Tuesday, June 30, 2009

Economics 30/06/2009: Growth Collapse, Balance of Payments, Travel tax; Public earnings

Above figure shows that our GDP/GNP growth continued to deteriorate dramatically in Q1 2009, with GDP shrinking a whooping 8.5% at constant prices and GNP falling 12%.
Consumer spending in volume terms was 9.1% lower in Q1 2009 compared with the
same period of the previous year. Capital investment, in constant prices, declined by 34.1% in Q1
2009 compared with Q1 2008. Net Exports in constant prices were €2,814mln higher in Q1 2009 compared with Q1 2008.

The volume of output of Industry (incl. Construction) decreased by 10.5% in Q1 2009 compared with Q1 2008. Within this the output of the Construction sector fell by 31.4%, output of Distribution, Transport and Communications was down 10.9% while Output of Other Services was 3.5% lower in Q1 2009 compared with the same period of last year.
Note declines in GVA above - we are not getting any better on value extraction either, with exception of 'other services' sector...

Domestic activity simply collapsed, as evidenced by the expanding GDP/GNP gap. More taxes, please, Mr Cowen!

Today's Fáilte Ireland May traffic figures confirmed the accelerating nature of collapse in air passenger traffic. In May, traffic fell by 15%, following a 10% decline of the first four months to April. Since the Government’s €10 tax was introduced on April 1st, the rate of traffic decline and tourism collapse has accelerated. The most significant fall was in arrivals to Ireland (down 19%). See Balance of Payments figures below for more details. Since the beginning of 2009, Belgian, Dutch, Greek and Spanish governments have all scrapped tourist taxes and/or reduced airport charges to zero. In contrast, our pack of policy idiots in the Leinster House decided that taxing tourists is just fine, as, apparently, they believe that Germans, Italians, Spaniards, Chinese, Americans and other nationals have no choice but travel to this global epicenter of cultural life and history that is Ireland. Time to call for an encore, Mr Lenihan.

Per CSO release today, the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) at the end of Q1 2009 stood at €1,693bn, an increase of €32bn on Q4 2008. The increase arose from a combination of exchange rate effects and the availability of new data.
Per CSO, "the liabilities - mostly loans - of monetary financial institutions (i.e. credit institutions and money market funds) amounted to €723bn. This was €56bn lower than for end-December and, at 43% of the total debt, was a smaller share than in the previous quarter. The decrease was due to a large reduction in debt liabilities, particularly short-term loans, and is to an extent reflected by an increase of over €50bn in Monetary Authority liabilities to the European System of Central Banks (ESCB) including balances in the TARGET 2 settlement system of the ESCB." General Government liabilities increased to €60bn driven by long-term bond issues more than offsetting a reduction in short-term money market instrument issues.

In other words - all's grand in the ZanuFF land: the banks are getting better and the taxpayers are getting deeper into debt.

And if debt figures are not bad enough, here are the latest Balance of Payments data - courtesy also of CSO release today: "The Balance of Payments current account deficit for Q1 2009 was €2,530m, over €1.6bn lower than that of €4,175m for the same period in 2008". Sounds good? Not really.

Due mainly to much lower imports:
  • Q1 merchandise surplus of €8,020m was over €3.7bn higher yoy;
  • The invisibles deficit increased by almost €2.1bn to €10,550m;
  • Services (€2,180m) and income (€7,586m) deficits were both about €1bn higher.
  • Total service exports at €16,050m dropped €360m largely due to insurance and financial services.
  • Service imports at €18,230m were up over €600m due mainly to higher royalties/licences and miscellaneous business services.
  • Tourism and travel receipts (€640m) and expenditure abroad (€1,324m) were down.
  • The higher income deficit results largely from reduced profits and interest earnings by Irish-owned businesses abroad (€1,808m) along with increased outflows of profits and interest from foreign-owned enterprises in Ireland (€8,631m).
  • Interest outflows on Government External Debt also increased.
  • In the financial account, Irish (mostly IFSC) residents redeemed €40bn of foreign portfolio assets and repaid €27.8bn of portfolio liabilities.
  • Inward direct investment was low at €794m and was similar to outflow.
Not too good for an exporting nation? You bet.

Of course, reasoned our seasoned policy morons, we simply have no alternative to raising taxes everywhere, for the public sector wages must be paid at an increasing rate. Never mind recession and Government promises to cut the public sector excess fat - if anyone had any mistaken beliefs that this Government is serious about tackling our state of public sector insolvency, hold your hope no longer. CSO figures for public sector employment and earnings released yesterday show once again that Brian Cowen is hellbent on robbing the ordinary taxpayers to pay for public sector cronies' privilege to earn lavish wages and perks. Public sector wages rose 3.4% yoy last month and public sector employment was up 1,000. So let's tax and borrow our way to pay public sector wages and pensions, should we? Irish Economic Model (as opposed to a real economic model) at last.

Monday, June 29, 2009

Economics 29/06/2009:

IMF Report last week highlighted some pretty nasty sides to our policies of the past, present and the future. For those of you who missed my Sunday Times article this week, here is the unedited version:

“They who delight to be flattered, pay for their folly by a late repentance,” said Phaedrus of Macedonia some 2000 years ago. No matter how much our Ministers herald this week’s IMF report as ‘being supportive’ of the Government policies, these words can be a leitmotif for the international organization’s view of our economy.

