Economics 09/07/2009: Green Shoots to Brown Manure

Inflation figures are out - more significant deflation in works than was anticipated by the analysts (-0.3% in June relative to May, with annual rate off -5.4% in June against 4.7% in May). We are also diverging from the Eurozone, though no one should really care about that. Mortgage costs reductions (down 5.7% on average in June relative to May) were the largest factor. Public sectors and state-controlled prices are still in inflationary territory, so no surprise here either. My prediction for the annual inflation rate to hit -5.8-6% in Q4 2009 and reach -4.1-4.3% in a year as a whole. Public sector v private sector price differentials should widen by ca 5.5-6%, so the rip-off that is our State controlled economy will continue into 2010.

A decent note on inflation was from the Davy's this time around (sadly, my usual favorite Ulster Bank note was a bit less advanced than customary). Davy: "The good news is that Ireland has closed the gap further with the euro area price level. HICP in the euro area was up 0.2% mom, according to the “flash estimate”, versus no change (+0.0%) here in June. Ireland's price level is slowly but surely re-adjusting towards the euro area-16 level. Note that the gap was a massive 22% in 2008 on average according to Eurostat. It has closed by more than two percentage points since the peak last year and will be below 20% on average at end-2009. We do not think the price levels should necessarily converge (productivity and, hence, income disparities justify a premium), but Ireland's exporting sector – particularly the indigenous part – needs the gap to tighten significantly yet."

Now, not to overplay these trends, one has to be aware of the fact that this is exactly what we are missing in terms of devaluation. Competitiveness, normally restored via dropping one's currency value, would imply the value of the Irish Euro traveling south of the current 20% price gap with the EU and would require a devaluation to the tune of 30%. Why? I don't frankly believe in our superior productivity, so any income differential between Ireland, and say, Germany, should be nominal. We can't do that currency adjustment. Which means that with price deflation taking, say, 6-10% of the Eurozone-Ireland gap away, this leaves a 20-24% decline in wages to take up the slack. Awesome price to pay for the Euro membership.


Production in manufacturing figures for May 2009 are out as well:
Turnover index is down on renewed pressure - sales are stalling again, but production index is up, so is overcapacity looming again?
The two series crossed over in May, so expect production to turn down in summer months and turnover index to stagnate, setting stage for new layoffs should things fail to improve in September. Margins tighten, so workers must be next.

As manufacturing records -1.3% fall in January-May 2009 in annual terms, the rate of decline has indeed slowed, but this can easily be a technical correction before a renewed pressure down. Of course, 18.7% increase in pharma output obscured the reality somewhat. Significantly, other modern sectors posted a 22% drop in output, while domestic sectors recorded 13.8% contraction in 2009 to June 1. Now, recall that Davy eagles have spotted the end of economy-wide recession by pointing to agriculture turn-around. Inclusive of massive subsidies boost to pork producers, food sector output was down 0.4% in the first five months of 2009.

In seasonally adjusted index terms, manufacturing industries now stand at 97.6 - a reading that is bang-on in line with December 2008 (97.4) and February (97.5), marking the third lowest point for the sector since 2005. Turnover indices have hit new spells of deterioration in Manufacturing, Chemicals and Chemical Products, Basic Pharma Products & Preparations, Computer, electronic & Optical Products and Other Manufacturing - in other all sectors but Food Products. Capital goods production index is at the second lowest point since January 2008, Intermediate Goods index is no turning negative again.

In case you need an illustrative proof:
Slightly more interesting day for the US economy.

First, a great salvo from Warren Buffett, who said that as unemployment can hit 11%, the US economy might need a second round of stimulus. To those still looking for those 'green shoots', Buffett's analysis is clear: "We're not in a freefall, but we're not in a recovery either," he told ABC's "Good Morning America. We were in a freefall really in the last quarter of last year, starting in the financial markets and spreading to the economy, and we had this huge change in behaviour." Buffett compared the 2009 $787 billion stimulus passed by Congress to "half a tablet of Viagra and then having also a bunch of candy mixed in --- it doesn't have really quite the wallop."

Second, US first-time claims for state unemployment benefits fell 52,000 to 565,000 in the latest weekly data, after seasonal adjustment, while continuing claims hit a record high, as the Labor Department reported. The four-week average of initial claims was down 10,000 to 606,000. The monthly moving average of continuing claims rose 12,000 to a record 6.77mln.

Nouriel Roubini has a superb article in Forbes (here): "The June employment report suggests that the alleged green shoots are mostly yellow weeds that may eventually turn into brown manure." A priceless openning salvo. As Brian Cowen is waiting for the US to pull us out of the depression.