Today we are bringing you an overview of the so-called Misery index, a measure that shows how an average citizen is doing economically, by looking at the unemployment rate and adding it to the annual inflation rate.

This economic indicator was created by the economist Arthur Okun. The principle behind it is that both the inflation rate and the unemployment rate have one of the most considerable impacts on regular citizens, as inflation eats away at disposable income. In contrast, unemployment makes getting disposable income even harder. It should be noted that data for August 2022 was used, as this is the last data point when data for all countries and regions are available, as some countries are yet to release their September CPI numbers. As the current macroeconomic outlook is quite bleak, with expectations of a recession in both the EU and the US, looking at how this index is doing will allow us to answer the question, is the world as miserable as it seems?

Misery index for select countries and regions (March 2014 – August 2022, YoY, %)

As can be seen in the index, the index stands quite high in August 2022, which is to be expected due to the high inflation rates currently present in the world. Currently, the country with the highest points in this index is Bulgaria, at 21.6%. Following them, we have Romania at 20.26%, Croatia at 18.6%, Hungary at 16.7%, the Eurozone, at 15.7%, Slovenia at 14.8%, and finally, the United States at 12%.

How does this compare to the same period last year? Even though August 2021 was a lot more influenced by the pandemic, its score in terms of the misery index is a lot better. For comparison, the index stood at 10.8% in the United States, which would mean it increased by 1.2 p.p. YoY. However, the US with its low base is quite an exception and not the rule. Looking at the other countries, the by far largest increase was experienced by Bulgaria, where the index increased by 12.6 p,p. Following them, we have Romania, where it grew by 10.1 p.p., Croatia, where it increased by 8.4 p.p., Slovenia, where it grew by 8 p.p., and finally, Hungary, where it increased by 7.5 p.p. In the Eurozone, the growth amounted to 5.8 p.p. in this period.

Furthermore, comparing the current numbers with the average since 2014, the misery index is 4.5 p.p. higher in the US, 5.3 p.p. higher in the Eurozone, 5.4 p.p. higher in Croatia, 7.3 p.p. higher in Slovenia, 7.8 p.p. higher in Hungary, 12.1 p.p. higher in Romania, and finally, 12.7 p.p. higher in Bulgaria.

So having this in mind, it would seem that the current situation is quite bleak, at least when it comes to the numbers. But again, taking this without a context would not make much sense, as the two contributing factors to the index, inflation and unemployment rate, both have a significant role at different times. For example, currently, the high inflation rate contributes 58% to the misery index in the Eurozone, 66% in Croatia, 69% in the United States, 74% in Slovenia, 76% in Romania, 82% in Bulgaria, and finally, 93% to Hungary. However, just a year ago, the story was completely different. In August 2022, inflation contributed 57% to the misery index in Hungary, which would mean that in course of a year, it increased by 36 p.p., with a similar story in Croatia, where it also increased by 36 p.p. YoY. In the US, however, the numbers are somewhat lower, and inflation contributed 49% to the misery index, meaning that the increase was a somewhat lower 20 p.p. YoY. In other more extreme cases, like Slovenia, the inflation rate amounted to 31% of the total misery index in August 2021, meaning that its contribution grew by 43 p.p. YoY, while in Bulgaria, we can see a similar story, where inflation increased its contribution in the index from 41% to 82% YoY. Finally, in the Eurozone, inflation contributed 30% to the misery index a year ago, which would mean that it increased by 28 p.p. YoY.

Annual inflation rate of select countries and regions (March 2014 – August 2022, YoY, %)

It should be noted that the inflation growth was already picking up pace by mid-2021, so looking at the YoY data would not tell the whole story, as inflation was already above its average levels by August 2022. Having this in mind, it would be better to compare the current number to the average during the last 8 years. Here we can truly see the stark difference between the numbers. On average, inflation contributed 33% to the misery index in Hungary in the last 8 years, 30% in the United States, 25% in Romania, 22% in Bulgaria, 15% in Slovenia, 13% in the Eurozone, and finally, 10% in Croatia.

This would mean that at current numbers, the inflation rate is contributing significantly more, at times 3-4 above its average contribution to the index. Taking this by itself does not offer much value, however, as it could be said that inflation rates are higher and thus the index is higher. While that might be true, what can then be taken away from this is that the unemployment rate plays a lot more of a crucial role in normal periods than inflation does.

With inflation growing so rapidly, and the threat of a recession looming ever closer, one would also expect an increase in the unemployment rate. However, this has just not proven to be the case, at least not yet. The unemployment rate (seasonally adjusted) stands at 6.6% in the Eurozone in August 2022, 6.3% in Croatia, 4.9% in Romania, 3.9% in Bulgaria, 3.8% in Slovenia, and 3.7% in the United States. Hungary is the only outlier here, where the unemployment rate stands at 1.1%.

