Showing posts with label Earnings. Show all posts
Showing posts with label Earnings. Show all posts

Tuesday, February 25, 2020

25/2/2020: No, 2019-nCov did not push forward PE ratios to 2002 levels


Markets are having a conniption these days and coronavirus is all the rage in the news flow.  Here is the 5 days chart for the major indices:

And it sure does look like a massive selloff.

Still, hysteria aside, no one is considering the simple fact: the markets have been so irrationally priced for months now, that even with the earnings being superficially inflated on per share basis by the years of rampant buybacks and non-GAAP artistry, the PE ratios are screaming 'bubble' from any angle you look at them.

Here is the Factset latest 20 years comparative chart for forward PEs:


You really don't need a PhD in Balck Swannery Studies to get the idea: we are trending at the levels last seen in 1H 2002. Every sector, save for energy and healthcare, is now in above 20 year average territory.  Factset folks say it as it is: "One year prior (February 20, 2019), the forward 12-month P/E ratio was 16.2. Over the following 12 months (February 20, 2019 to February 19, 2020), the price of the S&P 500 increased by 21.6%, while the forward 12-month EPS estimate increased by 4.1%. Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio over the past 12 months."

So, about that 'Dow is 5.8% down in just five days' panic: the real Black Swan is that it takes a coronavirus to point to the absurdity of our markets expectations.

Thursday, July 18, 2019

17/9/19: Flight from Fundamentals is Flight from Quality: Corporate Risk


Great chart via @jessefelder highlighting the extent to which the bond markets are getting seriously divorced from the normal 'fundamentals' of corporate finance:



Corporate debt has expanded at roughly x2 the rate of growth of corporate earnings since the start of this decade. And corporate bond yields are persistently heading South (see: https://trueeconomics.blogspot.com/2019/07/16719-corporate-yields-are-heading.html) and investment for growth is falling (see: https://trueeconomics.blogspot.com/2019/07/7719-investment-for-growth-is-at-record.html). Which continues to put more and more pressure on corporate valuations. As a friend recently remarked, at 2% interest rates, the game will be over. It might be over at 2% or 3% or 1.5%... take your number pick with a pinch of sarcasm... but one thing is certain, earnings no longer sustain markets valuations, real corporate investment no longer sustains financialized investment models, and economy no longer sustain real, broadly-based growth. Something must give.

Tuesday, May 14, 2019

14/5/19: Trump's Trade Wars and Global Growth Slowdown Put Pressure on Corporate Earnings


The combined impacts of rising dollar strength, reduced growth momentum in the global economy and President Trump's trade wars are driving down earnings growth across S&P500 companies with double-digit drop in earnings of companies with more global (>50% of sales outside the U.S.) as opposed to domestic (<50 exposures.="" of="" p="" sales="" the="" u.s.="" within="">
Per Factset data, released May 13, "The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for the S&P 500 for Q1 2019 is -0.5%. For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 6.2%. For companies that generate less than 50% of sales inside the U.S., the blended earnings decline is -12.8%."


Tuesday, May 15, 2018

15/5/18: S&P500 Earnings Diversification: International Trading Pays


An intersting (and occasionally covered on this blog) chart via FactSet on earnings and revenue growth for S&P500 constituents based on their exposures to international markets:


As the above clearly shows, globally diversified (by source of activity) companies have stronger growth in earnings and aggregate earnings. Not surprising, in general, but given the relative strength of the U.S. growth, compared to other regions' dynamics, this shows the value of income diversification.

Tuesday, September 13, 2016

13/9/16: U.S. business investment slump: oil spoil?


Credit Suisse The Financialist recently asked a very important question: How low can U.S. business investment go? The question is really about the core drivers of the U.S. recovery post-GFC.

As The Financialist notes: “Over the last 50 years, there has usually been just one reason that businesses have slashed investment levels for prolonged periods of time—because the economy was down in the dumps.”

There is a handy chart to show this much.


“Not this time”, chimes The Financialist. In fact, “Private, nonresidential fixed investment fell 1.3 percent in real terms over the previous year in the second quarter of 2016, the third consecutive quarterly decline.” This the second time over the last 50 years that this has happened without there being an ongoing recession in the U.S.

