Tuesday, January 8, 2013

8/1/2013: Some Notes on Green Shoots


Here's a summary of my points from tonight's RTE Frontline discussion. Note: these are not exaclty written up as an article, so treat them as working notes.


As a preamble, let's recognise three things:
  1. The current Government did inherit the economy effectively dead on the ground - at the bottom of a massive cliff. Since then, the economy remained largely static and structurally virtually identical to the one in 2010.
  2. The current Government did inherit a policies straight-jacket, breaking out of which would have required a massive amount of courage and leadership.
  3. The current stabilization can lead to an uplift in growth, to 1%-1.5% pa on GDP and under 1% pa on GNP side, but I would not call such a development 'green shoots'.
In my view, two rhetorical or allegorical analogies can be made for the Irish economy today:

One: the economy is a glass-half-full for the few (MNCs & some exporters) and empty for the many (ordinary households and SMEs).

Another: the green shoots we might be seeing in months to come are more likely the shoots from the last years' crops seeds that have failed to germinate in 2010-2011. The field of the Irish economy has not been properly seeded in years now.



Four core problems faced by Ireland going into 2013 are largely the same ones as we faced in 2008-2012 and the same ones the Coalition Government had highlighted in years of opposition:
  1. Fiscal deficit and debt
  2. Banks 
  3. Households debt
  4. Growth and structural reforms

On (1): Fiscal deficits and debt
  • Fact: Debt continues to rise, and is expected to hit (December 19th, 2012 IMF report) 122.5% of our GDP this year. At the end of 2011 it was 106.5% of GDP and thus the current Government has added/adding 16% of GDP or EUR35 billion worth of new debt. Most of this is not banks-related as the bulk of banks recaps took place in 2011.
  • Fact: Primary deficits have been cut significantly: from 5.9% in 2011 to 1.8% in 2013 expected. Yet in 2013 we still will have second highest overall fiscal deficit in the Euro area, possibly - highest, depending on what other countries do. We also have rapidly expanding interest rate bill - the increase in interest charges on the state in 2013 y/y will consume almost 2/3rds of the austerity 'savings' generated in Budget 2013.
  • Fact: The government continued with the programme of, what I call, quick-fix or 'fake' austerity that primarily focused on cuts to capital spending and tax increases, and not on structural reforms. Let's take a look at 2012 - the year when the Government was claiming to have been focusing on growth. Net Voted Capital spending was cut 19% - an overshoot on targets by 4%. Net Voted Current spending was not cut, but actually rose 0.1% y/y or 1.6% above the target the Government set in April 2012! That's a rate of overshooting of what ca 2.4% for the full year.
  • So the Government has delivered so far: higher debt and higher current spending, higher taxes, higher charges, lower capital spending and, thus, lower investment and jobs.

On (2) and (3): Banks and Household Debt
  • Fact: Lending by the banks continued to contract in 2012. Loans to private sector in Ireland, within covered banking instituions have declined on aggregate by over 4.3% in 12 months through November 2012. Rate of decline in loans to Irish households in July-November 2012 never once slowed below 3.6% and since this Government came to power, household loans are down 19% in total, mortgages down 20%, consumer credit 22%. All three continued to decline m/m in November 2012.
  • Fact: Deposits have stabilised and expanded by 2.6% in November 2012 y/y, but the fabled 'savings' glut the Government so much decries has not translated in real pay downs of Irish households' debts. We still have the most indebted households in the euro area. In fact, IMF has highlighted that for the Government in their recent report and yet there is little movement on dealing with this problem.
  • Fact: Banks are overcapitalised and zombified and the Government has no control over their internal practices or operations. Thus, mortgages rates are going up on ARMs and unsecured credit costs are rising in massive jumps despite the claims of 'improved funding outlook' and ECB continued liquidity supports. 
  • Fact: Banks were given yet another 'trump card' at the expense of the country, by the Government, the veto power in the new Personal Insolvencies Regime
  • Fact: the IMF has warned very clearly in its December statement that Irish banks remain source of risk in light of mortgages crisis. 
  • That mortgages crisis, may I remind the Government, is accelerating once again, even before the fig leafing of the 'Insolvencies Reforms': in Q3 2012 we had over 181,000 mortgages at risk of default of defaulted - up 6.5% q/q and 22% y/y. When this Government came to power there were 131,000 mortgages at risk of default or defaulted. This Government's 'repairing of the banks' has contributed to adding some 50,000 to these.
  • The debt crisis in Irish homes is now out of control and all we hear from this Government is the promise of the Insolvencies Regime reforms that will provide no support for troubled homeowners, property tax on negative equity homes, more semi-states price hikes on homeowners and householders, plus 'My Hands are Tied' when it comes to dealing with the banks from the Ministers in charge of this economy.

