Tyranny of numbers

The 2008/09 recession in historical perspective

Posted in General, Macroeconomy by Djavad on October 6, 2009

A few clarifications about my last post:  The fall in family income and expenditures is not the same as a recession.  In theory, other components of Gross Domestic Expenditures (GDE) can increase so the economy can expand as private consumption falls.  I suspect that GDE per capita did not decline as fast as the SCI numbers that I reported in my last post indicate.  However, as I wrote in a recent oped that dealt with the sanctions question, it is unlikely that other factors kept the GDE from declining, thus averting recession.

Personal consumption is the largest component of GDE, about half, so its collapse (in real terms) can bring down the economy even with the other two large components increasing. But of the latter investment, which is the next largest component accounting for about one-third of GDE, is very likely to follow private consumption. Private investment has been anemic as the oil boom dissipated late last year and public investment usually falls when the government is in financial trouble, again because the oil boom fizzled out last October.  Government consumption may have increased (the numbers are out on the CBI website and show increase in nominal terms but I have not checked them to see if they increased in real terms).  A definitive determination of the state of the economy in 2008 (1387) must await the publication of the national accounts data by Bank Markazi.

Iran will not be in the minority if the national accounts data do show a recession by any means.   Brazil’s economy shrank by more than 7% last year.  But, like Brazil, the countries that had negative growth generally experienced loss in their exports due to the global decline in demand.  Iran’s export earnings did not really fall.  Even if they did, there would be no reason for the economy to shrink because Iran’s (oil) exports do not directly affect employment. Our export sector does not employ many people.      The government certainly had enough money to keep demand up, but it did not.  It chose instead to fight inflation, which I think played a major role in bringing down the economy.

Declines in private incomes and expenditures of the order of magnitude indicated by the survey results for 1387 are unprecedented.   Here is a graph of GDP and Private Consumption per capita that gives the full history of fluctuations in Iran since 1959:

GDP and Private Consumption per capita in 1997 rials (x1000)GDP and Private Consumption per capita in 1997 rials (x1000)

As the graph shows fluctuations in GDP per capita tend to be far greater than in private consumption.  The most recent decline in consumption, however, which took place in 1995  (about 3%) was not accompanied by a drop in GDP per capita.  But the decline in consumption for last year, once it is incorporated in the national accounts, is likley to be twice as large and may well pull down the GDP with it.   The release of the GDP data is not too far away, I hope, so we do not have to speculate for long.  Which makes me wonder: how do people who have to make economic decisions–the private sector–deal with the uncertainty?  Would it not be nice if the government let people know how the economy is doing more quickly to keep everyone up to date?  You may say that they do provide the information that people really care about–the rate of inflation–quick enough.  The rest is just for the nerds!

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4 Responses

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  1. […] also need to understand the current economic and political situation in Iran. Inflation reached 30% earlier this year, and now runs at around 15%. It is remarkable how […]

  2. سروش said, on October 6, 2009 at 5:01 am

    That is also confusing for me. Because CBI has published the quarterly GDP from 1374 with two-three lags. The CBI published the quarterly data for spring-summer-Fall of 1387, without any report of GDP in any seasons!!!. I thought it might be a consequence of election. The government desired to hide the negative growth where the opponents could not use that as a card in election. But I do not understand why 4 months after the election CBI has not updated the GDP??

    • dsalehi said, on October 12, 2009 at 5:48 am

      I suspect that the CBI has had trouble convincing the government of its low numbers!

  3. Mohammad said, on October 6, 2009 at 4:28 am

    Related to your last phrase:
    IMHO, the problem is, how to make ordinary people care about growth rather than just inflation. Maybe a media campaign is needed for that! Or a change in schoolbooks. The problem is economic, but the solution seems to be political/educational.

    Ironically, Ahmadinejad wil probably be praised for lowering down the inflation to one-digit rates for the first time in years! Just as people now praise Mousavi for his war-period economic management, probably because inflation was low then. They don’t seem to care about growth.


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