The IMF clearly states that the bulk of our economic problems was predictable and stems from our own policies choices.

Structural deficit, notes the report reached 12.5% of GDP back in 2008.
Now, even following the savagery of April supplementary budget, the deficit remains at 11% of GDP for 2009.

Profligate in spending, Irish authorities project deficits of 10.75% of GDP in 2009 and 2010 falling to 2.5% of GDP by 2013. IMF projects – as a benign scenario - deficits of 11.75% in 2009 and 12.75% in 2010, and 4% in 2013. Bang-on in line with my forecasts published in January 2009. And this is before we factor in our ongoing short-term borrowing binge and the costs of NAMA.

IMF staff’s baseline scenario implies “stronger expenditure consolidation than currently projected by the authorities”. Read: Minister Lenihan is off the mark in his fiscal consolidation exercise. Over 2009-2014 primary expenditures will have to be brought down by a whooping 9.5% of GDP – a cut of some €16.2bn against additional revenue raising of €4.3bn. A note: An Bord Snip is toiling overtime to reportedly cut just €4bn.

The balance between new taxes and spending cuts that the IMF suggests is so out of line with the Government approach two Budgets and two policy documents issued to date that it is impossible to interpret the Report as anything more than a motivational platitude that a senior scholar would accord to a not-too-bright student attempting a difficult proof. That Minister Lenihan failed to notice this irony is truly remarkable.

The IMF has a right to be critical of our policies. The Fund has been at the forefront of warning the Government about the problems we facing today. Annually, in Article IV Consultation Papers of 2003-2007 Fund analysts said that Ireland must focus on reforming grossly inefficient public services, stabilizing tax revenues, and deflating the property and public spending bubbles. Time and again the Government presented the IMF polite warnings as the marks of its approval of our policies. Cheers were sounded at numerous press conferences and nothing was done to address specific risk factors.

In its 2004 paper the Fund noted, that “Increases in public sector employment ...gradually inched up from a low of 3.7 percent in January 2001 to 4.8 percent by July 2003. Domestic demand was supported by the ECB’s easing of monetary policy and an expansionary fiscal policy.” Later, the Fund told the Government that “progress in improving public expenditure efficiency, controlling public sector wages, and increasing domestic competition has been limited.”

Throwing good money after bad to ‘improve’ public services as the Government preferred to do was never sustainable for the IMF: “the size of government [in Ireland] is not small in comparison with other OECD countries when compared to GNP, the more relevant measure of domestic economic activity.”

Bertie Ahearne’s response to this was to declare himself the last standing socialist in Europe and accelerate spending growth, triggering a wave of public sector waste. By 2007, Ireland became the country with one of the most generous welfare systems in the OECD.

“The ongoing rise in debt levels over the past decade has placed Ireland above the average of household debt-to-income ratio for Euro area countries, only surpassed by the Netherlands and Luxembourg,” said IMF in 2006.

Neither CBFSAI nor the Department of Finance stepped in to reign in this activity, despite IMF warnings. No tightening in reserve ratios or regulatory restrictions on excessive and risky loans took place. Capital to risk-weighted assets ratio has fallen from 14% in 2003 to 12% in 2005 for domestic banks. Contingent and off-balance sheet accounts have risen from 538% of total assets to 879%. Annual credit growth to private sector ballooned doubled to 29%. Today, the Government continues to promote our low public debt with no references to the private sector indebtedness.

In 2007 the IMF warned about the risks to our fiscal sanity: between 2003 and 2006, Irish real GDP grew by 22%, while real primary public spending rose 27%. Unfunded forward expenditure commitments have swallowed all existent and expected future primary surpluses.

Not surprisingly, this week, the IMF found that cyclical public deficit (the deficit that can be attributed to the world-wide recession) accounts for less than 30% of our total shortfall – in line with my own analysis published in August 2008. We are, as a nation, borrowing tens of billions of euros in order to pay grotesquely over-paid public sector employees their wages.

Perhaps the most perverted reading of the report by the Government concerned the IMF assessment of NAMA. Far from being an unguarded endorsement of the Government strategy, the report is tactfully telling our leaders to start thinking about the basics.

Per IMF, the main risks to NAMA are with pricing of the loans, post-NAMA recapitalization, narrowness of its remit and potential lack of flexibility. Protection of taxpayers’ funds is a serious concern. All these issues were raised by a number of critics of the Government approach to NAMA over the recent months. None have been addressed by the Government.

Crucially, the IMF sees a room for considering nationalization of the banks with shareholders taking full hit on their asset values. The IMF suggests that such nationalization can be triggered by either insolvency of the bank or by cash flow constraints. Given that the IMF estimates that some €34bn of the loans can end up in the rubbish bin, the cash-flow constraints that can trigger nationalization may apply to all major banks in Ireland. This is hardly comforting to the Government that categorically ruled out nationalizing well before it got to do the sums on NAMA itself.

