CEIC News@lert: Positive Spillover Effects of Euro Area Growth for North Africa

July 16, 2014 INTRODUCTION Against the backdrop of revived economic activity in the euro area, a lot of debate has been centered on the potential positive spillover effects to the economies in North Africa. Economic growth in these countries is poised to gain momentum as increased demand in the euro area is expected to resuscitate North Africa’s export industries due to the close trade links between the two regions. National accounts and foreign trade data in the CEIC global database can help shed light on the linkages between the euro area and North Africa’s largest economies: Algeria, Egypt, Morocco and Tunisia. HIGHLIGHTS North Africa Trade Openness By definition, the potential positive spillover effects from healthy economic activity in a country’s main trading partners are larger for more open economies. A broad measure of trade openness of an economy is the ratio of total international trade (exports and imports) to Gross Domestic Product (GDP). By that measure, for the period 2000-2012 Tunisia, Algeria and Morocco exceeded the OECD average of 0.50. Tunisia stands out as the most open economy in the region with an average trade-to-GDP ratio of 0.96. The ratio for Tunisia has grown from 0.83 in 2000 to 1.03 in 2012, marking the greatest increase in the weight of trade in the economy among these countries and surpassing the OECD’s trade-to-GDP ratio growth from 0.44 to 0.57. During that period Tunisia benefited from increasing foreign direct investment in sectors with high value added, such as electronics, electrical equipment and motor vehicles. Likewise, Algeria’s average foreign trade-to-GDP ratio (measuring 0.67) considerably exceeded the OECD average. Morocco’s trade openness was in the vicinity of the OECD average, at just over 0.50, while Egypt remained a relatively closed economy with a paltry average ratio of less than 0.40. The relative openness of most of these economies suggests that external conditions are indeed an important factor in the growth path of these countries. Regional Diversification of Exports North Africa’s exposure to the economic conditions in the euro area in particular may prove to be significant. Export data breakdowns for the respective countries reveal that the euro area is the main market for exports from Tunisia, Morocco and Algeria. In 2013, exports to the euro area respectively comprised 65%, 56% and 54% of the total export earnings in these countries. Despite its geographical proximity along the north African ridge, Egypt remains an exception and in 2013 the euro area accounted for less than 30% of its export revenues. However, the evolution of these export earnings distributions seems to imply that some diversification has taken place over the past few years. In recent years the relative shares of exports to the euro area from these markets have been diminishing compared to the highs witnessed during the first half of the 2000s. Nevertheless, a significant geographical concentration of North African exports to the euro area is still present. Still, for the foreseeable future the consensus seems to be that the net effect of this close trade interconnectedness might be positive as the euro area economies continue to recover, albeit at a modest pace. Long-Term Relations Between Economic Activity in North Africa and the Euro Area The long-term structural linkages between countries in North Africa and the euro area can also be illuminated by the dynamics of aggregated output data. The scatter-plots below show the relation between the output gaps (measured as the deviation of GDP from its long-run trend) for the euro area and each of the four North African countries. The output gap is estimated using the Hodrick-Prescott smoothing filter (HP filter), available under the CDM functions. For a brief definition of the HP filter please refer to the last section of this News@lert. Not surprisingly, given the trade linkages described above, the correlations between the output cycle in the euro area and those in Tunisia and Morocco are quite strong. An immediate inference of any significant correlation between the output gaps in the euro area and Algeria can be a bit tricky though. The positive correlation is probably due to the composition of Algerian exports – more than 90% of export earnings are generated from hydrocarbons. Again, in line with the previous findings, Egypt seems to be an exception in the region. The relatively small importance of the euro area market for the country is evinced by no apparent correlation between the two economies’ output cycles. Thus, GDP data also add to the evidence of strong economic integration between the two regions (when Egypt is excluded), which merits further investigation and advanced modelling so that the potential spillover effects can be quantified, taking into account the structural characteristics of the different countries in North Africa. The Hodrick-Prescott Filter in CEIC Data Manager Among its numerous functions the CEIC Data Manager supports a Hodrick-Prescott filter. This filter is one of the most widely-used methods of smoothing economic time series by decomposing them into a long-term trend and a cyclical component. This function is commonly applied to GDP series in order to estimate output gaps. This is a simple method to compute a measure of the cyclical behaviour of an economy, and in effect represents the amount by which a country’s GDP is below or above its long-term trend (which can be interpreted as the economy’s long-run capacity or output potential). The filter is available under the ‘Smoothing’ set of the CDM functions, as shown below: Effectively, the filter decomposes the selected series into a smoothed (trend) and a cyclical component, such that: When applied to the GDP of the euro area, the filter yields the following results: Out of these two components, the output gap can be calculated as the percentage difference of actual output from its long-term, or potential value: Although, like all other filters of its kind, the HP filter has its limitations and must be used with caution, it remains a powerful and easy-to-use tool when modelling business-cycle fluctuations, simply smoothing time series, or carrying out trend estimations. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
16th July 2014 CEIC News@lert: Positive Spillover Effects of Euro Area Growth for North Africa