28/02/2011: Retail sales for January

Headline stuff: the volume of retail sales (i.e. excluding price effects) increased by 4.6% in January 2011 when compared with January 2010 and there was a monthly decrease of 3.8%. Now, wait, that sounds good?

Not really. Let’s take another shot at that statement: volume of retail sales was up 4.6% yoy in January 2011, but it was down 3.8% on December 2010. In fact, it was down for the third month running, having declined 0.6% in November, then 1.9% in December and now 3.8% in January. The rate of decline is accelerating so far. And at a massive speed: x3 times in November-December and at x2 times in December-January. (Mrs G is putting that bubbly back in the fridge right now).

But what about the value of sales? Remember – CSO likes volume indices cause they tell you how much physical stuff was shifted through the stores. But let’s not forget that retail sales jobs and businesses depend not on volume, but on value of stuff being sold. Exactly the same picture here as in the case of volume. Value of retail sales was up 4.0% on January 2010, but it was down for the third month running (-1.5%) in monthly terms.

Let me toss in another factoid here. December sales were extremely poor in 2010, but not so much in 2009. In fact, December 2010 value of sales was down 4.0% on December 2009. So the rush post-Christmas into sales was much shallower in 2010 than in 2011. Hence, the current ‘boom in retail sales’ announced today by CSO is nothing more than a compensatory run onto the post-Christmas sales racks. (Mrs G is now putting away the celebratory bottle of Sprite back into the fridge).

And one more point – the value of sales index has been artificially boosted by rampant price inflation in several categories of sales where prices are state-controlled or subject to commodities price inflation (see below).

Now to updated charts:
You can see what I meant by the spin above and below (notice the divergence of monthly and annual rates of change):
And just in case you want to see it: relative to peak retail sales are still declining
Faster rate of decline in the volume, of course, is due to rising prices (as mentioned above).

Now to ex-motors sales (or core sales):
Ok, now, if Motor Trades are excluded, the volume of retail sales decreased by 1.2% in January 2011 when compared with January 2010, while there was a monthly increase of 2.7%. Value of sales rose mom 2.6% although year on year there was a decline of 1%. Both value and volume of core sales broke two months declines in November and December. And this is good news. Relative to peak, value of sales is now at 82.21% (up from 80.10% in December 2010) and volume of sales is at 86.5% (up from 84.19% in December 2010). Last time value of sales was at this level was in June 2010 and volume – in November.
And take a look at the detailed sub-categories of sales:

• Motor trades - -4.2% in value and -3.5% in volume, so either we are buying cheaper and cheaper cars (in fewer numbers) or prices are falling faster than sales;
• Department stores down 12% in volume (mom) and 12.3% in value - symmetric drop-off as sales prices continued through the month;
• Fuel - volume of sales is up 0.9% mom (down 1.4% yoy), but value of sales is up 2.8% mom and 10.4% yoy - as mentioned above - inflation, folks is biting;
• Non-food business excluding motors, fuel and bars - now, here's the real retail sector story: -0.6% mom and -4.0% yoy in value of sales, and -0.9% mom and -1.5% yoy in volume - deflation and shrinking sales means recession continues.
• Of course, our massive newsflow has boosted Books, Newspapers and Stationery category - +4.9% mom in January in value and +2.7% mom in volume;
• Lastly, in tune with the nation watching Vincent Brown and other current affairs programmes, we've invested heavily in furniture and lightning - up 9.5% mom in value and 9.3% in volume
  

28/02/2011: Ireland v Iceland: Economy, part 2

In the previous post I covered some of the macroeconomic differences between Ireland and Iceland. One core conclusion that can be drawn from the previous post is that while Ireland retains stronger longer-term economic foundations based on historical performance, these foundations are not sufficient for us to achieve better performance than Iceland in the current crisis.

One might wonder what is the reason for this. Let’s recap how both countries have arrived into the current situation.

Both Ireland and Iceland have experienced rapid collapse of their asset markets (in both, there was a property bubble and a general financial services bubble, albeit Iceland had much smaller property sector than Ireland and in another crucial difference, Iceland had IFS bubble, while Ireland experienced a domestic financial services implosion). Hence, both economies started from roughly speaking similar conditions.

The crucial difference between the two can be found in the responses to the crisis. Iceland defaulted on its banks liabilities, writing them off the country economy’s balancesheet. Ireland took the entire banking sector liabilities and loaded it onto the shoulders of its economy.