Per Credit Suisse, the entire problem is down to oil-linked investment. And in part they are right. Latest figures reported by Bloomberg suggest that oil majors are set to slash USD1 trillion from global investment and spending on exploration and development. This is spread over 6 years: 2015-2020. So, on average, we are looking at roughly USD160 bn in capex and associated expenditure cuts globally, per annum. Roughly 2/3rds of this is down to cuts by the U.S. companies, and roughly 2/3rds of the balance is capex (as opposed to spending). Which brings potential cuts to investment by U.S. firms to around USD70 billion per annum at the upper envelope of estimates.

Incidentally, similar number of impact from oil price slump can be glimpsed from the fact that over 2010-2015, oil companies have issued USD1.2 trillion in debt, most of which is used for funding multi annual investment allocations.

Wait, that is hardly a massively significant number.

Worse, consider shaded areas marking recessions. Notice the ratio of trough to peak recoveries in investment in previous recessions. The average for pre-2007 episode is a 1:3 ratio (per one unit recovery, 3 units growth post-recovery). In the current episode it was (at the peak of the recovery) 1:0.6. Worse yet, notice that in all previous recoveries, save for dot.com bubble crisis and most recent Global Financial Crisis, recoveries ended up over-shooting pre-recession level of y/y growth in capex.

Another thing to worry about for 'oil's the devil' school of thought on corporate investment slowdown: slump in oil-related investment should be creating opportunities for investment elsewhere. One example: Norway, where property investments are offsetting fully decline in oil and gas related investment. When oil price drops, consumers and companies enjoy reallocation of resources and purchasing power generated from energy cost savings to other areas of demand and investment. Yet, few analysts can explain why contraction in oil price (and associated drop in oil-related investment) is not fuelling investment boom anywhere else in the economy.

To me, the reason is simple. Investing companies need three key factors to undertake capex:
1) Surplus demand compared to supply;
2) Technological capacity for investment; and
3) Policy and financial environment that is conducive to repatriation of returns from investment.

And guess what, they have none of these in the U.S.

Surplus demand creates pressure factor for investment, as firms face rapidly increasing demand with stable or slowly rising capacity to supply this demand. That is what happens in a normal recovery from a crisis. Unfortunately, we are not in a normal recovery. Consumer and corporate demand are being held down by slow growth in incomes, significant legacy debt burdens on household and corporate balance sheets, and demographics. Amplified sense of post-crisis vulnerability is also contributing to elevated levels of precautionary savings. So there is surplus supply capacity out there and not surplus demand. Which means that firms need less investment and more improvement in existent capital management / utilisation.

Technologically, we are not delivering a hell of a lot of new capacity for investment. Promising future technologies: AI-enabled robotics, 3-D printing, etc are still emerging and are yet to become a full mainstream. These are high risk technologies that are not exactly suited for taking over large scale capex budgets, yet.

Finally, fiscal, monetary and regulatory policies uncertainty is a huge headache across a range of sectors today. And we can add political uncertainty to that too. Take monetary uncertainty alone. We do not know 3-year to 5-year path for U.S. interest rates (policy rates, let alone market rates). Which means we have no decent visibility on the cost of capital forward. And we have a huge legacy debt load sitting across U.S. corporate balance sheets. So current debt levels have unknown forward costs, and future investment levels have unknown forward costs.

Just a few days ago I posted on the latest data involving U.S. corporate earnings (http://trueeconomics.blogspot.com/2016/09/7916-dont-tell-cheerleaders-us.html) - the headline says it all: the U.S. corporate environment is getting sicker and sicker by quarter.

Why would anyone invest in this environment? Even if oil is and energy are vastly cheaper than they were before and interest rates vastly lower...

Wednesday, September 7, 2016

7/9/16: Don't Tell the Cheerleaders: U.S. Corporates Are Getting Sicker


Some at the U.S. Fed think the U.S. economy is in a rude health (http://www.cnbc.com/2016/09/06/federal-reserve-interest-rate-outllok-williams-wants-hike-as-us-economy-in-good-shape.html), and others in the financial world think the U.S. corporates are doing just fine (http://www.wsj.com/articles/u-s-corporate-profits-rise-as-gdp-ticks-down-to-1-1-1472214856). But the reality is different.