Interestingly, a much over-looked sentence inserted in just two places in the report states: “
A number of Directors considered that, for bank restructuring, other [than NAMA] options including a greater equity interest by the government should not be ruled out.” Given the current market valuations, any ‘equity interest by the government’ in our ailing banks would spell an outright nationalization to have any meaningful impact on the financial institutions. This hardly constitutes the IMF endorsement of the Government strategy.

On potential for NAMA success, the IMF says that “if well managed, the distressed assets acquired by NAMA could, over time, produce a recovery value to compensate for the initial fiscal outlays.” Note that the Fund says nothing about recouping the cost of final outlays: bond financing, managing NAMA, inflation or recapitalization post-NAMA. These lines of expenditure are likely to yield tens of billions in taxpayers’ losses.

In short, IMF report, even after rounds of ‘consultations’ inputs and delays by our officials, presents a picture of Ireland as a country that is yet to address the grave and domestically rooted policy disasters it faces – 22 months after the onset of the crisis. Hardly an endorsement we can be proud about.


Another week, another bond offer from Ireland Inc. Last week, NTMA has sold a syndicated bond offer worth €6bn, with a whooping 5.9% annual coupon. The good news: it was a large issue and the maturity date for the new paper was 2019 – well away from 2012 and 2014 dates in previous two syndicated issues of this year. The bad news was the cost of the latest borrowing to the taxpayers. If the first €4bn bond raised this year was pricing each €1 in borrowed funds at €1.25, once expected inflation is factored in, the latest offer will cost us over €2.31 per each €1 borrowed. Not exactly a deal of a century. Another interesting feature of the syndicated bond offers to date is that the demand from banks, including Irish banks, remains very strong, covering more than 50% in all three placements despite continued problems in the banking sector. Funds allocations into Irish bonds rose steadily from 10% in the earlier offer to 26% in the latest placement. This can suggest two possible things. Either the fund managers re-discovering genuine interest in Irish paper or there is some sort of parking facility arrangement between the dealers and the issuer to store-up bonds for future use in NAMA-related transactions. Of course, one can only speculate…

And here are few quotes from earlier IMF reports on Ireland that did not make it into the article:

In its 2004 Article 4 Consultation Paper the Fund noted, in relation to the 2000-2003 period that: “
The substantial contribution of multinationals to Irish output and associated profit flows creates significant differences between measures of output, and the recent cycles in GDP and GNP have not been synchronized. ...Increases in public sector employment ...gradually inched up from a low of 3.7 percent in January 2001 to 4.8 percent by July 2003. Domestic demand was supported by the ECB’s easing of monetary policy and an expansionary fiscal policy.”

Thus, the IMF was diplomatically telling the Government that by 2003 Ireland was running overheated housing markets, slowing productive sectors and unsustainable expansion in the public sector employment and spending. Per IMF “...steps toward improving efficiency in public transportation have been met with resistance by public sector unions,” clearly identifying the main obstacle to the path of public sector reforms in Ireland.

The Fund had also serious criticism of the rising levels of public spending in Ireland. Preserving the emphasis placed by the IMF itself, Article 4 document told the Government that “the size of government is not
small in comparison with other OECD countries when compared to GNP, the more relevant measure of domestic economic activity in Ireland. Lower tax rates in Ireland as compared to the EU reflect favorable demographics, prudent fiscal policies that have delivered lower debt and debt-servicing costs, smaller defense requirements and lower unemployment-related social spending.”

2006 Article IV paper identified “
several macro-risks and challenges facing the authorities. As the housing market has boomed, household debt to GDP ratios have continued to rise, raising some concerns about credit risks. Further, a significant slowdown in economic growth, while seen as highly unlikely in the near term, would have adverse consequences for banks’ non-performing loans.”

Government response to this was extending a range of property tax incentives schemes and encouraging banks lending. No tightening in reserve ratios or regulatory restrictions on excessive and risky loans took place. Indeed by 2005, regular capital to risk-weighted assets ratio has fallen from 15% in 2003 to 13.6% in 2005 for all banks, and from 13.9% to 12% for domestic banks. Contingent and off-balance sheet accounts as a percentage of total assets have risen from 538% to 879%. This deterioration in the quality of our financial systems took place against the backdrop of rapidly rising lending with annual credit growth to private sector balooning from 15% pa in 2003 to 28.8% in 2005.

In 2006 and later in 2007 the IMF staff “suggested broadening the tax base by phasing out the remaining property based incentive schemes, reducing mortgage interest tax relief, or introducing a property tax.” Despite agreeing with the staff, Irish Government has gone into 2007 election year with double digit growth in current expenditure and massive handouts to the pressure groups. The tax base was not only left unreformed, but new tax measures were introduced that pushed the state deeper into dependency of property tax revenues.

In September 2007 the IMF took a look at the quality of Irish Government targets delivery. Table A.1 of the report contains an often neglected line specifying the rising disconnect between the policymakers’ rethoric and the actual outrun. Between 2003 and 2006, Irish primariy surpluses rose from 1.1% to 3.4%. Over the same period of time, real GDP grew by 21.8%, while real primary public spending rose 27%.

