Wednesday, April 29, 2009

Economics 30/04/09: Crime, Dive Reg, Trade Stats & Cars Regs

Crime stats are out today and there are surprises. In particular, a big surprise is the lack of up-tick in property-related crimes in Q1 2009.
The first picture illustrates crime stats for broad categories 1-5: all down, except for sexual offences and kidnappings etc. Nasty stuff, but at least some good news on murder, homicide, assaults etc.
The second chart shows categories 6-12, most are property related and all are down except for robbery7, extortion and hijacking. Given the current economic climate, this is surprising as crime rises in general as recession intensifies. Anecdotal evidence - like local authorities representatives in my area - are telling me that in the last 2 months some 23 burglaries took place in Ringsend, Irishtown and Sandymount area. This is a huge increase. But we shall see if this is matched in the Q2 2009 stats for the rest of the country. For now, however, except for the state robbing us blind, other criminals are staying out of our pockets... or are not being caught...

Live Register
is out and is worth a closer look. The pace of increases in LR is abating, but remains furious. The first observation is expected, given massive increases in previous months. We are seeing a technical correction, not an inflection. January-April 2009 we have added 96,000 of freshly un- and under-employed to welfare rolls. Same period 2008 it was 'just' 28,000. April monthly rise was 15,800 or 52% down on the record-breaking January increase of 33,000. Now, this might be some sort of 'good' news for some spin masters, but if April pace continues to the end of the year, we are looking at 515,000 unemployed by January 1, 2010. DofF Supplementary Budget figures estimate unemployment to close off at 12.6% in 2009. Yeah, right...

Below is a chart with data up to date and my forecasts. First forecast is basically a repeat of last years rates of rise for the following months. The rest of 2009 monthly average for this case is 4.88% - much lower than the 4-months average to date which is 7.34%. One slight departure - in this scnario I assume that December 2009 rise in Live Register will be lower than that for December 2008. Just to be nice... The second forecast is Adverse Scenario, corresponding to the next 8 moths of 2009 running along the rates of increases in the previous 8 months (since September 2008 through April 2009), with January record rise being moderated by roughly 1/2. The average monthly rate of increase for this scenario for the months of May-December 2009 is 5.87%, still below the current running average of 7.34%.

A worrying thing about this is that, as you have probably noticed - both scenarios yield LR figures well above 515,000. Benign scenario produces end of year unemployment rate of 16.7% or 568,842 on the Live Register, and adverse scenario provides for 18% unemployment with 613,200 on the Live Register...

These are plotted in the chart below.

Finally, it is worth mentioning that April saw an increase in the females rate of signing onto the LR, relative to males. 41% of new claimants signing up are now women, the largest proportional increase since May 2008. This is likely a sign that:

  • white collar jobs are now evaporating at a faster pace, thanks to the Government heroic efforts to support the 'knowledge' economy;
  • redundancy payments are wearing thin (with families beginning to run out of redundancy payments cash and thus being forced to sign members onto LR); and
  • tax bills for formerly two-earner households are rising, necessitating more women to sign onto the register.
Trade stats for January and February showed an increase in trade surplus - at a 7 year high now - driven by the declines in imports. February exports were up 6% - good news, imports rose as well up 4% in monthly terms. Table below illustrates.
Per CSO release January figures for 2009 when compared with those of 2008 show that:
  • Electrical machinery exports decreased by 51%, imports fell by 24% - MNCs are shrinking their production levels;
  • Power generating machinery imports increased by 49%, while electricity imports were up 101%;
  • Computer equipment exports were down 22%, imports fell 35% - ditto for MNCs;
  • Edible products by 34% - domestic exporters are suffering here;
  • Industrial machinery fell by 44% for exports and by 34% for imports, specialized machinery imports fell 56%, iron and steel imports down 43% - more MNCs cuts and these are savage;
  • Medical and pharmaceutical products exports increased by 15%, which means imports also rose by 6% - MNCs in this sector are firing on all cylinders and transfer pricing is abating - a cyclical component due to accounting timing;
  • Organic chemicals increased 10% for exports and but fell 22% for imports - again foreign firms cut production while drawing down surplus inventories;
  • Other transport equipment (including aircraft) exports rose by 610%, while imports fell 43% (one wonders if this was due to fire sales of old aircraft and helicopters as Celtic Tiger developers are starting to shrink their consumption);
  • Imports of road vehicles down 71% - say by-by to VRT and VAT receipts and thank you to the Greens and VAT increases;
  • Telecom equipment imports fell 26%;
  • Exports to China decreased by 39%, to Great Britain by 13%, to Germany by 14% and to Malaysia by 44%
  • Exports to the United States increased by 5%, to Belgium by 4%, to Bermuda by €70m and to Switzerland by147%.
  • Imports from Germany decreased by 43%, the United States by 25%, Great Britain by 19%, China by 29% and Norway by 55%.
  • Imports from Argentina increased by 29%, Poland by 10%, Indonesia by 47%, India by 12% and Egypt by 55%.
Chart below shows the extent of imports destruction in Ireland since the beginning of 2008. There is, of course, very little imports-substitution, so any decline in imports demand is a direct hit for our retail sector and no gains to domestic producers.
And imports losses are, of course, lost production by our MNCs and therefore a future loss of exports... and jobs.

New vehicles registrations site (that's right - a new dynamic face of CO with low-res masthead, but much better analysis of data is here) is full of interesting stats - primarily concerning the decline in motor trade since Brian, Brian & Mary decided to horse around with new VRT, increase VAT and rob households of their cash. You can see these for yourselves. But what got me thinking are the longer run trends. Here are some charts:
First, look at all vehicles registered in Ireland. Despite a dramatic fall-off in numbers, long-term moving average shows a clear twin-peaks pattern with sales peaking in and around 2000 - the vanity demand (given our license plates), followed by the fatter peak in 2007 - the SSIAs demand. There is no serious justification for asking for some emergency measures, e.g a scrappage scheme, for the sector as no amount of subsidy will bring us back to the boom days of 2005-2007. There is a room to argue against the VRT, but not on the grounds of some car sales jobs protection.
Second, look at the relationship in sales of new and used vehicles. A 'vanity' dip in sales of second hand vehicles around 2000 was followed by a much more sensible realisation in 2006-2007 that there is no need to pay through the nose for new cars. Gradually, we built up a knowledge curve that our own Irish-based dealers are:
  • taking fatter profit margins that those in the UK; and
  • providing no better service in return.
Hence, more people migrated to buying cars abroad and once there, they were buying used cars. This should have been a good news for the environmentalists (buying a used car implies no added CO2 emissions associated with manufacturing). But it was not, so the tax-hungry Greens followed the tax-hungry FF and hiked VRT levies on all cars. If there is a room for economically justifiable tax reduction - it is in cutting VRT on used cars. Why? Environmental reasons aside, when an Irish person buys a used car from the UK, the cost to this economy of the finds diverted to imports (as opposed to, say, domestic investment) is much lower than when they buy a new car from an Irish showroom.
Chart above dispels the myth of the 'Killer SUV-driving Yummy-mummies' on our roads. Remember the slew of articles in 2007 telling us that we should be ashamed of driving big 4x4s and that Blackrock and South Dublin Yummy-Mummies were out in tens of thousands on our roads for school runs, driving an ever bigger SUVs? Irish Times, as always a guardian against consumerism, led this yellow journalism pack. Now, see the share of vehicles with 2000cc or bigger engines that are on our roads? It is negligible! In fact, chart below illustrates this point in detail.
At no time did vehicles with engines in excess of 2,400CC represent more than 4.5% of the total vehicles numbers registered.
Lastly, the chart above shows how out of touch are our public sector purchasing managers with reality. 2008 recorded an absolute record in new vehicles registrations by the public sector, just as the economy was spinning into a recession. Well done lads.