In fact, U.S. companies are bleeding cash like there is no tomorrow (http://www.bloomberg.com/news/articles/2016-09-06/buyback-addiction-getting-costly-for-s-p-500-ceos-burning-cash) and they are doing so not to support capex or investment, but to support share prices.
Source: Bloomberg

And earnings are down:

Meanwhile, earnings per share are falling (and not only in the U.S.), as noted here: http://trueeconomics.blogspot.com/2016/09/4916-earnings-per-share.html


And here is 12 ko Forward P/E ratio for the U.S. on 12mo MA basis:
iSource: FactSet https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_9.2.16

And it gets worse on a trailing basis

So, quite obviously, things are really going swimmingly in the U.S. economy... as long as you don't  look at the production / supply side of it and focus on 'real' indicators like jobs creation (unadjusted for productivity and quality) or student loans (unadjusted for risk of default) or home sales (pending or new, of course, but not existing). Which should be helped marvelously by a Fed hike, because in a credit-based economy, sucking out fuel vapours from an empty tank is undoubtedly a great prescription for sustaining forward growth.

Wednesday, May 18, 2016

17/5/16: US Earnings Recession: Four Quarters Long... but How Much Longer?


Recently, I have been highlighting in my Risk & Resilience course for MBAs at MIIS and on this blog the perils of corporate earnings gaming, including the rather worrying trend toward companies posting negative net cash flows (basically using debt to fund shares repurchases).

Here are two of my lecture slides from two weeks ago:


And to add to the pile of evidence, as 1Q 16 earnings rolled in, the numbers were coming in at a frankly put brutal squeeze: we had the fourth consecutive quarter for the S&P 500 earnings running in the red, with 1Q 16 decline being the steepest since 2008-2009 at 6.3%:


However, some interesting insight on the matter of forward earnings guidance was recently published by the Deutsche Bank Research and here is a link to the article discussing it: http://www.valuewalk.com/2016/05/earnings-q1-marks-darkest-hour-just-dawn-says-db/.

Yes, DB's model for earnings for S&P500 is an interesting one. No, without seeing actual standard econometric tests, I can't tell if it makes any sense in reality or not (just because it has high R-sq means diddly nada without knowing how the residuals behave). And no, I am not sure I am buying the idea of 'all factors in favour' arguments presented by DB Research. I am, however, pretty certain that probabilistically a bet should be for more moderate earnings performance in 2Q compared to 1Q, which of course will prompt DB Research lads cheering confirmation of their own model. So I am skeptical, but... still, the article is worth a read.

Monday, May 16, 2016

16/5/16: Earnings Surprises and Share Price Impact


A very interesting summary graph from Factset on the impact of earnings performance relative to consensus expectations on share prices

In basic terms, upside to consensus is systemically rewarded, while downside impact decays over time. The chart reflects 5 years worth of data, so capturing the period of declining earnings, where positive surprises should naturally be priced at a premium. The question the data above raises is whether coincident or subsequent shares repurchases provide support to the upside for underperforming firms and/or for outperforming firms.

Remember, recent McKinsey research showed that deviations from consensus forecast do not matter that much when it comes to underwriting longer term returns:




Sunday, May 15, 2016

15/5/16: Gamable EPS and Shares Buybacks


EPS (Earnings per Share) is a corporate metric that is often pursued by the corporate managers and executives to increase their own payouts, and confused by investors for a signal of company health. As is well known (and we show this in our Risk & Resilience course), EPS is a 'gamable' metric - in other words, it can be easily manipulated by companies often at the expense of actual balance sheet quality.

And I have written about this problem here on the blog for ages now.

So here is a fresh chart from the Deutsche Bank Research (via @bySamRo) detailing shares buybacks (repurchases) contribution to EPS growth:


In basic terms, there is no organic EPS growth (from net income) over the last 7 quarters on average and there is negative EPS growth from organic sources over the last 4 consecutive quarters.