How does this compare to the average in the last 8 years? For all countries and regions observed, the unemployment rate is at 8-year lows. For example, in Croatia, the unemployment rate is 5.6 p.p. lower than average in August 2022, in Hungary, its 3.6 p.p. lower, while in other countries it is between 3 and 0 p.p. lower than usual.

Unemployment rate (seasonally adjusted, March 2014 – August 2022, %)

So, what can be taken away from this data? Given that this index tracks 2 very important indicators for the economic well-being of citizens, one thing could be said: Even though the inflation rates are really high right now, it has (at least) not yet spilled over to the companies in terms of them having to lay off people to continue normal operations. In fact, the opposite is currently happening in labour markets across Europe and the US, with a lot of the workforce missing. Attracting new workers where they are needed also means that companies have to offer higher salaries, which means they have to raise the prices of their products. This would mean that in a sense, currently, we are paying for a low unemployment rate with high inflation.

According to the media, Petrol’s subsidiary Geoplin, might run into problems in November and December if Russia stops supplying gas altogether. It is estimated they would need between EUR 100-140m in liquidity, which would indicate a loss of around EUR 100m. According to the media Petrol’s Supervisory Board will meet again on October 14 and 18 to decide on Geoplin, and on October 20, a meeting of the shareholders of Geoplin has been called, where they will vote on the capital increase of Geoplin.

There were recent talks about the need for liquidity and capital for Petrol’s subsidiary Geoplin, which you can read here. According to the media, the subsidiary might run into problems in November and December if Russia completely stops gas altogether. In this scenario, the company would need between EUR 100-140m of liquidity. This is calculated by arriving at a loss of c. EUR 100m in this year for two months of gas procured at a price of EUR 200 per megawatt-hour. This scenario was calculated using last year’s purchase gas quantities for the last two months of the year, which is app. 700,000 MWh. This is all calculated based on an assumption that Geoplin would make this purchase, which is not yet certain, especially the entire amount.

For Geoplin there is no other source for purchase except Gazprom and the gas need to be delivered to end suppliers. It is important to note that Geoplin had a profit at the end of August and September. We can conclude from this that the quantities for October are taken care of. Since the end of September, the price of natural gas on the market has been falling. Currently, it is still below EUR 160 per megawatt hour.

Since the adoption of the state guarantee law for liquidity funds for the purchase of energy products, there was already a negotiation regarding revolving credit with a syndicate of six banks led by NLB. Banks were ready to give credit, but Petrol was not ready to provide its share of the liquidity for Geoplin, while 80% of the total loan is state-guaranteed. If Petrol was to secure the potential need for liquidity, it would worsen its credit rating which is important for the efficient performance in the activity of buying and selling fuel as well as other products. So the current scenario is a capital increase or potential nationalization of Geoplin. Petrol said that “potential capital increase is a consequence of the lack of supply of Russian gas and significantly more expensive replacement purchases at current market prices. The assumptions are based on different scenarios of gas price movements and physical gas shortages. The financial and legal review, on the basis of which the amount of potential recapitalization will be proposed, has not yet been completed, so they cannot give concrete amounts yet.” Petrol’s supervisors met on 6 October, and no decision was made. They only announced that any decisions related to this were planned for October. According to the media, Petrol’s Supervisory Board will meet again on October 14 and 18 to decide on Geoplin, and on October 20, a meeting of the shareholders of Geoplin has been called, where they will vote on the capital increase of Geoplin.

Geoplin key financials [EUR m]

Transelectrica has signed a non-refundable financing contract in the amount of EUR 424m from the Modernising Fund for the accomplishment of 9 projects for the development of the national power grid infrastructure.

Transelectrica has signed a non-refundable financing contract in the amount of EUR 424m from the Modernising Fund. The funds will be used to accomplish 9 projects regarding the development of the national power grid infrastructure. This funding represents 30% of the total funds obtained by Romania through the Modernization Fund, the EU program that helps modernize energy systems and improve energy efficiency. Yesterday, the management signed the 9 projects. The financed projects through the Modernization Fund will contribute to the rise of the interconnection capacity with the European power system and the development of the transmission power grid of Romania. The major benefit of making these investments will materialize through the rise in the transmission capacity, rise in interconnection capacity and optimization of the overhead electric line through digital systems.

To remind you, OMW Petrom recently invested EUR 400m in electricity production in Romania, which should c. 70% be financed through the Modernization Fund. You can read more about it here.