Sunday, June 28, 2009

Economics: 28/06/2009: Consumer spending and ECB rescue

Two things worth noticing this week: both relating to longer running developments in the economy, and both not discussed widely enough in the past.

First, the issue of consumer spending in light of unemployment data from QNHS. As I highlighted earlier, it is the younger workers who are being laid off in droves. This, of course, puts pressure on spending power, as highlighted by several other economists and commentators. Doh! Younger workers save less and spend more out of their income. Layoffs are an immediate hit to their consumption. More ominously - and less discussed in the media and by analysts - young workers save for two reasons: car purchases and home purchases. That is when they are not scared sock-less with the prospect of unemployment (traditional precautionary savings motive) and by the threat of the older generations ripping them off via higher taxation (unorthodox exclusionary savings motive - piling up of savings to offset future loss of voting power and access to career growth due to unfair competition from established and entrenched older generations: this is my own theory of savings contribution, by the way).

In Ireland's case, precautionary savings motive will always be stronger for younger workers - courtesy of the bearded men of SIPTU/ICTU crowd who routinely betray younger workers in their quest for tenure-based job security and pay awards. Public sector leads here too, as many more temporary and fixed-term contract employees in the public sector are the younger one. Guess who will lose their jobs once Minister Lenihan takes to cuts in the public sector?

But the exclusionary savings motive is a new one for Ireland and it is the most venal of them all. Up until recently, Irish younger workers were virtually outside the effective tax net, courtesy of larger transfers and smaller wages. Next Budget will see their incomes decimated in order to pay lavish public sector wages. In the society that is much younger demographically than our fellow Eurozone travellers, our younger workers will, therefore, lose not only money, but also political power. This process is fully a result of perverse Social Partnership arrangement that has predominant concentration of power in the hands of the ageing public sector employees representatives and business groups aligned with public sector monopolies (also dominated by older workforce).

While precautionary savings effects are themselves long-lasting - hard to reverse and 'sticky' over time, the effects of exclusionary savings motive are even longer-term, depressing consumption and investment over much longer time horizon, as loss of power in the society cannot be rectified over business cycles and will have to wait for political cycles to play out. Ireland is going to pay for this 'socialism for the geezers' of our Labour Party, FF, ICTU/SIPTU/TGWU/CPSU etc for many years to come through:
  • lower innovation in consumption (with young people withdrawing from actively leading the new products/services adoption process);
  • lower general consumption (with young people and their families clawing back on consumption);
  • lower investment in productive capital (with younger people looking increasingly abroad for jobs and life-cycle investments);
  • lower entrepreneurial activity in traded sectors (with younger people preferring the perceived safety of the public sector to risky business of entrepreneurship);
  • lower overall career-cycle risk-taking (with less on the job innovation drive);
  • lower rates of growth both in domestic sectors and exporting sectors;
  • net emigration of the most skilled young in search of societies that politically and socially empower their youth, instead of turning them into taxation milk cows for the elderly bureaucrats;
  • lower rates of economic growth (per bullet points above).
In short, Ireland is now at a risk of becoming like geriatrically challenged Germany, courtesy of Cowen & Co.

Second, there is an interesting issue of ECB rescue for Ireland. My IMF sources told me that they fully anticipate to put in place an IMF team to monitor developments in Ireland as they expect, over the course of 2009-2010 a serious deterioration in Ireland's fiscal position and a renewed risks to the bond market. But the more interesting comment came on the foot of my questions concerning ongoing ECB rescue of Ireland Inc.

The fact: chart below (courtesy of Davy) shows the ECB lending to Irish institutions.Irish retail clearing banks (AIB, BofI and the rest of the zombie pack) have raked up €39bn worth of ECB lending, up from around €2bn a year ago. Non-clearing foreign banks have declined in their demand for ECB dosh. Mortgage lenders (ca €66bn) and non-clearing domestic financial institutions (€72bn) are by far the biggest ECB junkies.

Here is Davy take on this: "Headline private sector credit is off about 3% from its November peak and, if you extrapolate the trend forward to the end of the year, the year-on-year (yoy) rate could be -6% (+2.4% yoy in April). However, the economy is likely to contract by maybe 8-10% this year in nominal terms, which means credit is going to have to shrink by a lot more if de-gearing is to take place in Ireland. Otherwise, we are really borrowing from future consumption and investment."

All I can add is that we borrow from future growth and investment in order to pay wages to the public sector and welfare bills.

"On the deposit side, the resident number was running at -2.5% yoy in April – an improvement on January’s -4.5%. Our discussions with the banks would suggest that current account balances, which are a great barometer of economic activity, are still declining but not at the rate that they were – so another positive second derivative for us to consider."

I do not care for second derivatives, for, as I pointed out many times before, mathematics imply that as we fall toward zero economic activity, we are approaching the point of total destruction with a decreasing speed. Which is neither important, nor significant of any upcoming upturn. It is simple compounding past falls with smaller rates of decline acceleration.

"Finally, we will also be watching the ECB funding number, particularly the clearing bank figure, to see if it stabilises (see chart) at around €39bn. Dependence on ECB funding shot up in Q1 when Ireland Inc was under funding pressure, but the banks would say that conditions have improved since then albeit the market remains tough. Moreover, some banks are still paying up to get money, so there is a margin impact to be considered. However, the new one-year ECB facility will help ease this a little and give some much-needed duration."

