Friday, January 31, 2014

31/1/2014: January Credit Supply Conditions: Germany

Credit supply survey from Germany shows slight tightening in credit conditions, but continues to trend at the levels consistent with historically low credit constraints:

No surprise then that German policymakers are not to phased about the issues of credit supply... 

31/1/2014: Economics Teaching in Ireland

A very interesting research via @stephenkinsella and @brianmlucey on what is going on in Irish economics: teaching and research-wise...

Caveat - low response rate to the survey can be taken as a warning to conclusions, but also a reminder of just how detached Irish economics profession might be.

Basic conclusions: economics is a stand-alone science which should not be polluted by applications to the 'real world' which is highly imperfect, but does correspond rather well to orthodox economic models. If only the Government gave more money to economics researchers, the world can be made a better place, despite the fact that very few researchers seem to teach in the areas in which they research... Oh, and final point: leave us (economists) alone, you pesky little people...

Tuesday, January 28, 2014

28/1/2014: Decline in Debt and Regaining of Trust?

The following out this morning:

So is Herr Schaeuble correct? Did reductions of debt help 'regain trust during the crisis'? Were there actual reduction in debt?

Table summarises 2007-2013 maximum debt levels (for General Government Debt as % of GDP) attained by the euro area economies and the year when this maximum was attained:

Three observations:

  1. With exception of two countries: Germany and Portugal, 2013 debt to GDP ratios are maximal for the entire period 2007-2013.
  2. In the case of Germany, peak debt level attained in 2010 was 82.44% of GDP, while in 2013 estimated level of debt/GDP is expected to be 80.393% of GDP. The reduction is small. Meanwhile, German bund yields are not reflective of any specific reduction - they were low in 2009 and 2010 and they are low now.
  3. Portugal's peak debt/GDP ratio is notionally at 2012 at 123.8% of GDP. Country 2013 expected debt/GDP ratio is 123.56%, which is statistically indifferent from 2012 levels, so we cannot call this material by any measure.
Here's evolution of debts over the period in two charts, confirming that there has been no reduction in debt levels relative to the earlier stages of the Global Financial Crisis:

And here is the chart showing how dramatic were the increases in debt levels over the course of the crisis:

But, of course, virtually the entire euro area bond yields have shown improvements in 2012-2013, which is really totally and completely divorced from the debt dynamics:

The IMF is not even projecting decline in debt until 2015...

Monday, January 27, 2014

27/1/2014: Two Reforms, One Conclusion

Two headlines about EU policymaking, one conclusion:

EU audit reform reduced to 'paper tiger' : in which the EU 'reforms' of the rules for financial audits are shown as a 'paper tiger', "unable to break up the dominant position of the world's four biggest audit firms."

EU bonus cap to have little impact on bank pay : in which Fitch explains why "EU's new bank bonus rules are unlikely to have much effect on executive pay".

And the one conclusion is: for fake reforms with no teeth, tune into the EU policymaking post-crisis…

Friday, January 24, 2014

24/1/2014: The Fragile Five: Brazil, Turkey, South Africa, India and Indonesia

ECR wades in with a weekly analysis of the declining ratings across the Tier 3 countries: the Fragile Five: Brazil, Turkey, South Africa, India and Indonesia: here.

A chart and a table to summarise:

Thursday, January 23, 2014

23/1/2014: League Table of VC Funding, 2012

Remember that report from the WallStreet Journal that put Ireland at the top of the European league tables in terms of Venture Capital raised?  Reminder:

But here's the latest evidence on the same:
So we are not too low in the tables... although this still does not strip out state subsidies and MNCs funding...

23/1/2014: A Troubled Recovery: Sunday Times, January 12

This is an unedited version of my Sunday Times column from January 12, 2014.

To some extent, the forward-looking data on the Irish economy coming out in recent months resemble the brilliant compositions of Richard Mosse – Ireland's leading artist at the venerable La Biennale di Venezia, 2013 ( Mosse show in Venice comprised sweeping photographic landscapes of war-affected Eastern Kongo rendered in crimson and pink hues of hope.

