Thursday, September 5, 2013

5/9/2013: WEF on Ireland's Competitiveness - detailed analysis

World Economic Forum Global Competitiveness Report 2013-2014 puts Ireland's competitiveness in 28th place, one position worse in global rankings than in 2012-2013 report. Here are summary stats.

First, top 30 countries (2013-2014 ranks) and their recent performance history:


Several points of note:
  • Compared to two years ago, there is only one new addition to top 10 performers group: Hong Kong. Denmark - ranked 8th in 2011-2012 report is now ranked 15th.
  • Switzerland and Singapore are unchallenged ranked 1 and 2.
    Despite a recession, Finland ranks ahead of Germany and in venerable 3rd place. Sweden, meanwhile, lost 3 places over the last two years.
  • Ireland's competitiveness 'neighbourhood' now includes Brunei and Malaysia, with such 'stars' of global competitiveness as Saudi Arabia, UAE and Qatar outperforming Ireland significantly.
  • China and Puerto Rico are snapping on our heels. Iceland, Estonia, Oman, and Chile are nearby as well.
  • We ranked 9th in EU18 euro area.

Ireland's relatively poor performance is highlighted in the following table, showing our overall decline from 22nd position worldwide in 2008-2009 to 28th in 2013-2014 reports. Blue colour codes improvements on 2008-2009 ranks and red codes deterioration in rankings.


The table above shows that Irish rankings are severely depressed by the Macroeconomic Stability (134th), Financial Markets Sophistication (85th) and Market Size (57th). We can't do much about the latter one, of course. We rank below where we should be in terms of Infrastructure (26th) and in terms of Institutions (16th), Higher Education and Training (18th), Labour Market Efficiency (16th), as well as across both sub-components of Innovation factors.

Full report is available here: http://www.weforum.org/content/pages/competitiveness-library and on page 222 there is a handy summary for Ireland's scores. Here's a chart mapping Ireland relative to its peers average:
There is very little in the above chart that distinguishes Ireland to the better side of the average Innovation-driven economy. The largest gaps in our favour are found in Goods Market efficiency (largely thanks to the EU common trade area, plus our severe dependency on imports, normal for a small open economy), and Institutions (ditto for the EU, plus common law etc). Best way to describe us, using the above chart - abstracting away from Macroeconomic and Banking crises - is average for our group.

In case you think otherwise, our own assessments confirm the above conclusion:
Notice that - again aside from the financial crisis - our top 5 drags on performance are: Inefficient government bureaucracy; Inadequate supply of infrastructure; Insufficient capacity to innovate and Tax rates. All are of our own making.

Should you care to see more: here are the details. Reading the below, keep in mind, we really should be aiming to be in top 12-15 in the world, if not better. We certainly market ourselves as if we are in top 10 at the very least...


5/9/2013: ECB Boldly Goes Nowhere... again

The longer it lasts, the uglier it gets... ECB stays put (predictably) on rates today is adding 57th month that the policy rates are deviating from the historical mean, with the 'hill' to mean reversion getting steeper:



Currently, mean-reversion implies an almost 200bps hike without overshooting. Factoring in historical overshooting, we are into 250-300bps territory. Good luck thinking that 'gentle' tapering or 'gradual' restoration or whatever else you might call it going to be painless...

Oh, and for all of this, what do we have on the rates side?


At least, for its pain, the Fed has boldly gone where no one, save for Japan, have travelled before when it comes to rates. Euro area, meanwhile, has been playing chicken with itself...

5/9/2013: IBM: 64% of global CMOs want to approach customers as individuals


Since 2009, IBM Institute for Business Value has been surveying C-level executives around the world to  assess the development of digital economy.

Recently, IBM released some headline numbers for the forthcoming (October) survey for 2013:

  • 64% of CMOs want to approach customers as individuals
  • 71% of CIOs see communication moving towards more social/digital collaboration
  • Majority (55%) of CHROs foresee increasing organisational openness
  • Just 34% of organisations have an in-depth understanding of their customers
  • But 78% expect their organisations to have an in-depth understanding of their customers by 2017
  • Only 1 in 5 organisations has the capacity to use Big Data with just 40% intergating internal and external data sources, just 18% using Big Data to identify new products and services
  • 77% of all CFOs support products and services innovation

Handy info graphic (you can click on it to enlarge):


5/9/2013: Irish Services Sector Activity Index: July 2013

Monthly Services Activity Index from the cSO is out for July. Some interesting movements in the series.