Sure, good news, according to analysts is that we are getting deeper into short-term maturity debt with ECB, then? What's next? Calling on banks executives to replenish banks capital using credit cards? Let's consider this Davy-style 'positive'. Suppose bank A used to take 2-year loans from ECB at a rate R, so borrowing €1 today implied that it had to repay (1+R)^2 in 2011, with associated transactions cost of, say X per issue, the total cost of €1 today to bank A was €(1+R)^2+X. Now, the ECB forces bank A to split the borrowing into 50% into 2-year tranche and 50% into 1-year tranche at rates R1, R2, R3 corresponding to years 1 and 2 one-year rates, plus R3 being an annualized rate of borrowing for 2-year tranche. The issuance cost remains at €X. You have the cost of borrowing €1 now standing at 0.5*[€(1+R3)^2+X]+0.5*[€(1+R1)*(1+R2)+2X]=1.5*X+0.5*[(1+R3)^2+(1+R1)*(1+R2)].

Compare the two costs:
  • if the cost of borrowing does not rise over time, so that R1=R2=R3, then the 1-year lending scheme introduction will cost the banks more than the old 2-year scheme by the amount X;
  • if the cost of borrowing - ECB rates - rise in 2010 by, say Z bps, so that R2=(1+Z)*R1, then a two-year trip will be cheaper relative to the two 1-year trips by a grand total of €[X+Z(R1+R1^2)].
Thus, the idea of 'easing' of borrowing constraints that Davy herald is equivalent to saying 'the banks will be able to borrow more, but at a higher cost'...

"The next big development on the funding side is the issue of guaranteed senior notes beyond the September 2010 deadline, the legislation for which has just gone through the Dáil. With the likes of Bank of Ireland having 75% of its funding under one year, this will help slow down the
liability churn, although it will come with a cost. We might be looking at 350-375bps all in, which will not help margins either. As we discussed in our recent Bank of Ireland research note ("When September comes: autumn rights issue can be a big catalyst", issued June 19th), we do not need credit growth over the next two to three years to make an investment case for the banks. That is just as well as frankly we are going to get the opposite. Margin expansion would be helpful though, and margins will expand eventually. However, with the ECB likely to sit on its hands for a while and the NAMA benefit likely to come through over time rather than in one big bang, we can expect margins to go down before they come back up again."

This talk about extending the guarantee is a mambo-jumbo that is designed to get the banks off the hook of defaulting loans for just a while longer. In reality, there is only one 'investment case' for Irish banks - NAMA transfer of bad debts to the taxpayers. This is precisely why the banks will need no new lending to extract value. Once they dump their non-performing loans into NAMA and get recapitalization money from the Exchequer, the Great White Hold-up of Irish taxpayers will be complete. Any growth upside for the banks shares will, thus, come solely from impoverishing Irish taxpayers.

A strong investment case, indeed, thanks to the ECB turning chicken when it comes to forcing Irish Government and Banks to obey market discipline.

Friday, June 26, 2009

Economics 26/06/09: US Personal Income

US Personal Income increased $167.1bn, (+1.4%), and disposable personal income (DPI) increased $178.1bn, (+1.6%) in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $25.1bn, (+0.3%). In April (revised estimates), personal income increased $78.3bn, or 0.7%, DPI increased $140.0bn, or 1.3%, and PCE increased $1.0bn, or less than 0.1%. But don’t hold your breath for the trumpets of recovery: per BEA “the pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009”.

How big is this ‘in part’? Provisions of the Act reduced personal current taxes and increased government social benefit payments. The ARRA of 2009 provides for one-time payment of $250 to eligible individuals receiving social security, supplemental security income, veterans benefits, and railroad retirement benefits. These benefits boosted the level of personal current transfer receipts by $157.6bn at an annual rate in May.

Excluding these special factors, which are discussed more fully below, DPI increased $20.6bn, or 0.2%, in May, following an increase of $101.3bn, or 0.9%, in April. So things are getting worse not better. Uncle Sam is doing the job (no hope here for Ireland), but any real (non-fiscal stimulus) growth is still way off.

  • Private wage and salary disbursements decreased $12.4bn in May, compared with a decrease of $0.7bn in April = DOWN trend
  • Goods-producing industries' payrolls decreased $12.9bn, compared with a decrease of $12.2bn = DOWN trend;
  • Services-producing industries' payrolls increased $0.5bn, compared with an increase of $11.5 bn = DOWN trend.
  • Government wage and salary disbursements increased $3.9bn, compared with an increase of $5.7bn = DOWN trend.
  • Supplements to wages and salaries increased $3.3bn in May, compared with an increase of $3.9bn in April = DOWN trend.
  • Proprietors' income increased $0.4bn in May, compared with an increase of $3.1bn in April = DOWN trend.
  • Nonfarm proprietors' income decreased $0.2bn, in contrast to an increase of $0.5 bn = DOWN trend.
  • Rental income of persons increased $5.2bn in May, compared with an increase of $4.9bn in April = UP trend.
  • Personal income receipts on assets (personal interest income plus personal dividend income) increased $2.5bn, compared with an increase of $2.6bn = slight DOWN trend.
Good news, Americans are paying less in taxes: Personal current taxes fell $11.1bn in May, compared with a decrease of $61.6bn in April. The Making Work Pay Credit provision of the ARRA of 2009 (allowing a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns) reduced personal current taxes by $49.8bn at an annual rate in both May and April, and $11.2bn in March.

