Spain: 33% unemployed in 2013? Revisited

Today, Bloomberg discusses the rate of unemployment in Spain, which rose to 27.2%.  This level is interpreted as an unexpectedly high. In October 2012, we described the evolution of unemployment in Spain (it was 25% on the date of posting) and predicted the rate of unemployment at 33% if real GDP falls by 10% in 2013. We are using the LSQ technique applied to the integral version of Okun’s law 

u(t) = u(t0) + bln[G/G0] + a(t-t0)  (1)  

where u(t) is the rate of unemployment at time t, G is the level of real GDP per capita (we used TED, The Conference Board, EKS PPP ), a and b are empirical coefficients.   The best-fit (dynamic) model for Spain minimizing the RMS error of the cumulative model (1) is as follows:  

du = -0.406dlnG + 2.00, t<1995 
du = -1.11dlnG + 1.54, t>1994    (2)  

This model suggests a big shift in the slope and a smaller change in the intercept around 1995. Having a new unemployment estimate for 2012, we have updated the prediction of (2) in Figure 1. The 2012 real GDP reading fully confirms the excellent predictive power of the model. The predicted value is 25.5% and the reported rate of unemployment in the fourth quarter of 2013 is 26%. 

Figure 1 also repeats our prediction (red circle) of the unemployment rate in Spain in 2013 for a 10% real GDP drop. The Bank of Spain report a 2% fall in Q1, which is much smaller than 10%. In any case the current economic performance in Spain is poor. From (2) it follows that even a zero GDP growth rate results in a 1.5% increase in unemployment.

Figure 1.  The observed and predicted rate of unemployment in the Spain between 1971 and 2012.  In 2013, the rate may reach 33% in case of 10% fall in real GDP.  

The cumulative form of the dynamic Okun’s law is characterized by standard error of 1.68% for the period between 1971 and 2011 (0.92% after 1995). The average rate of unemployment for the same period is 13.6% (14.6% after 1995) with a standard deviation of the annual increment of 2.12%.

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