This story can be traced through the fiscal positions comparatives.
Chart above shows that the two countries have run significantly different fiscal policies through the crisis, with Government revenues deteriorating much more sharply during the early stages of the crisis in Iceland than in Ireland. From the peak of 47.671% in 2007, Iceland’s government revenues fell to 39.447% of GDP in 2010 and are expected to reach the lowest point of 38.464% of GDP in 2011. In the mean time, Ireland’s government revenue fell from 35.83% of GDP in 2007 to 34.423% in 2009 and then rose to 35.362% in 2010. Ex-ante, this suggests that Irish Government balance should be more benign than that of Iceland.

The above conclusion is supported by the data on Government expenditure above. Both countries peaked in terms of their Government spending in 2009 (Iceland at 52.09% of GDP) and 2010 (Ireland at 53.03% of GDP). But in terms of starting points, Iceland was in a much worse shape than Ireland with total expenditure in 2007 at 42.27% of GDP as opposed to Ireland with 35.78%.

However, the ex-ante expected deeper deterioration in fiscal positions for Iceland turns out to be incorrect.

As the chart above clearly shows, Iceland’s public net borrowing requirements were much more benign and are expected to be much shorter lived, than those of Ireland. In 2007 Ireland’s net lending stood at 0.051% of GDP, while Iceland posted a lending surplus of 5.402%. In 2009 Iceland hit the rock bottom in terms of its Government borrowings at 12.644% of GDP. But Ireland kept on going: from the net Government borrowing of 14.613% in 2009, we fell to 17.667% in 2010. By 2015 Iceland is expected to enjoy three years of surplus and its forecast government net lending in 2015 is set at 2.757%. Over the same time, Ireland will remain firmly in net borrower hole, with 2015 net government borrowing expected at 5.153% of GDP.

Much of this gap between Ireland and Iceland is accounted for by the liabilities assumed by the Irish state from its banking sector. Stripping out Government interest bill – again massively overextended by the banking sector rescue funding, primary net lending/deficits of the two governments are shown in the chart below.


Now, let’s take a look at the overall public debt levels. First the IMF data
It does appear that Irish Exchequer, despite having run smaller surpluses in 2004-2007 and despite having suffered much deeper crisis in the banking and own balancesheets is going to end up holding less debt than Iceland. This, however, does not reflect the quasi-Governmental debt, which relates to banks rescue packages and which in Ireland adds to at least 25% of GDP ion today’s terms while in Iceland the same debt adds up to nothing courtesy of their decision to default on banks liabilities.

The chart below corrects for this omission.
In fact in its recent assessment of the Irish economy prospects for recovery, the IMF stated that they expect Irish Government debt to GDP ratio peaking at over 120% and in the case of an adverse economic growth scenario – reaching possibly 150% of GDP.

Finally, here are the summaries of data from the IMF comparing two economies performance.

First - period averages:
And finally - starting year spot values:

27/02/2011: Ireland v Iceland: Economy, part 1

This is the first post of two dealing with comparatives between Irish and Icelandic economies during the ongoing crises. The post was motivated by a number of recent articles in Irish press presenting Irish situation in terms of the allegedly stronger crisis performance than Iceland, as well as Paul Krugman's response to these (here). This post will deal with real economy comparatives, while the second post will deal with fiscal performance relatives.

Both economies experienced deep crises in 2008-2010: Icelandic economy contracted to 90.41% of 2007 levels by the end of 2010, while Irish economy declined to 92.13%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 103.12% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. However, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold.

In terms of real GDP per capita Icelandic economy contracted to 88.64% of 2007 levels by the end of 2010, while Irish economy declined to 91.08%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 98.05% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. Again, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold in the next IMF database updates.

In terms of GDP based on purchasing-power-parity (PPP) per capita, Current international dollars, Irish economy has contracted by 10.25% in 2010 relative to 2007, while Icelandic economy declined by 7.75% - much less. Why? This result is especially worrisome, given that over the same period Irish economy experienced deep deflation (see below), while Icelandic currency was devalued substantially. Thus, Irish purchasing power should have risen, while Icelandic purchasing power should have fallen. And yet, real purchasing power of Icelandic income earners held up better than that of Irish counterparts.
In projections through 2015, the IMF expect that per capita, PPP-adjusted GDP in Iceland will reach 10% above 2007 levels, while in Ireland it will reach 7.58% above 2007 level. This, once again, means that the IMF expect Icelandic income earners to fare better than their Irish counterparts.

The same is reflected in the gap between GDP per capita in Ireland and Iceland. This gap stood at 3,487.63 in favour of Ireland in 2007. By 2009 it fell to 832.61 and by 2010 rose to 2,135.11 still below 2007 levels. According to IMF projections, the gap is expected to be 2,788.53 by the end of 2015. Notice that the average gap between 2008 and 2015 will remain below its historical average levels for 2000-2007. This confirms that much of the underperformance in terms of absolute real GDP per capita discussed above is due to (1) historical trends and (2) price differentials between the two countries.