  • Wholesale and retail trade sub-sector activity expanded m/m on seasonally adjusted basis by 2.46% in July 2013, having posted a m/m decline of 1.49% back in June 2013. 3mo MA through July 2013 was down 2.19% on 3mo MA through July 2012 and 6mo MA is down 4.21% y/y.
  • Transport and storage sub-sector posted a m/m expansion of 1.86% in July 2013, following a contraction in June 2013 of 2.08%. 3mo MA is up 3.84% y/y and 6mo MA is up 4.36%.

  • Accommodation and food services sub-sector activity contracted 0.76% in July 2013 m/m, having posted an expansion of 1.06% in June 2013. 3mo MA is now up just 0.32% y/y and 6mo MA is up 1.27% y/y.
  • Administrative and support services sub-sector activity shrunk 1.24% m/m in July 2013, having posted 5.25% growth in June 2013. 3mo MA is now up a massive 23.76% y/y and 6mo MA is up 22.04%.


  • Information and communication sub-sector activity shrunk 4.01% m/m in July 2013, having posted growth of 1.71% in June. 3mo MA is now up 8.01% y/y and 6mo MA is up 9.23% y/y.
  • Professional, scientific and technical activities sub-sector is down 4.68% m/m in July, having posted an 1.74% expansion in June. 3mo MA is down 6.64% y/y and 6mo MA is down 3.23% y/y. 


Lastly, overall index:
  • Services sector activity fell 0.82% m/m in July after posting growth of 0.37% m/m in June 2013.
  • 3mo MA through July 2013 was up 2.73% y/y against previous 3mo period MA growth of 2.09% y/y.
  • 6mo MA is up 2.41% y/y.


 Overall, still solid performance in the Services sector, with monthly (seasonally adjusted) changes not exactly stellar, but gains of the previous months continue to carry the sector to annual expansion.

5/9/2013: A Cautionary Note on Irish Services PMIs

having just written about the Irish Services PMI performance in August, here's an update on the link between PMI and actual Services Activity Index, published by the CSO (one month lag).

The latest data from CSO on Services Index will be analysed in the subsequent post, but for now a health warning reminder: Services PMI has barely any bearing on the actual Services activities in Irish economy:

Basically, correlation - from January 2009 through July 2013 - between the Services PMI and CSO Services Activity Index is exceptionally poor: it stands at just 0.1367. Services PMI readings have no explanatory power when it comes to tracking performance of the Services Activity Index. On log-changes chart, PMI is capable of capturing just 0.0071% of variation in Services Activity Index. On straight levels even less. Lags are not yielding any meaningful improvements in explanatory power, neither do non-linear models.

In my view, this testifies to the extreme skews in PMI survey data to reflect the role of MNCs in ICT and IFSC sectors here.

5/9/2013: OECD Migration report 2013: Ireland's blues

Last week, OECD published its International Migration Outlook 2013. I wrote about this in the box-out section of my Sunday Times column which is available here in an unedited version: http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html

Couple of charts to illustrate the actual findings from the OECD:



These show pretty severe adverse impact of immigration on Irish exchequer finances, driven primarily by (in descending order of importance):

  1. The extent of the current crisis
  2. The impact of immigration flows composition on transmitting the shocks of unemployment to exchequer balance sheet (exceptionally rapid replacement of previously jobs-linked immigration inflows prior to 2004 with post-2004 opportunistic immigration from the EU Accession states, primarily going to short-term jobs in construction and domestic services sectors)
  3. The impact of the Government policies since 2000-2001 that raised significantly spending on social welfare

The problem, of course, is that the latest Government policies, acting to limit access to Irish labour market for non-EU nationals continues to reinforce the second point above. We are increasingly trading on the assumption that Accession states' nationals regardless of their skills can act as a substitute for highly skilled and perfectly selected into jobs candidates from the rest of the world. Not exactly a smart policy, folks…

In 2006 I wrote about this effect on selection bias in Irish immigration policies post-2004 for the Romanian Journal of European Studies: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1100952 Seems like my warnings came to the front in the OECD data.

5/9/2013: Sunday Times, September 1: Mortgages Defaults & Arrears

This is an unedited version of my Sunday Times column from September 1, 2013.


As the great 17th century German mathematician and philosopher Gottfried Wilhelm Leibniz said: "There are two kinds of truths: those of reasoning and those of fact. The truths of reasoning are necessary and their opposite is impossible; the truths of fact are contingent and their opposites are possible."  In other words, facts can be contradicted, properly structured reasoning cannot.

Recent debate in Ireland surrounding the issue of mortgages arrears and strategic defaults is the case in point. Based on simple extrapolations of evidence collected in the economies with regulatory and social environments largely alien to Ireland, it clashes with the very logic of the regulatory and policy changes we have put in place.