Thus, disposable personal income (DPI) -- personal income less personal current taxes -- increased $178.1bn (+1.6%) in May, compared with an increase of $140.0bn (+1.3%) in April. So here we do have a meaningful improvement.

And that was reflected in personal outlays too. Personal outlays increased $17.9bn in May, in contrast to a decrease of $6.3bn in April. PCE increased $25.1bn compared with an increase of $1.0bn.

Personal saving -- DPI less personal outlays -- was $768.8bn in May, compared with $608.5bn in April. Personal saving as a percentage of disposable personal income was 6.9% in May, compared with 5.6% in April. Precautionary savings motive is still working through American balance sheets, but consumption is sloping up and loans repayments are going on still at a healthy rate. America is saving, deleveraging and getting better, although for now primarily thanks to tax-cutting and stimulus spending Federal Government…

Economics 26/06/2009: EU growth, Planning Permissions & QNHS

Eurocoin is out again and it is time to update our forecasts for Euroarea growth. First a note - Eurocoin have revised their past numbers in line with new methodology.
Note that above I use upper range forecast for July Eurocoin of -0.52 and implied GDP growth forecast of -2.1% for Q2 2009. Lower range forecast for the indicator is -0.91 and for GDP growth of -2.5%. Thus, I see an even chance of renewed deterioration in growth conditions in the Euroarea into mid Summer.

CSO Planning Permissions data Q1 2009: planning permissions were granted for 14,177 dwelling units, compared with 18,582 units for the same period in 2008, a decrease of 23.7%. Planning Permissions were granted for 10,256 houses in Q1 2009 and 13,301 a year earlier, a decrease of 22.9%. Planning permissions were granted for 3,921 apartment units,
compared with 5,281 units for the same period in 2008, down 25.8%. One-off houses accounted for 19.3% of all new dwelling units granted planning permission in this quarter. The total number of planning permissions granted for all developments was 7,486. This compares with 11,055 in Q1 2008, a decrease of 32.3%. Total floor area planned was 3,419 thousand sq. metres in Q1 2009. Of this, 61.1% was for new dwellings, 25.4% for other new constructions and 13.4% for extensions. The total floor area planned decreased by 24.3% in comparison with the same quarter of 2008.

Total annual permissions are down, Q1 permissions trending down as well, especially for dwellings.Total floor area down, but by less.
As average floor area per unit is rising along established trends - delivering value for money is tighter markets?The trend for better quality and smaller quantity is evident, which should improve performance for better builders, but pressure the profit margins. One area of concern is that the authorities are not granting higher density permissions, implying that per existent acre of site, cost of building is up, further reducing margins.
Track homes are not exactly popular, while
one-off houses are even less so. That said - square footage is also rising for one-off dwellings as, presumably, rural Ireland decided to spread out in the recession (those CAP payments are still rolling in?).
No such luck for apartments buyers, but they do have some nicer square footage to go by, as sales stagnated and developers need more goodies for money to close on new units. We can expect Ken 'The Merciless' MacDonald to start writing lengthy articles telling us that NOW IS THE TIME TO BUY one of his apartments, as RETURN OF CAPITAL APPRECIATION IS IMMINENT... Beware of the merchant...

Quarterly National Household Survey was out earlier in the week.

In Q1 2009 there were 1,965,600 persons in employment, an annual decrease of 158,500 or 7.5%. This compares with an annual decrease in employment of 3.9% in Q4 2008 and growth of 1.7% in the year to Q1 2008. There was an annual decrease of 122,200 or 10.2% in the number of men in employment, while the number of women in employment decreased by 36,300 or 3.9%.

The overall employment rate among persons aged 15-64 fell to 63.2%, down from 68.4% in Q1 2008. This brings the employment rate back to a level comparable to that recorded in Q1 1999, thus erasing all the demographic and migration benefits accruing to Ireland in the last 10 years.

Full-time employment decreased by 176,200 over the year, part-time employment increased by 17,700, with 14,700 of the increase attributable to males and 2,900 to females. Recalling that even before the current crisis Ireland was creating predominantly part-time jobs, we are now facing seriously adverse quality of employment conditions in the country.

There were 222,800 persons unemployed in Q1 2009, an increase of 113,400 (+103.7%) in the year. Male unemployment increased by 85,300 (+116.7%), with the number of unemployed females increasing by 28,200 (+77.7%). The seasonally adjusted unemployment rate increased from 8.1% to 10.2% over the quarter and from 4.9% over the year - the highest level since 1997. Seasonally adjusted, the male and female unemployment rates stood at 12.5% and 7.0% respectively. The long-term unemployment rate was 2.2% in Q1 2009 compared to a rate of 1.3% in Q1 2008.