On (4): Growth:
  • The Government puts forward two core figures identifying its recent achievements: lower unemployment and positive growth. Both are - at best - glass half-full.
  • In 2011 GDP went up 1.4%, but GNP contracted 2.5%. In 2012, we can expect GDP to increase by around 0.4% and GNP to shrink once again by ca 0.5% (IMF data). 
  • Since the Government came to power, GDP in this country has grown so far by ca 1.8% cumulatively, and GNP shrunk by ca 3%. The economy is flat on the ground and showing no real signs of a robust recovery. It is not contracting outright, but given the gravity of the fall, this 'stabilisation' is a poor showing.
  • Unemployment: official QNHS data for Q3 2012 shows that unemployment declined 0.2% (-3,600) on Q3 2011. But the number of people in the labour force has fallen -7,900 - more than double the rate of unemployment decline.  Live Register shows decline (December 2012 on 2011) of - 11,051 signees, yet almost half of these declines can be accounted for by people engaged in State-run Training Programmes. Based on exits from the workforce in Q3 2012, this suggests that the Live Register drop in 12months through December 2012 can be accounted for by people running out of benefits and joining State training programmes. In other words, jobs creation is not doing anything to add net new jobs in this economy. 
  • Since Q2 2011, when the Government took office, numbers of people in employment declined 20,000, in full-time employment - dropped by 29,000.
  • Quoting from the CSO: "The number of persons employed decreased by 0.2% (-4,300) over the year to Q3 2012. This compares with an annual decrease in employment of 1.3% in the previous quarter and a decrease of 2.1% in the year to Q3 2011. The annual rate of decrease of 0.2% in the year to Q3 2012 is the lowest since employment first decreased on an annual basis in the third quarter of 2008." Glass half-full if you kept your job, empty if you lost one or are looking for one.
  • The retail sector continues to struggle. Headline figure today for November sales is a decline of 0.2% in the value of all sales, y/y and a decline of 0.5% in the volume. This at least partially controls for the uncertainty of Budget 2013, as it compares sales to the period of uncertainty about Budget 2012.
  • Note: Minister Rabbitte made a reference to the m/m decline in sales of TV equipment as the core driver of declines in retail sales in November. This is simply 1% of the truth. In y/y terms, largest drops in sales were in Motor Trades (-4.5% in value & volume), Furniture and Lighting (-9.0% and -4.5% in value and volume), Books, Newspapers and Stationery (-8% and -9%) and Other Retail Sales (-8.3% and -7.1%). Seven out of 13 categories of sales posted declines in value of sales, y/y and nine in volume.

On Structural Reforms:
  • We need reforms of charges and fees in professional services, as well as in semi-states' controlled costs (energy, health insurance, education, transport, etc) - none were enacted so far by this Government to-date.
  • We need reforms of local authorities to reduce rates on businesses and to improve value-for-money - only minor, unambitious approach was taken so far by the Government, aside from creation of (for now) centralized 'local' property tax. Again - revenue measures were put ahead of structural reforms.
  • We need reforms of the Government services - reflected not on the capital side or revenue sides of the budget but in current spending - little done so far, short of slash-and-burn through the easier cohorts of employees (part-timers, contractors) and the continued loading of costs onto the shoulders of services users (the largest component of so-called 'cuts').
  • We need reforms to boost our institutional competitiveness - outside semi-states and public services, in areas such as taxation system, entrepreneurial supports (including tax policies), international trade, visa regimes, mobility of residents who are non-EU nationals (especially within professional grades, where such mobility is critical to their productivity), etc. Nothing, or even the opposite of the reforms is being done by the Government.
  • We need reforms of personal insolvencies regime to help homeowners and to stop the cancer of debt spreading uncontained. Very little is being done on this front by the Government.
  • We need political reforms to create an environment where policies are created not in a near-vacuum of the Ministerial Panels or Super-Groups, but in the open, with real debates, real testing by the Dail and the public, transparently and beyond the whip system constraints.
I am going to be brief on the outlook for 2013-2015. If we do the above, and do it well, we shall see a robust, sustainable recovery, starting with mid- or late-2013 and gaining momentum into 2015, with potential rates of growth at around 2.5% in 2014 rising to 3.5+% in 2015. If we have also positive global recovery environment to aid us, there is no reason why growth of 5%+ in 2015 should be off-limit. 
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