As noted in my lecture on the subject of 'EPS gaming', there are some market-structure reasons for this development (basically, rise of tech-based services in the economy):

Source of data: McKinsey
Source: McKinsey

However, as the chart above shows, shares buybacks simply do not add any value to the total returns to the shareholders (TRS) and that is before we consider shift in current buybacks trends toward debt funded repurchases. So, in a sense, current buybacks are rising leverage risks without increasing TRS. Which is brutally ugly for companies' balance sheets and, given debt covenants, is also bad news for future capex funding capacity.

Thursday, April 28, 2016

27/4/16: The Debt Crisis: It Hasn't Gone Away


That thing we had back in 2007-2011? We used to call it a Global Financial Crisis or a Great Recession... but just as with other descriptors favoured by the status quo 'powers to decide' - these two titles were nothing but a way of obscuring the ugly underlying reality of the global economy mired in a debt crisis.

And just as the Great Recession and the Global Financial Crisis have officially receded into the cozy comforters of history, the Debt Crisis kept going on.

Hence, we have arrived:

Source: http://www.zerohedge.com/news/2016-04-27/debt-growing-faster-cash-flow-most-record

U.S. corporate debt is going up, just as operating cashflows are going down. And so leverage risk - the very same thing that demolished the global markets back in 2007-2008 - is going up because debt is going up faster than equity now:

As ZeroHedge article correctly notes, all we need to bust this bubble is a robust hike in cost of servicing this debt. This may come courtesy of the Central Banks. Or it might come courtesy of the markets (banks & bonds repricing). Or it might come courtesy of both, in which case: the base rate rises, the margin rises and debt servicing costs go up on the double.

Tuesday, November 25, 2014

25/11/2014: Irish Recovery: A Dreamland of Falling Wages & Rising Work Hours




More fantastic news from our 'labour cost competitiveness' fairytale economy: average weekly earnings fell 0.8% y/y to EUR671.70 in Q3 2014, just as the economy continued to recover from the blistering growth of Q2 2014.

Revised figures for the sustainably booming Q2 2014 showed earnings falling to EUR684.97 in Q2 2014 - a decrease of 1.5% y/y.

Table to summarise the latest data:


  • Average hourly earnings fell 1.4% y/y in Q3 2014. 
  • Average hours worked rose 0.6% (normally a good sign), which meant that people worked more for less. 
  • Hence average weekly earnings fell. Cheers must be heard at the IBEC and across Official Ireland as that meant the labour costs have shrunk. 
  • Except, while average hourly earnings fell 1.4% (-EUR0.29) y/y, average hourly labour costs fell only 1.1% (-EUR0.26) so workers got poorer more than economy got 'competitive'. Oh dear… beggar thy people economics at work.

CSO notes that "average weekly earnings increased in 6 of the 13 sectors in year to Q3 2014". By converse this means average weekly earnings did not increase in 7 of the 13 sectors. Kind of looks gloomy, doesn't it?

So I must get more positive on the news front. Good news is that "the largest percentage increase in the Industry sector (+3.4%) from EUR805.44 to EUR832.59. The largest percentage sectoral decrease was recorded in the Professional, scientific and technical activities sector which saw weekly earning fall from EUR792.27 to EUR750.35 (-5.3%)."

Now, wait… that last bit is somewhat puzzling if we are to assume we are operating an exports-intensive smart knowledge economy backed by 'best employment creation' by the MNCs.

Ah, never mind… here's the summary:



Over the longer range, "average hourly total labour costs decreased by 1.9% over the four years to Q3 2014 from EUR24.72 to EUR24.26 per hour. The percentage changes across the sectors ranged from -10.8% in the Education sector (from EUR40.66 to EUR36.28) to +7.6% in the Information and communication sector (from EUR31.51 to EUR33.90)."

All of which should make us only more competitive as the 'labour costs mean everything' economy, and less attractive to anyone with marketable skills. Now, lets hope companies will pick up investment on foot of all these 'savings' because it is hard for me to see how on earth these figures can be supportive of any growth in household consumption and investment.

And, of course, the above figures fly in the face of claims of robust jobs growth and rapidly declining unemployment. Just as they fly in the face of the claims that our economic growth is driven by knowledge-intensive R&D-rich innovation economy.

