Eurozone gambling will continue to be a tough market
We have learned from the Great Recession that gambling is not immune from a fall in GDP, indeed it is affected as much as any other sector. Therefore a watchful eye on the world economy and planning your business within those parameters has become a prerequisite for the successful gambling company. With that in mind GBGC reports on a conference that took place in Sweden sponsored by the Swedish Ministry of Finance. They managed to attract some of the world’s brightest economists and central bankers as speakers.

The underlying theme of the conference was lower than expected growth for this period of the economic cycle following the advent of the Great Recession and the continued negative effects of accumulated sovereign debt.
If you wanted cheering up this was not a conference for you!
Anders Borg, Sweden’s Minister of Finance and one of the brightest Finance Ministers in the world, stated that the recession was protracted and the worst financial crisis since the 1930s. There is a challenging international environment that is adding to uncertainty and downside risks dominate. 

While expecting growth to pick up in 2015/16 he said that the debt overhang was generating pressure on growth. He warned that the next financial crisis debt levels will be higher than they were in 2008 leaving less room for Governments to manoeuvre so some debt restructuring was necessary in his view. Debt restructuring is simply changing the terms of a bond or loan, in effect a full or partial default.
Stanley Fischer is the Federal Reserve vice chairman and was Ben Bernanke’s teacher at MIT. He was also the head of the Israeli central bank. The thoughts of such an eminent economist carry weight.
Mr Fischer noted that since the Great Recession there had been forecasting errors and most economies had underperformed their expectations for growth. For every previous recession his colleagues at the Federal Reserve had noted that economies had bounced back much quicker.
His concern for today was three fold. 
A slow global housing recovery, the absence of fiscal stimulus (in Europe) and low demand for US exports. In addition there are three factors that would restrain the US economy going forward: slowing productivity growth, declining investment, and a drop on the labour participation rate.
GBGC’s interpretation is that we could be heading for a period of deflation and this has been highlighted recently by the sudden drop in GDP for Japan, a slowdown in China and in Europe we see Italy and Germany entering a period of negative growth and France stagnating. None of which was part of the plan! 
GBGC has always argued that in years gone by falling rates of inflation have been good for the gambling industry. Our analysis has shown that gambling customers are worse off during periods of rising inflation. To illustrate the point if inflation were eight percent and the worker received a pay increase of eight percent after tax this would be six percent leaving the worker two percent worse off. What makes matters worse is that the expenses of the gambling business almost certainly increase with inflation. So, as revenue is squeezed, expenses rise causing margins to narrow.
When inflation falls the gambling industry expenses fall and money in real terms has more value.
The circumstances today are very different. The prospects for deflation in Europe are now high. Workers pay is stagnating or falling in real terms and this is causing growth rates to slow. There is an absence of government stimulus; sanctions against Russia are hitting the major economies in Europe and investment is falling.
In the US there are worker shortages as pay has been cut in many industries so it should be no surprise that many do not find it worthwhile to work. In the UK pay has been restrained through imported labour from Eastern Europe and a supply of educated Spanish, Italian and French workers who see no opportunity for advancement in their own country. Apparently there are some 400,000 French living in London making it France’s sixth biggest city.
Workers’ pay is a real issue for the gambling industry because as we have said on countless occasions gamblers can only spend what they have in their pocket and if pay is falling behind inflation for whatever reason the industry finds it more difficult to cover costs. A point not missed by some of the major companies such as Scientific Games and Bally, GTECH and IGT, AMAYA and PokerStars as they merge their businesses to reduce costs and build better price points.
Worker pay is a symptom but not the cause of the disease. 
Let us return to the conference for a moment where Harvard Economics professor Carmen Reinhart illustrates the point so well. Of the twelve economies experiencing systematic crisis in 2007-8 (France, Germany, Greece, Iceland, Ireland, Italy, Netherlands, Portugal, Spain, Ukraine, UK and USA) only Germany and the US have reached their pre-crisis peak in per capita GDP.
This may come as a surprise to UK readers because the Government is telling us that GDP is back to where it was, they are telling the truth, but not on a per capita basis. People are worse off for the reasons explained previously.
According to Professor Reinhart the problem is the debt/GDP ratio and throughout history this has only been reduced by the following measure:
1. Economic growth
2. Fiscal adjustment/austerity
3. Explicit default or restructuring
4. A burst of inflation
5. A steady dose of financial repression where interest rates are kept low.
What course of action is the Government likely to take in the markets where you trade and how will this affect the business where you work? In Greece and Cyprus option (2) was imposed by the Troika, how likely is that option in your markets? We read that nothing much is being done to revitalise the Italian economy or to restructure outdated employment laws and regulation. Gambling revenues year on year are already down so Italy is certainly one to watch carefully. 
Option (1) Economic Growth is the Holy Grail, it is what everyone wants but it is not happening sufficiently to reduce the overhang of debt. It is what we wish for but in reality it may prove elusive.
Option (2) Politicians hate this because austerity does not win elections.
Options (4) Inflation and (5) Repression is what we have in the UK and in most countries but the inflationary burst has not materialised, in fact as explained before we are seeing the opposite.
Option (5) Repression is the most favoured route where interest rates are kept low or negative and regulation or manipulation policies directed at a captive audience to buy more Government debt. According to Prof. Reinhart real interest rates were negative for half of the time from 1945-1980. During this period there were quite serious bursts of inflation. This is why the prospects of deflation for Government debt is quite serious.
Finally Prof Reinhart states that public debt overhangs on average last for 20 years. That means there could be fourteen years to go, so there are no quick fixes unless through innovation we are miraculously able to achieve economic growth.
Israel announced towards the end of August that it intends to embark on a period of QE. Mario Draghi the European Central Bank president announced on 14 September lower interest rates for the Eurozone and an introduction to the process of QE (money printing). 
Wolfgang Munchau, writing in the Financial Times, said that the interest rate cut was largely symbolic and a few hundred billion Euros was hardly likely to turn a ten trillion Euro economy.
But Draghi’s intervention is at least a start in the right direction and by year end he will probably have persuaded the hawks on his board to begin more QE in a meaningful way. In the meantime the Eurozone is going to remain a tough market for gambling.
What has been announced is not going to reduce unemployment or put more pay into workers’ pockets. I doubt the politicians of Club Med and France have the courage to tackle the structural reforms that Draghi is telling them to start. Even if they did, the benefits would take some time before they would trickle down to the tills of gambling operators.