The conjecture is that between 20 and 40 percent of all mortgages arrears in Ireland are 'strategic' in nature. Most likely, this is an over-exaggeration, although we do not know with certainty. However, the incontrovertible truth that this conjecture helps to obscure is that the mortgages arrears crisis is structural and unyielding to the solutions proposed so far. The reason tells us that the mortgages arrears crisis can only be dealt with through the means of a systematic resolution approach.


To-date, no bank in Ireland has completed a full assessment of the extent of strategic defaults amongst the mortgages in arrears held on its books. In the end of Q2 2013, Irish banks held 100,920 restructured mortgages loans. We do not know how many of these relate to strategic defaults. The banks failure to report actual hard numbers suggests that they have not succeeded in identifying many such cases. Thus, factually, five years into the mortgages crisis, we have no evidence as to whether or not strategic arrears are a widespread problem. This lack of evidence is either down to the banks own choices not to analyse the data or their unwillingness to report the results of their analysis.

As the result, we lack not only the crucial evidence to tell how many borrowers are tempting to game the system, but also any knowledge as to what might be driving them to do so.

Finance literature defines strategic defaults as a scenario where mortgagees can afford to pay their mortgage bill, but opt not to do so because walking away from the loan offers them a chance to reduce their financial losses over time. Under this definition, strategic defaults generally arise in the cases of severe negative equity.

Do we have strategic defaulters in Ireland? Reason suggests the answer to this question is yes we do. Is the problem as large as to cover 20 to 40 percent of all distressed borrowers? Logic implies that the answer to this question is no.

Suppose the claim of massive strategic defaults was true. Given property prices dynamics in Ireland over the last 6 years, this means that the bulk of such defaults should have occurred back around the 2010-2011, before the rate of property prices declines slowed down substantially. In terms of mortgages arrears data, the above suggests that arrears of over 360 days duration would be more likely candidates for representing strategic defaults. This is further supported by the fact that over the last 12-15 months, Irish authorities have stepped up the rhetoric against the alleged abusers of the system, and implemented well-publicised legislative and regulatory changes, such as the Personal Insolvency Bill, limiting the incentives for such behaviour.

Now, let's do some sums. Based on the Central Bank data, if strategic defaults were really covering between 20 and 40 percent of total mortgages arrears in Ireland, the number of such cases will be somewhere between 36,000 and 73,000 accounts. These would amount to between 48 and 96 percent of all accounts that are in arrears for over 360 days in the country. In other words, based on these claims, at least half of all longer-term arrears in the country could be suspected of being in a strategic default.

That's pretty extreme of a statement to be plausible. Crucially, such a claim is not consistent with what we can expect from the changes in policies and increased banks scrutiny. More likely, strategic defaults problem is more prevalent in the buy-to-let segment of the credit markets and here it might reach, say 20 percent of all loans in arrears. This would suggest that across all mortgages, including primary residences, there may be some 22,000-25,000 suspect mortgages or just 12 percent of all accounts in arrears. This would be a significant number, but a far cry from the claims put forward by the banks and some analysts.


However, the strategic arrears argument is just a red herring, designed to draw our attention away from ‘the truth of reasoning’, to use Leibniz’s terminology, that clearly shows that Irish mortgages arrears crisis is continuing unabated.

Quarter on quarter, defaults are up across all categories of mortgages, by numbers of accounts, outstanding volumes of loans and levels of built up arrears. Year on year the arrears are rising at double-digit rates. Total arrears now number 182,840 accounts, representing EUR36.6 billion in outstanding loans. The latter figure is growing at almost 10 percent annually. Given current property valuations and the costs of recovery on foreclosed mortgages, reported by the banks to-date, these represent a system-wide loss of ca EUR11-12 billion, hidden on the books. That is before we factor in the inevitable adverse impact of mass-repossessions on the market prices or high costs of personal insolvency resolution.

For Irish banks (as opposed to foreign banks) the above potential losses are closer to EUR6.5-7.5 billion. March 2011 stress tests were based on the Central Bank 2011-2013 projected losses of EUR5.8-9.5 billion for mortgages across Irish banks. In other words, the scenario that the 2011-2013 actual losses booked by the banks, plus the potential losses built up in the arrears will exceed the 2011 stress tests' capital allocations is now highly probable.


The only hope of avoiding another banking crisis, therefore, is that the system can somehow delay recognising the arrears-related losses. The argument that there are huge strategic default numbers hidden in arrears figures helps this, as it suggests that the banks can recover the losses associated with these abuses.

Alas, the strategic defaults are unlikely to be significant enough to help the banks. At the same time, it is hard to imagine that a significant delay to losses recognition can be brought to bear by the policy changes put in place to deal with the mortgages arrears.

