Thursday, May 14, 2009

Economics 14/05/09: Economy bottoming out?

Per Davy note today: "pace of decline of activity has slowed: January-February was the worst point of the recession. All available indicators suggest that the Irish recession is past the most acute point. It is becoming clear that January-February was the most intense phase."

This statement is conditional on two assumptions - not explicitly identified -
  1. Irish fiscal position remains sustainable underpinned by relatively easy borrowing, despite the demand for new and massive volume of funding under NAMA; and
  2. Global economic stabilization is going to spill-over into Irish growth.
"Consumer confidence bottomed last summer," says Davy. I would not be impressed by this statement too much. Consumer confidence can be volatile. Underlying fundamentals are still weak and even assuming consumer confidence is on an upward trend (I am yet to see this happening), consumer spending might not resume, as jobs losses fear and taxation increases expectations are still there. It will take a NAMA-induced budgetary hit on households after-tax income to send confidence tumbling down to historic lows, but this is on the books for H2 2009 anyway.

"Core" retail sales are rising says Davy note. Hmmm, rising? Latest data for retail sales ex motor (core) we have shows that in February 2009 core sales rose 1.3% after contracting 1.1% in January and rising 1.1% in December after falling 2.3% in November... A saw-like pattern at the very best. If Davy want to stake their claim on February numbers, why not call for the 'bottoming out' in December?

"Survey indicators for services, manufacturing and construction have improved". Now, don't tell that to PMI survey administrators at Markit and NCB...

"Unemployment claimants are increasing more slowly". I am stunned to see Davy economics team actually looking at month-to-month dynamics for something so rich in lags and various degrees of severity by unemployment type as unemployment figures. Presuming they are referring to the Live Register data, what we do know is the following:
  • the pace of overall increases in Live Register data have slowed down from a destructively high level in January-February 2009;
  • this does not tell us anything about a trend, but can either signal a temporary bounce or indeed a reversal in trend;
  • I prefer the former explanation to the latter because I can clearly see a new wave of layoffs rising - construction sector jobs destruction is by now complete. But financial services and business services jobs and retail sector workers are probably going to see rising rate of layoffs. If I were working for Davy, I would explained to the 'masters ordering the music' for this note that laying off a financial services worker is 6-8 times more expensive for the economy than laying off a low-skilled construction worker. I would also explain that the probability of a laid off construction worker leaving this country is probably 10-15 times greater than the probability of a laid off Financial or Business Services worker going elsewhere. I would further add that our banks have issued much larger and more stretched mortgages to the latter, not the former and thus their impairments on mortgages side is, guess what, much more adversely impacted by the next wave of layoffs than by the former one.
"Meanwhile, the fact that Irish exports outperformed during the collapse in global trade late last year and in early 2009 received little attention". I agree with this statement. The problem is can we hold on to this performance and also, how much of the good news is driven by the resilient and competent MNCs and how much is driven by the lower value-added domestic exporters? One only needs to look at the combination of sectors with rising imports (inputs) and exports (outputs) to see where the answer to this question lies.

Having told us the half-baked story of the 'green shoots' Davy forecast the economy will bottom in Q1-Q2 2010. Now, this is puzzling. If we are seeing reductions in the rates of decline in some series today, while other are, according to Davy recording an outright improvement, what will be happening to the economy between Q3 2009 and Q2 2010? Bouncing at the bottom? No - Davy say that it will bottom out in Q1-Q2 2010. So things will be deteriorating then through Q4 2009. But hold on a second. The same Davy note also says - in its title - that "Ireland is probably past the worst of the recession"...

Anyone to spot a blatant contradiction here?

Well, Davy didn't:

"Consumer spending may trough in six to nine months due to the savings ratio peak and slower income declines" - so we are not past the worst yet in terms of consumer spending?

"The risks to our forecasts are evenly balanced: the economy may hit the floor sooner if we are too pessimistic about the fragile recovery in the global economy, but a double-dip recession is possible if the reaction of households to the recent Budget is negative". So again, under both scenarios, we are not past the worst point yet.

And as a side bar - how far detached from the reality do you have to be to presume that the household reaction to the recent Budget can be anything but negative?

I am simply amazed at the lack of consistency or basic logic in the Davy's arguments! But enough on this - there is an article of mine coming out on Sunday on the issue of 'green shoots'... so until then the topic shall rest.

But here is a good analysis of 'green shoots' theory for the global economy that folks in Davy might want to read.


Paul MacDonnell said...

Let me get this straight. The government ties the consumer to the stake. Revenue / Finance line up in front, raise their rifles and fire. As the bullet is travelling towards the consumer. Davy, a stockbroking firm, runs to the public with an an analysis that says 'the consumer will be fine: the worst is over - nothing to see here'.

Myles Duffy said...

Constantin, I listened to the superficial, cliche-ridden commentary - not analysis, from their chief economist on The Pat Kenny radio show this morning. I felt like giving him a good shaking. He sounded as convincing as a barber with a billboard and I will patiently await some more robust evidence of 'green shoots', especially as those with a job are to suffer further income confiscation this month.

x said...

Well, I just don't know. Was speaking with a person from the US who more or less thinks the worst is over in their country. We might just get a dead cat's bounce during the summer. Consumer confidence (or rather the lack of scepticism by the population at large) may result in a short-lived rebound of optomism. Let's face facts, there is a generation who've never known recession or hardship and believe there's a quick fix to every problem.

The only sticking point to complete recovery is debt. Debt was the quick cure-all for recent economic problems. While individuals may be able to take on more debt to stimulate the retail side of the economy, as a collective nation our options are narrowing by the day.

One man's green shoot is another man's thistle.