Monday, July 15, 2013

15/7/2013: Current Account Q1 2013: Extreme Imbalances in the Irish Economy

CSO recently released Balance of Payments stats for Q1 2013 - you can read the main headlines and see underlying data here.

Current account data is of more interest from my point of view. And it shows some changes both at a trend and at shorter-term levels, as well as the extremes of skewness in Irish economic activity in favour of the MNCs-dominated Financial and ICT services.

Let's run through the credit side (exports from Ireland) of the CA first.

Aggregate levels of exports (goods and services):

  • Aggregate level (goods and services) exports run at EUR55.657bn in Q1 2013, down on EUR60.295bn in Q4 2012 and down on EUR58.034bn in Q1 2012. This marked the level of exports comparable to Q1 2011 (EUR55.570bn) before we adjust for inflation.
  • Aggregate exports were dow 7.69% q/q in Q1 2013, having posted an increase of 1.22% q/q in Q4 2012. The rate of decline was 4.1% y/y compared to 2.19% rise in y/y figure for Q4 2012. 
  • Current level of quarterly exports is down 12.03% on peak.
  • Cumulated exports of goods and services for last 6 months were down 3.87% on previous 6 months and down 0.93% y/y. Last 12 months cumulated exports (12 months through March 2013) were still up 2.21% y/y. 

Chart above clearly shows the downward shift in the shorter-term trend from the peak of Q2 2012. The chart also shows that prior to the Q2 2012, from Q3 2009, rate of increase in overall exports was slower than in the period of Q1 2005-Q4 2007. This suggests that the 'exports-led recovery' of 2010-2011 was not rapid enough to compare with the previous periods of strong exports growth, such as Q1 1998-Q4 2000, and Q1 2005-Q4 2007. Instead, the rate of growth in exports was closer to that attained in Q1 2003 - Q4 2004 - the period coincident with growth post-collapse of the bubble.

Breakdown between goods and services exports:
  • Credit on goods side (exports) shrunk 3.82% q/q in Q4 2012 and this was followed by the decline of 4.83% in Q1 2013. Y/y exports of goods were down 9.21% in Q1 2013, after posting a y/y increase of 0.52% in Q4 2012. Credit on goods side of the Current Account was down 18.16% on peak in Q1 2013. 
  • Longer term series for credit on goods side were down 7.12% in current 6 months cumulative basis compared to previous 6 months period and y/y last 6 months cumulated credit on goods side was down 4.47%. Over the last 12 months (through March 2013) cumulated credit on merchandise side was down 1.74%.
  • On services side of credit in current account, q/q rise of 4.65% in Q4 2012 was followed by a decline of 8.66% q/q in Q1 2013. Y/y changes are more solid: +8.90% in Q4 2012, slower at +2.68% in Q1 2013. Current levels are 8.66% below peak.
  • Longer term trend for Services shows current 6 months cumulated services credits down 0.74% on previous 6 months - bad news. Good news, current 6 months cumulated credit up 5.84% y/y. 12 months cumulated credit through March 2013 is still solidly up 8.75% y/y.

On trends side: chart above shows worrying shorter-term changes downward in merchandise credit, from a gently up-sloping trend established in and contraction in Q4 2009, and a sharp short-term decline on robustly upward trend in services.

Breakdown in the core MNCs-driven services credits is in the following chart:

Balance side:
  • Merchandise balance has deteriorated at an accelerated rate in Q1 2013. Net balance in Q1 2013 stood at EUR7.458 billion surplus, down from EUR8.616 billion in Q4 2012 and EUR8.401 billion in Q1 2012. Overall, this is the lowest Q1 balance on merchandise side since the disastrous Q1 2008.
  • On Services, side, balance rose to EUR754 million in Q1 2013 from EUR238 million in Q4 2012 and is up on EUR178 million recorded in Q1 2012. Q1 2013 balance marked the third highest balance in the series, but the balance is rather sluggish compared to previous two top performing quarters (Q2 and Q3 2012).

  • Overall balance is at EUR1.197 billion in Q1 2013, down on EUR2.895 billion in Q4 2012 and up on deficit of EUR704 million in Q1 2012. Good news is: Q1 2013 marked the 7th strongest quarterly balance on current account side of all quarters since Q1 1998, and the strongest first quarter of any year since Q1 1998.
 Chart below shows breakdown in balance contributions by key MNCs-driven services sector:

The chart above underpins the extremely skewed distribution of source of the current account balance. Taking three sources of the balance attributable to MNCs-driven trade in services: Financial Services, Computer Services, net of Royalties and licenses payments, the three sources of balance accounted for 21.5% of all credits recorded on the credit side of the Current Account, but 190% of the total balance. In other words, even when we factor out net outflows of funds to cover licenses and royalties, the resulting balance on two sub-sectors of ICT and financial services stood at EUR2.271 billion which is almost double the total current account surplus of EUR1.197billion recorded across the entire economy.

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