle is both a curse and a blessing: ever since the early 1970s, Moroccan economy experienced short booms and long busts. In fact, ever since 2000, the cycle has been remarkably stable, with relatively harmless standstills, and stability tends to yield virtuous results in wealth and output accumulation. The economy praised by the IMF in their reports resides in business cycles expansion stability, not in the level of growth. This is another argument political parties would do well to consider: growth does not matter much if it is not stable, does not yield business activity, and finally, does not bridge inequalities. And just so to be clear: this relatively robust business cycle cannot be solely attributed to any government or political player; if anything, it is merely the economy re-adjusting after a decade-long of recession after the Structural Adjustment Program was lifted in 1992.
The expansion cycle is a curse because the trend is losing speed, and at this moment any ill-thought decision might turn the temporary slacking into a recession. It might be temporary, but the effects on business activity would be a lot less painful would economic policy try to stick to the long-term path, or in more operational terms, to the real output.
Promising anything more than 6% GDP growth for more than three quarters could get the economy overheated, and bring us back to the late 1970s economic difficulties. The best a government can do is to try and maintain the same expansion rate, but certainly not engage in expansionary budget policy because it would kick off inflation, public debt and the virtuous cycle could well be reversed, and in times of global uncertainty, it is best to keep the domestic economy in shape by sticking to the 5% potential output target.
The business cycle argument is yet another piece of evidence Moroccan private sector and corporations that a smooth but lower than expected 5% growth is better than sky-high 6 to 8% GDP growth; high growth means higher deviation from both long-trend and potential output, and more volatility on the business cycles.
For more information on Moroccan business cycles, Finance Ministry produced a briefing note, March 2009 with some interesting figures to look at.