What about economic performance in the two countries relative to the global economy? Chart below shows the shares of each economy in total global GDP. In 2007, Iceland accounted for 0.019% of the world GDP, while Ireland accounted for 0.268%. By 2010 these shares were 0.016% and 0.237 respectively. The decline in Iceland was 15.79% and in Ireland 16.55%. So Iceland outperformed Ireland here.

By 2015 IMF expects Icelandic economy’s weight in the global economy to be 0.015% - a decline of 21.05% on 2007. For Ireland the same forecasts imply 0.215% weight in the global economy and a decline on 2007 of 24.30%. Again, Iceland is expected to outperform Ireland into 2015 in these relative (to global economy performance) terms.

Comparatives with Iceland aside, however, Irish economy is expected to reach, by 2015, virtually identical level of global economy share as it enjoyed between 1996 and 1997, in effect erasing the entire period of some 20 years worth of economic growth.

As I mentioned before, Ireland clearly showing real deflation trend during the crisis, which is not the case for Iceland (in part, Icelandic inflation reflects devaluation of its currency).
It is worth noting that moderation in Icelandic economy inflation has been dramatic and highly orderly since 2008-2009 peak. This shows that the economy is expected to be adjusting through its post-default and post-devaluation period in an orderly fashion. In contrast, Irish deflation during the crisis has been pronounced and persistent.

Now on to unemployment. It is clear that Irish unemployment is running at the rates more than 50% above those in Iceland. By the end of 2015, IMF forecasts Irish unemployment to be 9.5% and Icelandic unemployment to be 3.12% or more than 3 times lower than that in Ireland.
Again, note the dynamics of expected adjustments to peak unemployment in the two countries. IMF clearly forecasts unemployment to decline in Iceland at a much faster rate than in Ireland. Given that icelandic unemployment declines are more likely to arise from jobs creation, rather than emigration, while Irish unemployment declines are robustly influenced by rampant outward migration of displaced workers, these dynamics also reflect the deeply-troubled nature of the Irish economic crisis, when compared with that of Iceland.

Which, in turn, shows that more likely than not, stronger Irish performance in GDP growth terms above is really driven by the MNCs and their transfer pricing, rather than real economic activity at the domestic economy. Lest I be accused of voicing anti-MNC sentiments - we do live in a society where saying factual things can get us labeled anything totally unrelated to the factual evidence presented - MNCs activities are great. All I am suggesting is that counting on them to carry us out of our real economy collapse (unemployment, shrinking employment, declining real disposable incomes etc) might be a bit naive.

Although IMF provides no forecasts for employment numbers after 2011, we can use population statistics and employment numbers through 2011 to compare two countries in terms of employment rates as percent of total population. In 2007 51.76% of Icelanders were in employment – a percentage that declined to 45.20 in 2010 and is expected to fall to 45.09% in 2011. In Ireland, 2007 employment rate was 48.93%, and this has fallen to 41.18% in 2010 and is expected to be 41.33% in 2011.
Again, in terms of employment rates Ireland is far behind Iceland – a sign that although out workers might be more productive (with a large share of this productivity accounted for by the transfer pricing by the MNCs), we tend to have smaller share of people working.

Do notice that the Icelandic economy performance in terms of employment takes place against the backdrop of having younger population than Iceland. Over the period of time covered, Iceland showed relatively stable rate of employment, while Ireland posted dramatic increases in employment rates during its growth period. This means that our current performance in terms of employment rates cuts against our demographic trends, while that of Iceland is in line with their demographic structures. In other words, one could have expected a decline in Icelandic employment rates even absent the crisis, while we should have expected continued increase in Irish employment rates absent the crisis.

In terms of external trade, both countries have improved their chronic current account deficits throughout the crisis. However, the great exporting nation of Ireland have seen much more shallower improvements than those found in Iceland. Krugman makes exactly this point in his article (linked above), but he considers net exports instead of the current account.
Chart above shows that between 2007 and 2010, Icelandic current account deficits fell from 16.29% of GDP to 0.91%. The Icelandic current account deficits are expected to continue declining through 2015, reaching forecast 0.38% of GDP by 2015. In Ireland, 2007-2010 decline was from 5.24% to 2.73%, while by 2015 the current account deficit is expected to fall to 1.24%.