Currently, banks hold 1,503 repossessed properties, a number that is still tiny compared to the overall default rates, signaled by mortgages over 720 days in arrears, which number 39,093 accounts and amount to EUR9,358 billion in lending. Thus, over a quarter of all mortgages in arrears are now in default for more than 2 years continually. Many of these are non-reparable. The rates of recovery on these mortgages are unlikely to be more than 40-50 cents on the euro.

Amortising such losses over six-to-seven years period - as envisaged under the reformed personal insolvency regime - may not be an option as to-date the regulators and the banks have been serially failing to deliver sustainable, long-term solutions to arrears.

Data on mortgages that have been restructured by the banks shows that restructuring of the loans is proceeding without any major change in either the mix of solutions offered or the rates of improvement on arrears achieved. At the end of June, only 55 percent of all restructured loans were not in arrears, which is virtually unchanged compared to Q3 2012, the earliest quarter for which we have comparable data.

The risk of default for restructured mortgages is even more significant when we consider the types of arrangements put in place in restructuring. Some 50 percent of all restructurings involve temporary switches to interest only payments or reduced payments of capital component. Eight out of ten restructured mortgages give only temporary reprieve to the borrowers. In effect, of the total of 21,563 principal residences accounts restructured through the end of June 2013, around 20,520 accounts have been restructured so as to potentially either increase or leave unaltered the overall volume of debt over the life-time of the mortgage. Instead of reducing debt burden, our 'solutions' to the mortgages crisis are increasing it.

The overall levels of mortgages that are at risk of default or defaulted continues to climb. Total number of mortgages at risk currently stands at 239,834 accounts, up 11.3 percent year on year in Q2 2013. These represent ca EUR47 billion worth of mortgages or more than one third of all residential lending in the country, up on 29.5 percent a year ago. The systemic risk to the system is rising despite some nascent stabilisation experienced in the property prices and overall macroeconomic conditions, and despite the historically low cost of credit.

The economy is hurling at a breakneck speed toward mass households insolvencies and large scale repossessions over the next 1-3 years. The logic of reality is constantly negating the factoids of the official analysis.

To break this vicious cycle we need to change our modus operandi.

Firstly, we must produce an independent and credible assessment of the problem of strategic defaults. The end-game here should be putting in place a system of evidence-based monitoring and evaluation of defaulting borrowers that is transparent, independent of the banks and accessible to all those involved in structuring long-term solutions. Anyone found genuinely guilty of gaming the system must be forced to bear the full burden of their actions.

Secondly, we need to set a mandatory, clearly priced and transparently administered menu of long-term solutions. All banks must be compelled to offer these to their borrowers.

Thirdly, we need to put in place a system of independent oversight and arbitration over the solutions offered by the banks.

Without swiftly dealing with the strategic defaults and with the problem of structuring, pricing and deploying long-term solutions, Ireland is risking a repeat of the acute banking crisis over 2014-2016. Navigating the world of contingent facts requires more than extrapolating foreign studies to domestic environment. It requires proper logic and reasoning as the backing to policies and systems we deploy.





BOX-OUT:

This week, the OECD published an assessment of the effects of immigration on the member states economies. On average, across the OECD, immigrants contribute positively to the host countries' exchequers, with a net contribution of 0.4-0.57 percent of GDP. In today's Ireland immigrants' contribution to the state purse, net of benefits received, is negative at -0.23 to -0.39 percent of GDP. There is no discernible difference between native and foreign born employment rates in Ireland in 2012. There is a relatively large difference in unemployment rates between the native- and foreign-born sub-populations, that is especially pronounced for women. OECD data puts Ireland in the 8th worst position in the OECD in terms of labour markets effects of immigration and the second worst position in terms of the immigration effects on public finances. Given the fact that Ireland is continuously attracting large numbers of highly-skilled, fully employed, young and tax-compliant professionals, the above findings suggest that Irish aggregate figures are more reflective of the economic impact of the two other major cohorts of immigrants. These are: immigrants who arrived in 2001-2008 from the EU Accession states and those who arrive for family reunification reasons. However, per OECD data, the latter cohort, actually makes a larger positive contributors to the state finances any other type of the household, including the native households. This leaves immigrants from the EU Accession states, most severely hit by the collapse of building and construction and domestic services sectors in Irish economy during the crisis, as the cohort behind the overall negative findings. The point is that, traditionally, stock of immigrants in a host economy acts as one of the automatic stabilisers - a factor that adjusts on its own to reflect the prevailing economic conditions, shrinking in the recession and expanding in recoveries. In modern Ireland, one of the legacies of the 2001-2007 bubble, is that instead of stabilising economic activity, immigration might have acted to amplify the crisis.





5/9/2013: Services PMI: August 2013

With a delay (due to extenuating circumstances) - here's my analysis of dynamics of the Services PMI for August for Ireland.