In our case, the rose-tinted hues of improving recent data are colouring in hope over the adversity of the Great Recession, now 6 years in the running. Beneath it all, however, the debt crisis is still running unabated.

This week, Purchasing Manager Indices (PMIs), published by Markit and Investec, signaled a booming Q4 2013 economy. Services PMIs averaged 59.7 over the last quarter of 2013, well above the zero-growth mark of 50. Alas, the Services PMI readings have been showing expansion in every quarter since Q1 2010, just as economy was going through a recession. The latest Manufacturing PMIs averaged 53.6 over the Q4 2013, implying two consecutive quarters of growth in the sector. Sadly, manufacturing activity, as reported by CSO was down substantially year on year through October. Things might have improved since then, but we will have to wait to see the actual evidence of this. Past history, however, suggests this is unlikely: PMIs posted nine months of growth in the sector over the twelve months through October 2013, CSO's indicator of actual activity in the sector printed seven monthly declines. Rosy forward outlook of PMIs is overlaying a rather bleak reality.

But the story of fabled economic growth is not limited to the PMIs alone. Property markets were up in 2013, boosted, allegedly, by the over-exuberance of international and domestic investors, and by the penned up demand from the cash-rich, jobs-holding homebuyers. No one is quite capable of explaining where these cash riches are coming from. Based on deposits figures, Irish property buyers are not taking much of cash out of the banks to fund purchases of South Dublin homes. They might be digging money out of the fields or chasing the proverbial leprechauns’ riches or doing something else in order to pump billions into the property markets. Still, residential property prices are up year on year. Alas, all of these gains are due to Dublin alone: in the capital, residential real estate prices rose 14.5 percent over the last 12 months. In the rest of the country they fell 0.5 percent.

Fuelled by rising rents (up 7.6 percent year on year) and property prices, the construction sector also swelled with the stories of a rebound. Not a week goes by without a report about some investment fund 'taking a bet on Ireland's recovery' by betting long on real estate loans or buildings, or buying into development land banks. Thus, Building and Construction sector activity in Q3 2013 has reached the levels of output comparable with those last seen in Q4 2010. Not that it was a year marked by robust activity either, but growth is growth, right? Not exactly. Stripping out Civil Engineering, building and construction activity in Ireland is currently lingering at the levels compatible with those seen in H2 2011. Worse, Residential Building activity was down year-on-year in Q3 2013. Meanwhile, in line with other PMI indicators, Construction PMI, published by Markit and Ulster Bank, suggests that the sector has been booming from September 2013 on. Again, more data is required to confirm this, but CSO's records for planning permissions show declines in activity across the sector.

The truth is that no matter how desperately we seek a confirmation of growth, the recovery to-date is removed from the real economy we inhabit. As the Q3 2013 national accounts amply illustrated, the domestic economy is still slipping. In the nine months of 2013, personal consumption of goods and services fell EUR734 million in real (inflation-adjusted) terms, while gross domestic capital formation (a proxy for investment) declined EUR381 million. Thus, final domestic demand - the amount spent in the domestic economy on purchases of current and capital goods and services - fell EUR1.3 billion or 1.4 percent. In Q2 2013 Irish Final Domestic Demand figure dipped below EUR30 billion mark for the first time since the comparable records began back in Q1 2008, while Q3 2013 reading was the third lowest Q3 on record.

Beyond Q3, the latest retail sales data for November 2013, released this week, was also poor. Even stripping out the motor trades, core retail sales were basically flat on 2012 levels in both volume and value.

With domestic economy de facto stagnant and under a constant risk of renewed decline, Ireland remains in the grip of the classic debt deflation crisis or a balancesheet recession.