Thursday, May 29, 2014

29/5/2014: Earnings in Ireland: Something's Fishy in that Murky Water?..


Average weekly hours and earnings were released by CSO this week, covering Q1 2014 data. Remember, these are delivered in the context of reportedly growing employment and accelerating economic activity, right?

Ok, top-line observations: y/y average weekly earnings are down 0.4% or EUR2.66/week (EUR138.32 per annum, assuming paid holidays and not adjusting for working hours etc, but you get the point: in 2013 a person earning average weekly earnings level of salary would have had EUR2,346 per month in disposable after-tax income, in 2014 they have EUR2,341 per month).


Worse than that, the decline in weekly earnings was driven by a drop in average hourly earnings (down 0.5% y/y) against flat hours worked (31.2 hours/week on average). In other words, we are creating jobs in tens of thousands, but seemingly there is no pressure on hours worked and there is downward pressure on hourly earnings.

Were these changes down to cuts in bonuses, perhaps?

Well, no: excluding irregular earnings, average hourly earnings fell 0.6% y/y. So if you work in a job where bonuses are not present, congratulations, the economic recovery is biting into your earnings even more. It is worth noting that this trend is not uniform in the economy: private sector hourly earnings rose 0.6% but public sector earnings fell 2.5% year on year. And steepest increases in earnings took place in enterprises with less than 50 employees (+2.3% y/y), while steepest declines took place in enterprises with 50-250 employees (-2.9% y/y). Large enterprises saw average hourly earnings excluding irregular earnings fall 1.6%.

So short term falls in earnings are down to public sector and larger enterprises...

Of course, earnings can be volatile even y/y, so here is a handy comparative for earnings changes on Q1 2010:

Per CSO: "Across the economic sectors average weekly earnings increased in 7 of the 13 sectors in the year to Q1 2014, with the largest percentage increase in the Construction sector (+10.2%) from €639.35 to €704.41.  The largest percentage sectoral decrease in weekly earnings was recorded in the Education sector (-2.7%) from €814.12 to €792.03. Between Q1 2010 and Q1 2014 average weekly earnings across individual sectors show changes ranging between -6.3% for the Education sector from €845.59 to €792.03 and +13.6% for the Information and communication sector from €915.94 to €1,040.10"

Still, Public Admin & Defence are down just 0.1% on Q1 2010... shrinking Industry is doing swimmingly, as does Finance & Insurance & Real Estate...

On last bit: average working hours were unchanged y/y in private sector, but up 2.3% in public sector. Which is worrisome - rising employment in private sector should lift hours ahead of numbers employed, by all possible logic, since hiring more workers is costlier than letting those employed work longer hours for the same or even higher pay. Still, hours are static y/y, and are up by only 0.1 hour on Q1 2010... Puzzling... Worse: working hours are unchanged y/y and down on Q1 2010 for smaller firms, where wages pressures seem to be highest.

This simply does not gel well with the numbers of tens of thousands of new employees, unless, of course, new employees are working fewer and fewer hours...

Tuesday, February 18, 2014

18/2/2014: Wages and Employment: Irish labour market plight


This is an unedited version of my Sunday Times column from February 9, 2014.


In recent months, Irish Government has gone into an overdrive, producing various reports, scorecards and papers on the Irish economy. Much of this activity is a welcome sign that various Departments are starting at last to engage with the world beyond the halls of civil service and political establishment.

The most recent report card on the Irish economy, courtesy of the Department of Finance, presents an interesting read. The document provides an insight into Official Ireland's view of the future, with forecasts covering 2015-2018 medium-term priorities for the Government, including: managing public finances, focusing on jobs, and restructuring the financial system.

To those of us inhabiting the real economy, removed from the MNCs and Government finances, of key importance here are the objectives of "reviving domestic demand" and "increasing employment". The Department’s overarching framework for achieving economic growth in the economy rests on the assumption that over 2014-2016, both total domestic demand (sum of public and private consumption of goods and services and investment) and exports will be positive contributors to growth. In fact, domestic demand is forecast to add, on average, 1.2 percentage points to economic growth annually, accounting for more than half of the GDP expansion in 2014 and 2015 and over 40 percent of growth in 2016.