Yesterday's reading on Services PMI was spectacular by all measures:


  • Headline  index rose to 61.6 in August 2013, the highest reading since February 2007 and 19th highest reading in history of the index.
  • August reading marked the third consecutive month of index reaching statistically significant levels of growth.
  • 12mo MA is now at expansionary 55.6, 6mo MA at 55.7 and 3mo MA at 58.0. These readings should signal a break in the third recessionary dip we have experienced.
  • Current 3mo MA is solidly ahead of 3mo MA through May (53.4) and is ahead of same averages for 2012, 2011 and 2010.
The most critical bit, however, is that this is the first time now that the PMI has breached the levels consistent with the pre-crisis activity. This is not to say we are heading for 4.4-4.6% annual GDP growth, but it is significant nonetheless. 



All-in - very solid expansion, very solid reading and starting from actually high levels of activity to begin with.

We do not have - courtesy of Investec and Markit deciding to cut back the information they release to us, mere mortals - the actual composition details or the breakdown by sector. However, per Markit release, most of the growth is accounted for by booming IFSC. The overall Services PMI is very significantly skewed in the direction of MNCs (as I showed on a number of occasions).

Monday, September 2, 2013

2/9/2013: Irish students at World Statistics Congress 2013


An overlooked (by this blog) piece of news worth posting about in my opinion. Per CSO:

"In Hong Kong today at the World Statistics Congress 2013 Irish maths students were placed among the best in the world in a poster competition run by the International Association of Statistical Education (IASE) in collaboration with the International Statistical Literacy Project (ISLP). The poster competition attracted over 7,200 entries, from 117 different countries, across five continents, including the USA, Canada, Japan, Korea, New Zealand, Australia, all the EU member states and South Africa. The theme of the ISLP poster competition, this year, was Agriculture."

Well done to Irish students! Congratulations to all five on their stellar work! And well done to the CSO for running the John Hopper Medal for Statistics poster competition in Ireland.

Full information about their work and the competition is here: http://cso.ie/en/newsandevents/pressreleases/2013pressreleases/irishmathsstudentsamongthebestintheworld/


2/9/2013: Irish Manufacturing PMI: August 2013

Markit/Investec Irish Manufacturing PMI out for August today. As usual - no data on sub-indices, no statistical analysis released.

Headline reading improved to 52.0 in August, up on 51.0 in July, marking the highest reading since November 2012 when it stood at 52.4 and the third highest reading in 12 months. Release from Markit is here. My analysis as follows:

  • 1.0 points gain on July is a decent number. We are now into third consecutive month of nominal seasonally-adjusted readings above 50.0. All of these are good signs.
  • Another good sign: 12mo MA is now at 50.8 and 3mo MA is at 51.1. This implies that 3mo MA is ahead significantly over 48.8 reading for 3mo through May 2013. However, on a negative side, 3mo MA through August 2013 is down on 52.6 recorded for the 3mo through August 2012, although it is ahead of 3mo MA for the same period in 2011, and down on same period average for 2010.
  • Cautionary signs: current reading is still below statistically significant levels (ca 52.2), although we are in a Laplace distribution (as I noted earlier, based on higher moments). Last time the index was reading statistically above 50.0 was in November 2012.
  • Another note of caution: Q3 2013 to-date averages at 51.5 - nice number, but recall that in a contractionary Q1 2013, PMIs averaged above 50.1. Nonetheless, good news - the index for Q3 2013 to-date is above both Q1 and Q2 readings. 
Trends illustrated:


Note strong departure from 6mo MA in the chart above, which is encouraging; and in the chart below, note that we have finally reached above the crisis-period average for the index.


Another good news bit is that we have moved closer to confirming the index breakout from the downward trend that run from July 2012 through June 2013. One-two months more of this performance and we can be moving onto a new trend:


Summary: overall, decent performance by manufacturing PMI in August. 

I cannot confirm any of the statements made by Markit/Investec, and note: I have not seen Investec usual longer release so far. However, per Markit, all three main sub-sectors have posted increases in output in August, and "new orders rose for the second successive month, and at a solid pace that was the strongest since July 2012". No idea where actual indices readings are at. "Meanwhile, employment continued to rise, extending the current sequence of job creation to three months. However, the pace of increase slowed over the month." Again, no idea as per actual readings.

2/9/2013: Sunday Times August 25: Construction Sector Revival?

This is an unedited version of my Sunday Times article from August 25, 2013.


Not a week goes by without a new report on the property market and construction sector digging up disparate shreds of evidence to suggest yet another turnaround in the property sector fortunes. Some of these are based on the real data, albeit often selectively interpreted; others, on desperate hodgepodge of hearsay and industry anecdotes.