The usual canary in the mine of such a crisis is credit supply. Per latest data from the Central Bank, volumes of loans outstanding in the private economy continued to fall through November 2013. Average levels of credit extended to households fell almost 4 percent in Q4 2013 compared to 2012 levels. Loans to non-financial corporations fell some 5 percent over the same period.

Total private sector deposits are up marginally y/y for Q4 2013, but household deposits are down. Thus, recent improvements in the health of Irish banks are down to retained profits and tax buffers being retained by the corporates. Put differently, the canary is still down, motionless at the bottom of the cage.

In this environment, last thing Ireland needs is re-acceleration in business and household costs inflation. Yet this acceleration is now an ongoing threat. Courtesy of the 'hidden' Budget 2014 measures Irish taxpayers and consumers are facing an increases in taxes and state charges of some EUR2,000 per household. Health insurance, water supplies, transport, energy, and a host of other price increases will hit the economy hard.

And after the Minister for Finance takes his share, the banks will be coming for more. The cost of credit in Ireland has been rising even prior to the banks levies passed in Budget 2014. In 3 months through October 2013, interest rates for new and existing loans to households and non-financial corporations were up on average some 19-23 basis points. Deposits rates were down 71 bps. Based on ECB latest statistics, the rate of credit cost inflation in Ireland is now running at up to ten times the euro area average.

In other words, we are bailing in savers and investors, while squeezing consumers and taxpayers.

These trends largely confirm the main argument advanced in the IMF research paper, authored by Karmen Reinhart and Kenneth Rogoff and published last December. The paper argues that in response to the global debt crisis, the massive wave of financial repression is now rising across advanced economies. The authors warn that economic growth alone may not be enough to deflate the debt pile accumulated by the Governments in the advanced economies prior to and during the current crisis. Instead, a number of economies, including are facing higher long-term inflation in the future, and lower savings and investment. The menu of traditional measures associated with dealing with the debt crises in the past, covering both advanced and developing economies experiences, includes also less benign policies, such as capital controls, direct deposits bail-ins, as well as higher taxes and charges.

Ireland is a good example of the above responses. Since 2011 we have witnessed pension funds levies and increases in savings and investment taxes. We also have witnessed state-controlled and taxed sectors pushing prices ever higher to increase the rate of Government revenue extraction. Budget 2014 banks levy is another example. Given the current state of banking services in Ireland, the entire burden of the levy is going to fall onto the shoulders of ordinary borrowers and depositors. Insurance sector was bailed-in, primarily via massive increases in the cost of health cover and reduced tax deductibility of health-related spending.

As Reinhart and Rogoff note, historically, debt crises tend to be associated with a significantly lower growth and are marked by long-run painful adjustments. The average debt crisis in the advanced economies since the WWII lasted 23 years – much longer than the fabled ‘lost decade’ on reads about in the Irish media.

All of which goes to the heart of the today’s growth dilemma in Ireland: while macroeconomic performance is improving, tangible growth anchored in domestic economy is still lacking. The good news i: foreign investors rarely look at the realities on the ground, beyond the macroeconomic headlines. The bad news is: majority us live in these realities.


This column's mailbox greeted the arrival of 2014 with a litany of sales pitches from various funds managers. All were weighing heavily on ‘hard’ performance metrics, with boastful claims about 1- and 5-year returns. While appearing to be ‘hard’, these quotes present a misleading picture of the actual funds’ performance. The reason for this is simple: end of 2008 – beginning of 2009 represented a bottom of the markets collapse.

Over the last 10 years, annual returns to the S&P500 index averaged roughly 5 percent. This is less than one third of the 15.5 percent annualised returns for the index over the last 5 years. In Irish case, the comparatives are even more striking. Five-year annualised rise in ISEQ runs at around 12 percent. Meanwhile 10-year returns are negative at 1.2 percent.

Since no one likes quoting losses, the industry is only happy to see the dark days of the early 2009 falling into-line with the 5 year metric benchmark: the lower the depth of the depression past, the better the numbers look today.