RSPI Propangada Section said...

I am not an economist.

If we are as uncompetitive as ESRI and OECD tell us, how come exports are rising ? Is it a technical issue ?

TrueEconomics said...

RSPI: for most countries, competitiveness in domestic sectors lags, but nonetheless closely follows competitiveness in exporting sectors. This is not the case in Ireland (and some other small open economies). In Ireland, MNCs-led exporting sectors (with MNCs accounting for a good 80%+ of our total exports) are competitive. This is so not because we have some miracle quality labour force or because our state-run and regulated sectors (energy, telecoms, transport etc) are state-of-the-art, but because MNCs book huge transfer pricing profits here. So even camels inside Pfizer's plant in Cork, say, would be competitive given our tax treatment. I am exaggerating, of course.

We are not strongly competitive in the domestic sectors because of wages structure, labour quality, workers' expectations, energy costs, local authorities costs, poor logistics, transport costs etc. Hence, we have very thin and struggling domestic exporters base composed primarily of smaller producers.

That said, several current trends worth highlighting:
1) our domestic exporters' competitiveness has been improving, especially in manufacturing, over recent years, primarily due to a gradual shutting down of inefficient producers. This process ill go on and in fact is going to spill over into exportable services as well, as our legal eagles and finance companies realize that the days of the 'fat Celtic Tiger' fees are over and you have to do actual work to earn dosh from now on. The first stage in this process is to lay off drift wood - which they are doing now;
2) as wages fall (albeit they should be falling more via wage reduction not via tax increases, as has been happening since October 2008), some of the labour productivity measures will be rising and therefore competitiveness will be improving. This is the most painful way of improving competitiveness, because it comes not via direct increases in productivity, but via a fall in associated costs. Years of neglecting domestic sectors are now catching up with us, so the economic cholesterol' that is clogging our veins has to be worked off with some sweat and pain;
3) lack of domestic demand is now drawing out more and more domestic companies to seek exports markets. This is new and refreshing. Some will succeed, many will fail, but those who do succeed will have to gain in competitiveness (productivity) in order to thrive in the global market place.
4) What we are seeing right now is the dramatic shrinking of profit margins of domestic exporters who are trying to stay afloat. This is also putting a squeeze on wages in these companies. Hence our decent ability to weather shocks in exporting sectors.

OECD (note that ESRI does not have anything really original to add to the competitiveness research - it is a pure parrot to the OECD) is right to point out to the longer term losses in our competitiveness. But one has to be aware that what they measure are lagged indicators, so their numbers reflect more longer term trends. CSO's direct measures of goods flows provides a short-term snap shot of trading performance. In the short run - cuts in wages, profit margins, residual orders etc can present a picture of increased competitiveness. But this is not a long-term story. At least not yet.

Anonymous said...

600,000 on the dole. That is a nightmare scenario that nobody publicly seems to be contemplating. You have written previously about some of the 'more dubious' methods used in other countries when counting those officially unemployed in the past. Surely any solution to the labour crisis must involve a combination of the creation of new jobs in existing firms, creation of jobs in new firms, some amount of job-training effort and that still leaves space for something innovative to be added to the mix.

Is there now a case for looking again at the 5-day working week and really challenging if that is the right frame upon which highly productive employment can be based?


TrueEconomics said...

JK: 600,000 is just one scenario, so I should be careful to say that it is a nightmarish number in my view and I certainly hope we are not going to get there. Scary part is that the dynamics that get us to 600,000 are not that dramatically different from what we have experienced so far. In addition, my numbers assume that labour force remains static and that net emigration is not going to pick up significantly. The former assumption is justified by my view that people are going to start dropping out of the labour force after 1+ years on the dole. This is some months away. The second assumption is based on my view that the US, UK, Australian economies are not going to pick up in new jobs creation until mid 2010.