Spin and marketing talk aside, the data itself can be highly unpredictable and hard to interpret. Between Q1 2010 and Q4 2011, Irish Construction sector Purchasing Manager Indices (PMIs) published by Markit and the Ulster Bank were signalling what looked like a stabilisation. CSO’s building and construction sector activity index also posted a quarter-on-quarter rise in Q3 2011. The sector promptly reverted into the red from there.

Faced with past false starts in the data and promotional advertorials in the media, we may be tempted to write off the building and construction sector altogether. This would be a mistake for at least three reasons.

Firstly, traditionally, the building and construction sector acts as one of the leading indicators of real, sustained economic recovery. In particular, in normal recessions, the recovery is led by the early return of firms to capital investment, including in buildings and structures, usually closely followed by an increase in residential investment by the households. Both the US and the UK are showing this pattern over the last two years. While Ireland's recession is driven by deeply structural factors, one can expect any sustained growth momentum to occur only on foot of renewed domestic investment.

Secondly, based on real factor costs calculations, Irish building and construction sector contributes directly 1.6 percent of Irish GDP today. This is a significant contribution, although it is just a half of the average contribution recorded over Q1 1997 - Q1 2013 period. Furthermore, building and construction contribution to GDP rose by 7.3 percent in Q1 2013, while the overall GDP at factor costs declined 1.3 percent. Bringing Ireland's building industry to the long-term sustainable levels in volume and value implies increasing its direct contribution to the GDP by over EUR1.5 billion on current levels to EUR3.8-3.9 billion.  Reaching this level of activity will put Irish building and construction sector output ahead of that by the agriculture, forestry and fishing.

Thirdly, some of the recent data on building and construction sector does warrant extremely cautious optimism.

Let's take a look at the main sources of information on the state of our construction industry. These include, CSO's quarterly reports on volume and value of output in the building and construction sector, as well as more forward-looking planning permissions through Q1 2013. We also have more current Purchasing Managers Indices (PMI) covering data through July 2013. Monthly CSO data on property markets indicates, albeit imperfectly, the trends in the demand for residential investment. Last, but not least, we have international forecasts and data from the Eurostat, ECB and Euroconstruct.

On the surface, the data concerning the building and construction output points to some improvements in the sector activity and dynamics. Per CSO, year-on-year, the volume of output in building and construction increased by 10.7 percent in Q1 2013.  There was an increase of 9.5 percent in the value of production in the same period. The annual rise in the volume of output reflects year-on-year increases of 26.8 percent and 2.4 percent respectively in civil engineering and non-residential building work. Alas, output in residential building decreased by 2.5 percent. Not exactly the growth breakdown one would expect from a building investment recovery.

The above weak positives, however, are further undermined by the fact that the levels of activity in the sector remain extremely low by historical and international comparatives.

Building activity in residential construction sub-sector back in Q1 2006 stood at 107.9 as measured by value index. In Q1 2013 the same stood at 7.8. The latter number represents an increase of just 0.5 points above the all-time low. Non-residential building sub-sector posted shallower peak-to-trough declines, although these still are well in excess of anything seen in normal recessions and in other euro area countries. Despite the shallower contraction, the non-residential construction also showed poor pick-up dynamics: the sub-sector output is now up just 2.6 points relative to the absolute low in Q2 2012.

Truth is, most of the recent gains in CSO’s building and construction indices to-date have been driven not by the organic private sector investment, but by civil engineering activities. Forth quarter running, this trend suggests that although, the construction sector might have stabilised, this stabilisation appears to be driven simply by the unprecedented fall in sector activity to-date, rather than by any sizeable pick up in demand for traditional building and construction investment.

The rosy projections from Euroconstruct, envisioning Irish construction sector expanding some 16% out through 2015 is case in point. As robust as this forecast growth number might appear, if it were to materialise, Irish construction sector will only return to 2011 levels of activity by the end of 2015.

Instead of a U-shaped recovery, we are currently witnessing a continued L-shaped disaster.

More forward-looking indicators, such as the construction sector PMIs strangely contradict the data on the actual sector activity reported both by the CSO and by the Eurostat. Since around mid-2009, civil engineering PMI persistently signaled sharper contraction than overall construction sector PMI and its housing and commercial sub-sectors. More ominously, PMIs across all sub-sectors of construction industry remain in a contractionary territory every month from January 2012 through July this year. One exception is a weak expansion signaled by the housing sub-index in July this year. No matter how one spins the PMI data, however, the indicator continues to show the sector shrinking, not expanding across all quarters since the onset of the crisis, including Q1 and Q2 2013.

This points to the deeper, structural problems in the sector.