The problem is that even the ten-year returns figures are often bogus. The quotes, based on index performance, usually ignore the fact that the very composition of the markets has changed significantly during the crisis. This is especially pronounced in the case of ISEQ. In recent years, ISE witnessed massive exits of larger companies from its listings. Destruction of banking and construction sector in Ireland compounded this trend. Put simply, investors should be we weary of the industry penchant for putting forward five-year returns quotes: too often, there's more wishful marketing in these numbers than reality.

23/1/2014: The Age of Great Stagnation: Village Magazine, January 2014

This is an unedited version of my column in Village magazine for December 2013-January 2014.

With employment rising, property prices on the mend, mortgages arrears stabilising, Exchequer returns surging and business and consumer confidence regaining pre-crisis highs, one can easily confuse Ireland for an Asia-Pacific economic dynamo.

Alas, the reality of our economic predicament suggests that once the official hullabaloo about the return to growth is stripped back to the bare facts, it becomes clear that Ireland is entering a new age, the Age of Great Stagnation.

The reasons for this are two-fold.

Firstly, we are still facing a long-term debt crisis. No matter what statistic one pulls out of the hat, this crisis, embodied in high levels of debts carried by our households, non-financial companies and the Exchequer, is going to be with us for many years to come.

Secondly, we are still in a structural growth crisis. Neither our own development model, heavily reliant on FDI and transfer pricing by the multinationals, nor our core trading partners growth models, reliant on fiscal and financial repression to drag themselves out of the crisis, are sustainable in the long run.

In our leaders’ dogmatic adherence to the past (a behavioural  fallacy that economists call path-dependency) our official growth theory suggests that economic recovery in our major trading partners will trickle down to Irish national accounts.

Alas, in the longer run, a lot is amiss with this thinking.

For starters, exports-led theory of growth is simply not true. Over 2000-2013, Ireland led the euro area in growth and in a recession. Since the onset of the crisis, cumulative real GDP across the euro area contracted by 2.1 percent. In Ireland, over the same period, GDP fell by 4.7 percent as domestic drivers for the crisis overpowered external factors. As for the recovery period, unlike in the early 1990s, the improving economic fortunes abroad are not doing much good for Ireland’s exports to-date. Over the last four years, volumes of imports of goods by the euro area countries grew by almost 15 percent. Irish exports of goods over the same period of time rose just 2.2 percent.

The reason for this is structural. Tax arbitrage only works as long as there are profits to move through the Irish tax system. Once the profits dry out, arbitrage ends. Pharma sector is a good example of this dynamic. Replacing goods exports-driven growth with ICT services-driven trade is decoupling our external balances from the real economy.

Worse, much of our trade balance improvements in 2009-2013 was down to collapse in imports. This presents a serious risk forward. To fund our public and private liabilities, we need long-term current account surpluses to average above 4 percent of GDP over the next decade or so. We also need economic growth of some 3-3.5 percent in GDP and GNP. Yet, to drive real growth in the economy we need domestic investment and demand uplifts. These require an increase in imports of real capital and consumption goods. Should our exports of goods continue down the current trajectory, any sustained improvement in the domestic economy will be associated with higher imports. A corollary to that will be deterioration in our trade balance. This, in turn, will put pressures on our economy’s capacity to fund debt.

And given the levels of debt we carry, the tipping point is not that far off the radar. In H1 2013 Ireland's external real debt (excluding monetary authorities, banks and FDI) stood at almost USD1.32 trillion - the highest level ever recorded. Large share of this debt is down to the MNCs. However, overall debt levels in the Irish system are still sky high. At the end of H1 2013, total real economic debt in Ireland - debt of Irish Government, excluding Nama, Irish-resident corporates and households - stood at over EUR492 billion - down just EUR8.5 billion on absolute peak attained in H3 2012.

Which brings us to the second point raised in the beginning of the article: our economic, regulatory, monetary and political dependency on the euro area.