Now, some illustrations:
Employment is folding everywhere, except for personal protection services. wait another few months and a new emergency rip-off Budget, and guarding our unpopular Government will be the boom sector...
Average hours worked down, short-term work up, contractors work down. And in more details:
Bad employment up, good employment down. But public sector is not feeling the heat:

Regionally - all the subsidies to waste, the same black spots of unemployment remain:Border, Midlands, Mid-West and South-East are all bad performers in unemployment terms in the boom days of 2007. Ditto today. A new entry - casualty of the downturn - is the West. Doubtless, there will be calls for new tax on Dublin to pay welfare rolls wages out in our Gateways to Excellence Regions... But look at participation rates:
Collapsing across the state. Note Border and Midlands - dramatic fold down in participation rates - driven by, most likely an exodus of younger workers from Dublin and other areas' construction sites... No wonder I heard Midlands referred to as our Little Poland (Lithuania, etc).

And finally - my favourite topic - demographic dividend...
Note that as of Q1 2009, unemployment rate among 15-19 yo males was 33%! We are indeed wasting our young to protect job security of our public sector middle-aged and elderly...

Thursday, June 25, 2009

Economics 25/06/2009: Unemployment and IMF

While many of you are wondering where is my comment on last night's IMF report, I must ask you for your infinite patience - it is forthcoming in this week's Sunday Times and I will be posting more on the issue over time.

In the meantime, the US Bureau of Economic Analysis (BEA) reports today that the real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 5.5% in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3%.

I can see our strategy to wait for Americans to turn around working... thanks to the Irish Government tough choices on policy side, US GDP contractions are flattening out. Happy times are just around the corner.

Of course, one cannot suggest that the Irish Government is not doing more than just help the Americans in their troubles. Indeed, hat tip to BL, Politics.ie have the following itinerary for our Dear Leader of Offaly, Knight of the Bogs and Lord of the Bord Na Mona Mansions:
  • Brian Cowen attends the official re-opening of Shinrone National School, Birr, Co. Offaly
  • Brian Cowen raises the First Green Flag at Coolderry Central School, Birr, Co. Offaly; and
  • Brian Cowen attends the Official Opening of Isotron Ireland’s new Electron Beam Sterilisation Facility, at Tullamore, Co. Offaly
Of course, Mary Coughlan, the Grand Dame of Diplomatic Etiquette and the Lady of Jobs Announcements Junkets was equally busy jet-setting across the nation to announce jobs:
  • 45 at Boston Scientific plant in Galway (after cutting 240 jobs in Galway last August and as another motor trade company sheds 70 jobs in Galway the same day as Mrs Coughlan arrived there);
  • alongside Gaeltacht Minister Eamon "Gimme More Subsidies" O'Cuiv visiting west Donegal today to assess the damage caused by flash floods (I didn't know the DETE is also responsible for emergency services in this country); but
  • Flooding aside, she did have a chance to pull an unveiling string at the launch in Finnabair Business Park in Dundalk...
All in the day's work for Tanaiste, directly responsible for dealing with our soaring unemployment rate (on the exact day when CSO unveiled the latest unemployment data from QNHS).
Of course, neither Biffalo-Gruffalo, nor Scary-Mary are much of the IMF/Economic Policy men (women), so why not let poor rookie, Brian Lenihan deal with the opposition fire on the issue of yesterday's damming report? Afterall, as the US data shows, things are already getting better (by getting worse at a slightly slower pace than before)... "The heart attack patient has no pulse, Doctor," shouts the nurse. "Excellent, things have bottomed out then," retorts Dr Biffalo, "Pints!"

Wednesday, June 24, 2009

Economics: 24/06/2009: OECD Unemployment stats

OECD's latest unemployment forecast is out for the Euroarea. Two things worth noting:

First, the OECD has gotten Irish unemployment spectacularly wrong (they used QNHS official data that is lagging). Correcting for this, chart below shows the discrepancy delivering up to date numbers. Scary.
Second, even the original chart numbers show Ireland as having the most extreme rise in the Euro area in unemployment. In sheer numbers, Australia, Denmark, Germany, Italy and Sweden all had smaller increases in unemployment than Ireland. Taking into account Live Reg latest numbers, Ireland's 230,000 newly-added unemployed (since December 2007) mean that our unemployment increase was greater than that for Australia and Denmark combined, or Denmark and Italy combined, or Denmark and Sweden combined...

Globally: unemployment in OECD countries is now expected to continue to rise well into 2010, per yesterday’s data from the OECD. The average unemployment rate will be approaching 10%, up from 7.8% in April, according to new projections.

“More than 57 million people will be unemployed in OECD countries by the end of 2010, according to OECD estimates, up from 37.2 million at the end of 2008, when the average unemployment rate was 6.8%. The expected increase will bring OECD-wide unemployment to 9.9% at the end of 2010, its highest level since the 1970s, with an average for the year of 9.8%. Unemployment touched a recent low point of 5.5% in the last quarter of 2007, standing at 31.6 million at the end of that year,” says OECD.

Previous downturns show that the jobs recovery will lag a long way behind the pickup in economic growth.