Demand for new construction remains exceptionally low, outside the small sub-pockets of activity, such as premium segment of Dublin City apartments and houses, and the highly tailored top quality office space suitable for the booming services-exporting MNCs. The former trend is clearly evident in this week's residential property prices figures published by the CSO. It is further confirmed by the data showing continued weakness in demand for residential properties based on the volume of transactions in the markets. The latter is evident in industry reports and in aggregate shift in exports growth away from manufacturing and professional services toward ICT services.

All-in, investment in buildings and construction remains effectively nil across the economy and without a significant pick up in this investment, the sector performance is going to be highly volatile and concentrated in specialist areas, such as agricultural facilities and wind farms, to be accurately reflected in the high-level data.

This month, ECB Monthly confirmed that the malaise affecting the building trade in Ireland is similar in drivers to the demand-induced recession in the euro area. The ECB linked construction industry slump in Europe to weak macroeconomic conditions, debt-stricken households and dysfunctional banking system. All factors present in the euro area case for the building sector continued decline are also at play in Ireland.

Which brings us to the last piece of evidence necessary to complete the puzzle: the planning permissions. CSO data showed that the number of planning permissions for houses actually fell 9.3 percent year-on-year, reaching the second lowest level in history of the data series. Number of permissions for apartments also fell, by 18.4 percent on Q1 2012. More ominously, aggregate activity in the construction sector, as measured by the new permissions granted, shrunk across the board and hit an absolute lowest point for any quarter since Q1 1975.

In summary, there is little evidence to-date of a sustainable and robust uptick in Irish construction sector activity, while there is plenty of evidence that the sector output is close to stabilising at the extremely low levels. After six and a half years of ongoing declines, we now have a construction industry showing ‘bouncing at the bottom’ pattern of output. Alongside the rest of the economy, Irish building firms are desperately searching some catalyst for the restart of the investment cycle.

This realisation, coupled with the recognition of the overall importance of the sector to the Irish economy in the long run and as a potential driver for the recovery should lead to a significant re-think in the policy stance toward the sector.

Targeted tax incentives for construction sector have not worked and will not work in the current environment of subdued demand. Instead, we need to push for a more aggressive deleveraging of the households and development-related property sector firms. The former means re-thinking our approach to mortgages arrears to include mandatory and enforceable restructuring and rebalancing of the household debt to deliver sustainable and quick resolution of the debt crisis. The latter implies a re-drawing of the property tax to cover land holdings.

While we might like to stimulate the demand side of the investment equation in building and construction sector, such stimulus is simply not on the cards for the Exchequer struggling with excessive fiscal deficits and debt and for the economy suffering from severe private sector debt overhang. Focusing on dealing with the household debt problems, and holding the course on fiscal targets while trying to avoid tax increases and capital spending cuts is all we’ve got as the potential tools for spurring some recovery in the construction sector.





BOX-OUT:

This week, the IMF published a research paper co-authored by the fund own researchers with participation from the University of Geneva that looked at multi-annual fiscal consolidations planned across the 17 OECD economies in the period between 1980 through 2011, including those covering the current crisis period. The researchers asked a simple, but highly contentious question: are sovereign debt markets pressures responsible for forcing the governments into adopting austerity programmes.

The study has found the only in a third of all cases of past and current austerity programmes, the plans for fiscal consolidations were driven by market pressure. In the nutshell, markets are important, but by far not the main sources of pressure on the highly indebted and/or deficit-stricken governments. The authors further found that markets exerted pressure on the governments in the cases where fiscal and macroeconomic fundamentals have deteriorated more severely than in an average crisis. In other words, the markets are not the culprits behind the severe austerity, but rather a reflection of the underlying crises present in the first place.  Per authors: “If history is a guide, the absence of market pressure will not inhibit fiscal consolidation in advanced economies with currently weak fundamentals, such as high debt ratios, adverse debt dynamics or below trend growth.”

The researchers also concluded that the current crisis is different from the previous ones, primarily because the current crisis involves “…increased policy uncertainty, monetary union in the euro area, and unprecedented monetary accommodation.”

So the fabled ‘bad wolves’ of the bond vigilantes so frequently evoked by the austerity-planning Governments in the popular media and on election trails are nothing more than the ordinary messengers conveying the reality of fiscal and monetary mismanagement.

Sunday, September 1, 2013

1/9/2013: WLASze Part 2: Weekend Links on Arts, Sciences and Zero Economics

This is the second WLASze: Weekend Links on Arts, Sciences and zero economics post for this weekend, with the first post linked here.


An interesting article about the dramatic change in the relationship between knowledge ownership, knowledge delivery platforms and knowledge acquisition models as exemplified by the Oxford English Dictionary:
http://www.theguardian.com/technology/2013/aug/23/oxford-english-dictionary-future-digitally
Strangely, this is similar to travel and tourism.

