Abstract:

Assessments of the potential output concepts (potential output,  output gap and structural deficit) in real time are very unreliable. Errors are arising from revisions of data on economic activity by statistical offices, because of missed forecasts, and because of the methodology of the evaluation of the potential  output. The methodology of estimating potential output for the most recent periods contributes most to erroneous assessments. Estimated indicators of the potential output for the current period are relatively reliable only after  data for at least the next four years are available. Therefore, potential output concepts are unfit for the role they play in the European fiscal framework, particularly for small countries.

The paper illustrates very questionable economic and political signals which provide indicators of potential output (structural deficit, output gap) of the Commission for policy management in Slovenia. The range of indicators of potential output of the European Commission in 2007 and 2016 are analyzed. It is shown that extreme overheating of the Slovenian economy, which had began in 2006 and had ended in deep crisis after 2009, were not identified by the indicators of potential output (output gap or structural deficit) even one year after the climax (attained in 2007). The paper also shows that the reverse happens in 2016. Indicators of potential output of the Commission  indicate overheating, although all macro-economic achievements indicate exactly the opposite of those in 2007. Prices are falling, credits are shrinking by about 10% per year. Due to the stagnation of domestic consumption economy generates a surplus in current transactions, which is among the highest in the EU. Unemployment is at least 50% above the level that accelerates labor costs, service sectors have not yet emerged from the crisis stagnation, etc.

The costs of misdiagnosis of the situation after 2005 were enormous. The consequences, to put it mildly, of the very strange signals of the key indicators of the European fiscal framework (the potential output, output gap and structural deficit), prepared by the Commission in 2016 could be very painful.