Instead of charting own course toward sustainable long-term competitiveness, we remain attached at the hip to the euro area. The latter is now seized by a Japanese-styled long-term stagnation with no growth in new investment and consumption, and glacially moving deleveraging of its own banks and sovereigns. Financial, regulatory and fiscal repressions are now dominating the euro area agendas.

All of the trade growth across the euro area today comes from the emerging and middle-income economies outside the euro block. And competition for this trade is heating up. Even Portugal, Greece and Spain, not to mention Italy are posting positive trade surpluses and these are projected to strengthen in 2014.

Meanwhile, we remain on a slow path to entering new markets, despite having spent good part of the last 6 years talking about the need to 'break' into BRICS and the emerging and middle-income economies. In Q1-Q3 2012, Irish exports of goods to BRICS totalled EUR2.78 billion. A year later, these are down EUR240 million.

We are also missing the most crucial element of the growth puzzle: structural reforms.

Since 2008 there has been virtually no change in the way we do business domestically, especially when it comes to protected professions and state-controlled sectors. Legal reforms, restructuring of semi-state companies’ and the sectors where they play dominant roles, such as health, transport and energy, reductions in the costs and inefficiencies in our financial services – these are just a handful of areas where promised reforms have not been delivered.
Instead of reducing the burden of monopolistic competition in key domestic sectors, we are increasing it. In banking, oligopoly of three domestic players is being reinforced by exits of international banks and lack of new entrants into the market.

In line with the lack of transformative changes in state-controlled sectors, there is little innovation in the ways the Government approaches fiscal policies. Taxes and charges are climbing up, while spending continues to run ahead of pre-crisis trends. On a cumulative basis, over 2008-2013, Irish Government spending above 1997-2007 trend stands at around EUR79 billion. This trend is based on a generous assumption for annual growth of government spending of 6 percent from 1997-1999 on. Over the last sixteen years, average annual growth in our nominal Gross National Product run at under 6.07 percent per annum. Growth in Government spending over the same period stands at 7.22 percent and for current expenditure – at 7.46 percent.

Meanwhile, costs are rising across all categories of regulations, from taxation to professional compliance, to operational aspects of enterprise. Not surprisingly, Ireland is experiencing falling entrepreneurship. According to the World Bank data, in 2004-2008, Ireland's average density of start-ups was 6.1 allowing for an average of 17,500 new companies to be formed per annum. In 2012 the density fell to 4.5 and the number of new companies registered slipped to 13,774.  This does not account for numerous re-openings of the businesses liquidated over the recent years to resolve the back-breaking tolls of upward-only rent reviews.

The political cycle is now turning against the prospect of deep reforms with European and local elections on the horizon.  With it, any prospect of real, structural change in the economy is fading away. The current technical recovery in the economy is likely to push Irish growth to above the euro area average rates in 2014. Beyond then, there is little visibility as to what can sustain such a momentum. In short, enjoy this late sunshine, while it lasts.

23/1/2014: Insatiable Innovation - IBM's View on End-of-Growth Hypothesis

For some months now I've been meaning to post on the topic of the IBM's recent report on global development in Innovation markets, titled "Insatiable Innovation: From sporadic to systemic".

The paper is a sizeable response to the popular theory gaining ground that the world is past innovation capacity peak. I covered this topic on this blog (see for example

IBM folks, obviously disagree: "Is innovation dead? Numerous press reports seem to indicate so. A view is emerging that innovation is no longer the driver of growth it once was, as evidenced by a January 2013 cover article in The Economist. Pundits point to declining growth in global productivity as further proof that “The Big Idea” is a thing of the past (e.g., global per capita GDP 10-year CAGR, which topped 4 percent in the 1950s, fell to nearly 0.5 percent by 20102)."

A note of caution is worth putting forward here, IBM authors do not do literature analysis. This makes their paper weaker. They could have benefited from directly challenging the evidence and analysis presented in the likes of Gordon's work on the topic, rather than dismissively waving arms at it.