The Department of Finance vision of the future is a positive one, especially for the financially battered Irish households. Alas, it also reflects some potential contradictions – a sign of the overall dilemma inherent in our economy’s structure. For all the talk about recovery and regaining of our economic independence, Ireland is still facing years of dealing with the debt crisis as well as sustained fiscal austerity. Growing out of this predicament can only be achieved by pushing up exports. But this, in turn, requires moderation in production costs and, thus, suppression of domestic demand. As the 1990s showed, you can’t have both, growth in exports and growth in the domestic economy, until we erase the debt overhang.


By definition, increases in domestic demand can only come from either public or households' consumption and investment uplifts or both.

Growth in Government spending on both current and capital goods and services is not on the cards. In 2014 and 2015 Irish fiscal tightening will continue to reduce domestic demand. In particular, fiscal consolidation, as planned, will take 1.8 percent of GDP in 2014 and 1.1 percent of GDP in 2015. Thereafter, we are still set to face the so-called 'preventative arm' of the EU’s Stability and Growth Pact (SGP). Under the 2011 Six-Pack legislation amending the SGP, a number of fiscal rules will apply to Ireland, including the requirement to continue reducing structural imbalances by at least 0.5 of GDP per annum, plus the debt break mechanism designed to draw debt to GDP ratio down toward 60 percent benchmark over time.

Which means the households are expected to fund the fiscal adjustments in 2014-2015, and fiscal maintenance in 2016 and beyond. All while delevaraging own debts and paying for the banks deleveraging their loan books, without dipping into deposits which will have to remain high to sustain core banking sector performance metrics.

Meanwhile, the Department of Finance forecasts that Ireland's unit labour costs adjustments over 2008-2015 will total 21 percent, relative to the Eurozone average. This projection, turn, underwrites the forecast growth in our exports.

Just how the households of Ireland can be expected to deliver on all of this is anyone's guess. An even bigger guess is required to explain as to how all of the above financial pressures on Irish households can be dealt with while increasing private investment and consumption, e.g. growing domestic demand.


The answer to the above questions rests with the outlook for the labour markets and wages.

In 2013, Irish economy seen the return of growth in employment - the only significant bright spark on otherwise bleak economic horizon. Based on the latest data we have, in 12 months through September 2013, numbers in employment rose in all sectors in Ireland, with exception of Transport and storage, Administrative and support services, Public administration, and Health and social work. Non-agricultural employment rose by 33,000 and the bulk of new employment was generated in the jobs with 35 and higher average weekly paid hours. In fact, in Q3 2013 compared to Q3 2012, the number of people in employment more than 35 hours per week rose 52,500.

This means that employment growth is now beginning to support domestic demand growth.

The problem is that this support is coming off extremely low levels. Between 2008 and 2013, number of jobs with weekly work hours in excess of 35 hours has fallen 242,500. And gains in employment so far are still fragile. At current rates of growth, it will take us some 13 years to get back to the same levels of full-time employment. Of all sectors, only three are currently registering larger number of jobs than in 2007-2008 period: Accommodation and food, Information and communication, and Health.

And the latest Live Register figures released this week show that controlling for State Training Programmes participation, declines in the numbers on the Live Register remained rather static over the last 4 months.

With employment rising off low levels the other source for growth in domestic demand can be found in earnings. And, aptly, in recent months, there has been resurgence in political chatter about the need to raise wages.

In part, these calls are driven by wages dynamics during the crisis. As of the end of September 2013, average weekly earnings in Ireland were down across all sectors by EUR16.40 compared to the same period in 2012 and down EUR31.37 compared to 2008 average. However, earnings were up significantly in Information and communication: rising EUR40.28 per week on Q3 2012 and up EUR64.28 on 2008 levels. This is a sector with employment that is predominantly capturing foreign workers into new jobs. In turn, these workers have only tenuous connection to the domestic economy: they rarely invest in Ireland, do not save here and are more likely to spend money abroad than the long-term residents. In almost all sectors of the economy linked more directly to Irish resident workforce, earnings are still declining.

So employment might be growing, but wages are declining or stagnant. Which does not bode well for household incomes and, in return, for domestic demand growth story.