The reason I prefer using the current account is because of several reasons:

1. As I have argued in a different post (here), current account can be used as a metric of our ability to repay debt out of trade surpluses, once we account for transfers abroad to pay dividends and profits on earnings by the foreign investors into Ireland, including the MNCs, take in our own investors earnings from abroad etc
2. Current account does not mask the extent of transfer pricing on our net exports
3. Current account also links to Government debt costs and thus lends itself naturally to the second post to follow
   

As we show in the next post, much of the reason for better external economic balance performance of Iceland is due to lower transfers from Government to the foreign bondholders, s Icelandic debt is expected to perform much better through the entire crisis. This means Icelandic current account is going to be relatively stronger than Irish one, as Ireland is expected to lose increasingly larger share of its economy to payments to foreign debt holders in years to come.

Next post will cover Government/fiscal policy performance of the two countries.

19/02/2011: Paying down our debt out of Exports

Let's do a quick exercise. Suppose we take our current account - defined as the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid and remitted profits). Suppose every year we use the current account balance solely for the purpose of repaying our Government debt. How long will it take us to do so.

Let us start with some notes on methodology.

Our current account is in deficit - since 2000, there was only one year - 2003 - when we had a surplus in the current account (charts below), which really means our external trade was not enough to generate a surplus to the economy. So let us assume that the we can reverse this 180 degrees and that the deficits posted in 2009-2010, plus those projected by the IMF to occur in 2011-2015 are all diverted to pay our Government debt.
Notice - this is impossibly optimistic, as our Government does not own current account, but suppose, for the sake of this exercise that it can fully capture net profits transfers abroad and cut the foreign aid to zero, plus divert all interest payments on own debt and private external debts to repayment of the principal on own debt.

Secondly, assume that only Government debt is taken into the account (in other words, we assume away Nama debt, some of the quasi-sovereign financing of the banks resolutions, and all and any potential future banks and spending demands in excess of the EU/IMF assumptions, as well as all future bonds redemptions - the latter assumed to have a zero net effect at roll-over, so no added costs, no higher interest rates, etc).

In other words, here is what we are paying down in this exercise:

Now, suppose we take current account balances for 2009-2015 (projected by IMF) as the starting point. The reason for this choice of years is that they omit fall-off in our exports in 2008 and also the bubble years of 2004-2007 when our current account imbalances were absurdly large due to excessive outward investment and consumption of imports.

Next, assume:

• We deal with present value of the debts
  
• We apply an average 3% annual growth rate to repayments we make (current account transfers grow 3% on average per annum)
  
• Currency effects are removed (so we use flat USD1.33/Euro FX rate throughout)

So here is the result:
And the conclusion is: if Ireland diverts ALL of its net current account (2009-2015 IMF projections taken at 3% average growth rate forward) to pay down Gov debt, it will take us until 2064 to reach 2007 level of official (ex-Nama+banks) Government debt.

Note: incidentally - the charts tell couple of interesting side-points based on our historical debt path:

The Government told us that we are not in the 1980s - as we had much higher levels of debt then. Ok, the figure above shows that as of 2010 - we ARE back in the 1980s: 2011 debt will equal as a share of GDP that attained in 1989. According to IMF database, our debt has peaked at 109.241% of GDP back in 1987. It is projected to be 104.7% in 2013. Not that much off the peak.

But, of course, in the 1980s there was no quasi-Governmental debt - the debt of Nama, some of the banks recapitalization measures and the debts that still might arise post-2013 from the Government banks Guarantees and resolution schemes. If we add Nama's 31bn worth of debt issued, this alone will push our 2011 debt levels to 121.8% of GDP and factoring in coupon rate on these, but 2015 our Official Gov Debt + Nama will stand (using IMF projections again) at 124.8% of GDP - well in excess of the peak 1980s levels of indebtedness.

Secondly, despite what any of us might think about the Celtic Tiger years, the Government never paid down the old debt, it simply was deflated by rising GDP. Which suggests that even during the Celtic Tiger boom years - our exporting economy was NOT capable of paying down actual debt levels.

16/02/2011: Banks issuing loans to themselves

Note from the banks front:

ECB’s printing machine keeps working over time. Greek and Irish banks have issued at least €70 billion of bonds to themselves to create the collateral required to get cash from the ECB before last week. Then, Greeks announced they will issue €30 billion more unsecured bonds to themselves for the purpose of pawning these at the ECB. The European Central Bank's balance sheet now funds the equivalent of 18% of Greek banking sector assets, 15% of Irish and 7% of Portuguese. CBofI holds another 7%.

Some amazing 'innovation' on financial front this is.

16/02/2011: Heading for another round of crisis pressures?

Two nice charts, lest we forget where the crisis is at:

Greek 10y sovereign bonds:
And Irish 10y sovereign bonds
Both courtesy of Goldcore, both are daily yields over 1 year.