But what IBM authors do do is solid review of their own experience coming from the real economy and own IBV studies:

"Our view, based on analysis of past IBM Global CEO studies, as well as practical, hands-on experience, is that innovation is far from dead. It is, instead, thriving among those outperforming companies that apply product, operational and business model innovation to truly differentiate themselves from their competition. The ability to generate, control and exploit innovation can become a major source of strategic advantage and economic benefit, as demonstrated by the growth in value of those companies deemed “most innovative"."

This is not the evidence that can undermine the core thesis put forward by Gordon, but rather an argument that incremental innovation is alive and well.

Interestingly, the evidence presented by the paper seems to reflect well on the thesis of slowdown in revolutionary innovation and the diminishing returns to innovation. At the top level, here's what IBM are saying: "Innovation has been constantly evolving in its complexity and impact. Beginning with the industrial revolution in the Nineteenth Century and continuing through one technological milestone after another, economic activity has become more global, opening up new markets, new businesses and new business models (see Figure below). These models have evolved to the extent that, in today’s age of “universal customization,” customers are empowered to affect product attributes in real-time, with products and services becoming hypercustomized to meet the needs of individual customers."

Wait, but this is exactly what the thesis of diminishing returns to innovation is about. As returns are reduced, complexity (and associated costs) rise. The chart above, perhaps inadvertently, but nonetheless correctly, shows that acceleration in economic returns to technology from the current plateau can only happen if/when we move to Universal Customisation. This is fine, except we are not yet there. Thus IBM top-level view that innovation is about to raise the gear of productivity growth is reliant on assuming that what we envision already occurred. It has not. Hypercustomised has not yet met any of the needs of individual consumers and we have no idea when it will do so.

"Growing complexity has intensified competition, providing an ever-greater impetus for:
  • Product innovation that has broadened the competitive playing field. Products today increasingly face non-traditional competitors.
  • Operations innovation that has generated efficiencies and decreased cost for organizations and customers. Many organizations, for instance, now source production from specialists.
  • Business model innovation that motivates creation of sophisticated ecosystems of products, services and experiences. Emerging technologies are fundamentally changing business and scale economics."

Let me discuss couple of points, not subtracting from the graph, but rather adding to the picture of complexity in innovation it attempts to capture.

While at the first stage of Mass Industrialization, production lines started to replace farmers and artisans and new industries fueled economic growth, in more individualised world, empowered by what IBM terms "Mass (robotic)automation", Miniaturization and subsequently Universal Customization do not only lead to the increased functionality within a reduced size, improved speeds and performance and computerisation, but also to re-introduction of atomistic / artisan producers back into demand chain.

The reasons for this are two-fold:

  1. With advanced production technologies, execution of production becomes secondary to innovation and design. Speed to market becomes key differentiator of successful innovations from failed. Here, larger systems, including corporate systems, can be and will be successfully challenged by smaller producers;
  2. As demand becomes more individualised and more atomistic, satisfying this demand will involve more atomistic products and designs. Here, artisans can deliver significant value added to the market.

Universal Customisation, thus, is a stage where artisans, atomistic designers, consumers-producers evolve to regain markets from corporate, vertical structures of command and control.

Which means that the only way the system does not dissolve into entropy is by assuring that Global Connectedness stage delivers seamless access to the markets. In other words, Global Connectedness will require not only revolution of data flows (Internet), but revolution in logistics.

Or put differently, unless there are some yet-to-be-mapped breakthroughs in a number of areas, the age of Big Innovation is eclipsing. Gordon's thesis still stands...

23/1/2014: Remember that 'upbeat' IMF Growth Outlook?..

A quick note on the IMF update to the World Economic Outlook, released earlier this week. Here are some charts showing core forecasts progressions for growth and other global economy's performance metrics, with brief comments from myself.