More importantly, earnings deflation or stagnation must continue if the Government projections for exports growth were to materialise.

The maths are further stacked up against the theory of domestic demand growth fuelled by wages rises. Given changes to taxes over recent years, a euro increase in wages from current levels for an average household will yield less than 50 cents in the gains in the disposable income. When juxtaposed against the non-discretionary spending, such as funding mortgages, this means that wages increases are not exactly an efficient path to growing domestic demand. Based on Central Bank data, average mortgage in arrears today is EUR190,372. Per CSO, average household income is around EUR61,000pa, once we adjust for unemployment. Which means that at current tax rates, a 1.5 percent increase in income (corresponding to average weekly earnings rising by EUR10.13 on their Q3 2013 levels) is not enough to offset a 0.25 percent rise in mortgage interest.

This week, we have seen the publication of the research paper showing that some 100,000 households in Ireland are unable to pay their mortgages despite having regular income from employment. That is roughly 63 percent of all mortgages in arrears.

Put simply, from economy’s point of view, it is more effective to raise and extend mortgages interest relief than attempt fuelling wages inflation. With ECB’s policy firmly geared toward lower rates, one might be excused thinking that interest rates increases are for now a distant prospect, but in 2013, house loans rates for outstanding mortgages in Ireland went up 0.1 percent compared to the same period in 2012, while rates of outstanding consumer loans were up 0.34 percent. Overall, these increases, suggest that just to keep up with the cost of funding our immense household debt overhang, households need to see wages increases of some 2.2-2.4 percent per annum. Unless you work in ICT, this is not on the books, given supply-demand imbalances in skills and jobs in this economy.

Which leaves us with only one sector where realities of supply and demand have little to do with pay and employment and where wages increases can be imposed by the state: the public sector. This is precisely where pressures to raise wages are currently emerging, driven by political, not economic considerations. With local and European elections approaching, Labour wing of the current Government is trying desperately to force the reversal of their slide in electoral approval ratings. Labour's traditional support base - the Unions - are happy to oblige, in return for concessions of value to their members.

The problem with this, however, is that in order to keep labour costs competitive on the aggregate, wages hikes in the public sector will require more wages ‘moderation’ somewhere else in the economy. Furthermore, with fiscal policy breaks still in the hands of the EU, increases in the lower skilled wages in public sector are likely to benefit incumbent employees at the expense of the newcomers. And if productivity growth in private sectors does not compensate for labour cost increases in public sector, we will be heading for new layoffs, slower jobs creation and, thus, contracting domestic demand.


Our economy is between a rock and a hard place. We are living through the slowly unfolding nightmare of the exports-led recovery – a recovery during which households’ earnings and employment growth are unlikely to reignite domestic economy any time soon. The only way this dilemma of wages vs exports can be resolved is if it is accompanied by a rapid reduction in household debt. But, of course, you won’t find that featuring anywhere in the Official Ireland glossy presentations or in Labour Party’s exhortations about the need for wages growth.



Box-out:
This week, Irish Spirits Association published the latest statistics on our whiskey sector. According to the association data, Ireland had only 4 registered distillers delivering gross value added to the economy of EUR568 million for all spirits produced. This compares against 108 distillers of whiskey alone, pumping out value added of ca EUR3,630 million in Scotland. Total exports in Ireland stood at 6.2 million cases per annum. Scotch exports were fifteen times that number. The figures highlight both a massive potential for Irish whiskey growth and a huge gap between our sector output and that of our next-door neighbours. Looking at the Scottish model, it is clear that Ireland’s decades-old policy of industrialising production in the whiskey sector has failed spectacularly. We need a new policy approach focusing on stimulating independent distilleries, catering to higher value-added premium segment of the market, and delivering rapid innovation with focus on high quality. Marketing efforts of our trade facilitation agencies are not enough.

Thursday, June 20, 2013

20/6/2013: Heroes of our times and earnings...

Latest data on (annual) earnings, to highlight the vast gains in Irish 'competitiveness'

And the heroic folks who earned a 4.2% (second highest) earnings premium are... well... see below:


http://www.cso.ie/en/media/csoie/releasespublications/documents/earnings/2012/earnlabcosts2012.pdf has more on the same...