Tuesday, June 23, 2009

Economics 24/06/2009: Agriculture's Value in Economy

Let the number speak for themselves. Per CSO data release yesterday:
Subsidies as a share of total value of production are creeping up, accounting in 2008 for 31.6% of the entire sector output. Intermediate consumption is also up, made up of various inputs. Net value added is down - the contribution of the sector to this economy through activities actually attributable to production: from 32.3% in 2004 to 13.7% in 2008. Why are we still having a Department of Agriculture in this country if the net and gross value added by this sector is smaller than the net subsidies the sector receives, i.e the sector produces less real value than it takes out of the EU in handouts...

Economics 24/06/2009: SMEs feeling the heat

Yesterday's business conditions survey from ISME paints a picture of dire operating conditions for Irish SMEs.

Q2 2009 survey results "confirm that smaller companies are still in the throes of economic despair with employment levels, investment and sales remaining extremely negative. Despite this harsh environment business optimism has improved for the second quarter running, albeit from historically low levels." The survey was based on 600 companies responses shows both that there is no 'green shoots' improvement and that expectations for 12 months ahead are not offering much hope of an upturn "with companies further readjusting downwards their employment and investment levels."

Business confidence "has improved since the previous quarter with a net 56% of companies less optimistic in comparison to a net 71% in the previous quarter. The most negative sector is Construction with a net 73% less optimistic, followed by Retail at 71%, Distribution (70%), Manufacturing (51%) and Services at 48%." In contrast, "74% of companies, up from 69% in the previous quarter, viewed the current business environment as being either ‘poor’ or ‘very poor’." Only 23% expect business conditions to improve over the next 12 months, up from 16% in Q1 2009. 66% of companies said viability of their businesses was under threat over the next 12 months, if present conditions remain.

Employment conditions continue to deteriorate dramatically:
"Nearly two thirds (62%), (56% in the previous quarter), of companies employing less than this time last year and only 6% employing more. These figures are the worst ever recorded and confirm that there has been no slowing down in job losses in the sector, with evidence suggesting that this trend is to continue over the next number of months. The Construction sector was worst affected with 83% of companies letting people go in comparison to 72% of Distributors, 61% of Retailers and Manufacturers, and 43% of Service firms."

Furthermore, "employment prospects remain bleak with 43% of companies anticipating letting people go over the next 12 months, with only 7% planning to increase employment numbers. Distribution companies are the most pessimistic with a net 52% expecting to let people go, in comparison to 40% in the Construction sector, 35% Retailers, 32% Manufacturers and 28% of service businesses."

Clearly distribution services are feeling the squeeze of higher excise duties, VAT and other consumption damaging taxes and retail sector collapse. Construction sector, despite having bled jobs at the fastest rate of all segments of Irish economy in the past still remains one of the focal points of jobs destruction. Ditto retailers. The spread between these sectors and services is narrow enough signifying that we are indeed heading for the second wave of layoffs in the higher wage sectors.

"Sales continue to fall off a cliff with a net 77% of companies reporting lower sales in comparison to a net 72% in the previous survey. To put this in context there has been an eight fold increase in the number of companies reporting reduced sales in comparison to the same period last year. Only 23% of companies expect to increase sales over the next 12 months. Not surprisingly profit levels are badly affected with a massive 73% of companies anticipating a reduction in net profits, while 61% expect revenues to decline over the next 12 months, down from 69% in the previous quarter."

A massive 81% of companies said their sales/order books are down in comparison to last year. But only 33% of companies reported that their stock levels are down for the year, in comparison to 24% in the previous quarter, suggesting that overcapacity is still plaguing this economy and putting more pressure ahead on employment levels.

Credit crunch is also getting worse: "26% of companies have orders, production capacity and markets unserviced for want of working capital."

And new orders are being pressured by existent orders cancellations (implying even more pressure on employment in the short term) as "54% of companies have encountered cancellation of orders in the last quarter." Interestingly (the level of detail supplied in the survey is remarkable), cancellations were from,
  • Locally Based Multinationals 16%.
  • Export Destinations 7%
  • Local Indigenous Firms 77%
This means only one thing - domestic economy is still in a free fall and exporters are the last line of defense we have left. It is Stalingrad time for Brians & Mary and they are still in denial that the winter has arrived.

SMEs continue to reduce "investment in their businesses with 32% having done so in comparison to 30% in the previous quarter. 19% indicated they increased investment, down from 25% in the previous 3 months. Only 16% of companies anticipate an increase in investment over the next 12 months."

This puts to an end any arguments the Government might have had about aiding the investment cycle through 'knowledge' economy programmes and tax changes they 'introduced' in December 2008. It ain't working, folks.

Although our Government economists are keen on talking about deflation, "firms continue to experience inflationary pressures, with increases of 5% plus being reported for transport, energy, raw materials, Insurance and waste. However, there is evidence of reductions in wage costs and rents." So in the nutshell - the Government and its cronies in the unionised, state-controlled and priced sectors are still ripping-off consumers and producers, while ordinary workers are taking a pay hit.

Finally, "47% of companies apportion blame to the Government for the current economic crisis, with a significant number of SMEs concerned at the lack of direction being provided."

I don't have much to add to this one.