Per your suggestion on 4-day week (I presume you meant to say 4-day, not 5-day) - there is problem here in so far as mandatory hours cuts will impose huge additional costs to employers with workforce on fixed salary contracts. Hourly wage workers are pretty much already had their hours cut and there is no cost to the employer in doing so, other than a slight increase in the marginal administration and HR costs. But if you reduce hours for those on fixed salaries, you are either saving nothing (if you leave numbers employed fixed) and thus increase your labour cost contribution per unit of output, or you are increasing your costs (if you are to, say reduce working hours by 20% to increase numbers employed).

Another problem with mandatory hours cuts is that an employer would like to work more productive workers harder, thus increasing overall firm productivity.

Lastly, mandatory hours reductions do not really work - look at France - as they drive huge non-compliance and gray market for labour.

The only answers to the problem of rising unemployment are:
(1) increase productivity of labour (at the lower skills spectrum this will require minimum wage cut, while at the higher skills spectrum we will need to cut cost of employment, among other things);
(2) decrease cost of jobs creation (reduce upper marginal tax rate so people can moderate their wage expectations, while entrepreneurs have incentives to get rich, thus creating employment);
(3) remove incentives for companies to continue operating inefficiently (this will require forcing domestic sectors to compete internationally via deregulation and removal of protection - licensing, regulatory, subsidies, etc); and
(4) break up high-cost generating monopolies and state companies in energy, transport etc - this will lower costs of jobs creation, but will also open up large parts of Irish economy to real opportunities for new business to emerge (in this context ESB's latest jobs creation plan is counterproductive as it simply reinforces their grip on the markets).

There is really no other way to get jobs growth happening. Sadly, all three points above require time and investment to bear fruit. This is why it was crucial for us to implement these changes when we had time and money to do so. Now, following a classic definition of a stupid man being the one who learns from his own mistakes, we have no choice but to take bitter medicine while in pain...

Anonymous said...

Hi Constantin. Actually what I was referring to was the idea of moving from a 5-day week (certainly in the private sector this is the typical working week) to a 6-day week where in certain jobs people could share jobs on a 4+2 basis or a 3+3 basis. The key thing is not to consider it a single 6-day job but rather two jobs, one at 4 days a week and the other at 2 days a week. The idea would be to allow those who want (that's the crucial point) to have a better work/life balance. My own anecdotal experience is that people who work a shorter week tend to be extremely productive in the time they are at work. I can't see this kind of idea working in all sectors or job types.

I guess two questions arise. 1. does it do anything meaningful in terms of income tax inflows (would it be a net positive scenario overall) and 2. is the current labour law configured to allow such an approach?

Looking at the lines of people waiting for dole payments there has to be a argument for something more meaningful than training schemes.. I mean what exactly would be people be training for?


TrueEconomics said...

JK - agree, we need something more meaningful indeed - see tomorrow's Mail on Sunday and next Thursday's Business & Finance magazine. Will be looking for your comment on these.

On 4+2 / 3+3 time shares - a good point to make here is that if these are paid as part-time rates, we are talking about some cost savings and improvements in output per Euro of wages. But this has to be short-term solution only, because in the long run part-time work reduces skills and aptitude.

On income tax, converting people off full-time wages to part-time will yield a net decrease in tax revenue, since more people will be shifted to a lower band. However, this can be countered by the argument that otherwise they would be laid off. So direct tax impact is negative, total tax impact is probably positive.

Current labour laws are not suited for this approach to be adopted on a large scale. You can take two people to do 4 days a week and 2 days a week work - not a problem, but you cannot easily convert existent full-time employee to part-time contract. In many private companies it is done at a net increase in hourly wages, in some it is done through renegotiation of the contract. Both means are rather costly, so employers resort to such measures when dealing with people they cannot afford to let go - either because they have rare and important skills or (more commonly) because they have long employment tenure.