There is a sense of superficiality in discovery driven by travel and tourism - the sense that is quite rightly justified. Tourism is a form of voyeuristic discovery, based on superficial bounds of presence (longer trip - more knowledge; less structured trip, less organised by the travel agent, more spontaneous - more knowledge acquisition, etc.). To some, more structure, less spontaneity leads to more discovery. The key, however, is that tourism-driven discovery runs from the planning stage of the trip, through the period of physical presence in the given location, and there after such interest decays at a rapid rate, as we might continue to show desire in information about the location we visited, but such an attention is probably more anchored to reinforcing the perceptions and experiences we acquired during the actual trip. In short, tourism-driven discovery is bounded by time of presence in the location. In contrast, a book sitting on a bookshelf at home can be visited any number of times, with discovery and learning being unbounded by the constraints of expensive travel. This is a less-bounded form of discovery.

The new mode - of renting access to the book, rather than owning physically its contents - is an entirely different platform for learning. For example: time and number of visits to the book is thus limited by the duration of subscription, log-in times etc. Secondly, a rented book is not conducive to carrying permanent notes and marginalia.

There are, of course, obvious benefits: updating of content is instant and available to all users, without requiring a re-purchase at some specific intervals; reader-publisher feedback is instant (which also raises questions of ownership of 'notes' and 'marginalia'), etc. In summary - this is not a trivial issue, folks. Thoughts?..


From changing how we 'own' a book to changing how we 'see' a book:
http://www.theguardian.com/artanddesign/2013/aug/25/buildings-of-books-matteo-pericoli?CMP=twt_gu


A very interesting example of visualising across distinct modes of expression: from verbal to physical, from multidimensional to three-dimensional, from unbounded (writer<->reader aesthetic and ethical values flows) to bounded (physical, unalterable form), etc.


Nicola Samori is showing at RLB Kunstbrucke in Innsbruck: http://www.rlb-kunstbruecke.at/, Samori's own site is here: http://www.nicolasamori.com/ An interesting artist with a wide range of techniques and media:

(2011, oil on copper, 70 x 50 cm)
and
2011 wax, pigment, plaster, iron, 250 x 50 x 50 cm

Amazing grasp of classical representational techniques and compositions, contextualised in modern narratives.


Returning to the world of books, the news coming out the US is that J.D Salinger - the author of The Catcher in the Rye - one of America's greatest writers of all times, is going to publish 5 new books starting with 2015… The pesky issue is that Salinger is now 3 years and 7 months dead and the last time the author published anything new was 48 years ago…
http://www.businessweek.com/articles/2013-08-26/j-dot-d-dot-salinger-will-publish-five-more-godd-no-mn-books#r=hp-lst
Salinger's last published work, "Hapworth 16, 1924", appeared in The New Yorker on June 19, 1965. Ever since, Salinger did not publish a single piece of new work.


Staying on the topic of books and publishing: More than 50 years after one of the greatest novels ever written about the WW2: Vasily Grossman's “Life and Fate” was confiscated by the KGB, Russia's Federal Security Service has transferred the complete archives and original manuscript of the novel to the State archives, where they are now open to researchers. Full article here.


The documents were seized by KGB back in 1961. Grossman's novel ranks as one of the most important works of literature in the 20th century and is an absolute 'must' for anyone even remotely interested in either history, or literature or both. It is a sublime work of art, a deeply psychological study of humanity and an immense historical record.


Shifting from books to science,  a massive volcanic eruption was captured on Jupiter's moon Io: http://phys.org/news/2013-08-major-volcanic-eruption-jupiter-moon.html
And this is hardly the first one: a link to some older Io eruptions news is here.


The biggest eruption observed on Io so far took place in 2001, when a lava flow was observed, reaching over hundreds of square kilometres across Io's surface - a link here.


 Good compilation of Io images here.


Amazing set of photographs, showing the Niagara Falls completely drained of water back in 1969 - link here. More of a curiosity than science, and certainly not art, but still - amazing set of images...


Neither art, nor science, but as above - fascinating images come from California's Sierra Nevada mountains: http://preview.reuters.com/2013/8/24/gallery-yosemite-wildfire
One thing to keep in mind: California Redwoods regenerate by fire…

And the latest update on these is here. The fire causes are suspected to be entirely man-made, rather than natural: "Todd McNeal, fire chief in the town of Twain Harte, west of Yosemite, said at an Aug. 23 community meeting that officials "know it's human caused, there’s no lightning in the area. … (We) highly suspect that it might be some sort of illicit grove, marijuana grow-type thing."


As a former sergeant in firefighting unit (yep, 2 years in Soviet Army) I can tell you - this is a certifiably terrifying sight.


Enjoy the above and stay tuned for more WLASze.