The core point in the below is where does one exactly find the 'good news' relating to the IMF upgrading growth conditions expectations? The answer is that, contrary to media reports, the upgrades evaporate when once compares January 2013 forecasts against January 2014 ones, although there are some improvements in comparative for October 2013 against January 2014 forecasts. Materially, however, the upgrades are minor.

First for Advanced Economies:

The above chart shows evolution of real GDP growth for 2013 from the most recent forecast (January 2013) to the latest estimate (January 2014). The notable feature of this is the deterioration in underlying economic conditions over 2013, with forecast from January 2013 overestimating expected outrun for Global Economy growth and for all major advanced economies, save Spain, Japan and the UK. In case of Spain, forecast and outrun differ in terms of shallower expected decline in real GDP now expected for Spanish economy, compared to January 2013 forecast. In the case of Japan and the UK, the difference in higher estimated growth rates compared to forecast.

Moving on to 2014 forecasts for real GDP growth:

Much has been said in the media on foot of the IMF upgrade of its forecasts for global growth for 2014. This analysis is solely based on the comparing IMF outlook published in October 2013 against the forecast published this month. However, looking at January 2013 forecast against January 2014 forecast shows that the IMF outlook for the global economy has deteriorated since a year ago, from 2014 real GDP growth forecast of 4.1% to 3.7%. The same applies to all major advanced economies, save Germany, Italy, Japan and the UK.

Another important note here is that in the case of Italy and Germany, the difference between January 2013 and January 2014 forecasts is well within the margin of error. And that for the Advanced Economies as a whole, the forecast between two dates has not moved at all.

Thus, overall, the news analysis of 'greater optimism' from the IMF with respect to growth is really unwarranted - there is very little significant change to the upside in the IMF latest outlook.

Things are a little better for 2015 outlook:

However, we only have two points for comparing these forecasts: October 2013 and January 2014, so the above analysis (12 months span between forecasts) is not really available. Nonetheless, there is a significant marking up of global growth expectations between two forecast dates (from 2.9% to 3.9%), and  small downgrade in Advanced Economies growth forecast from 2.5% to 2.3%.

In addition, only Spain and the UK received a significant (statistically) growth upgrade, with the Euro area, Germany and Italy upgrades being within the margin of error.

The matters are actually far worse for the Emerging and Developing economies. 2014 forecasts are shown below:

With exception of Sub-Saharan Africa, all other major emerging and developing economies and regions have been downgraded in January 2014 forecast compared to January 2013 forecast.

When it comes to 2015 forecasts: there are more upgrades to growth forecasts:

But none - save for Developing Asia, China and MENA - are within statistically meaningful range.

The really devastating - the thesis of 'improved IMF outlook' - evidence comes from looking at the IMF forecast for Global Growth (controlling for FX rates):

Summary of the above chart is simple and ugly:
  • Lower growth estimates for 2013
  • Lower growth forecast in 2014, compared to the forecast published a year ago
  • Lower growth forecast in 2015

And now, recall the 'salvation by trade' argument for Europe and Ireland? The 'exports-led recovery' story? Here are IMF latest forecasts for global trade volumes growth, and for imports by the advanced economies (AE) and emerging and developing markets (EM & developing):

Summary of the above chart is also simple and ugly:
  • Lower trade growth in 2014 and 2015
  • Lower imports growth in Advanced Economies in 2014 and 2015
  • Lower imports growth in EMs in 2014 and 2015
So basic question is: Who will be buying all the exports that are supposed to grow across all European states?.. Martians?

23/1/2014: Funding Markets Spring Hits a Bump in the Euro Area: H2 2013 Repo Market Report

ICMA (International Capital Markets Association) report released yesterday showed massive 9.5% contraction in euro area repo markets, leading to lower availability of short-term funding to banks in the market over H2 2013 compared to H1. The core drivers of the decline are

  • ECB's supply of funds met by lenders who are becoming more reliant on Central Bank's funding, and
  • Cash hoarding by banks.
Here is a summary table showing H2 2013 repo market at the lowest point of any half-year period since H1 2009 and the third lowest reading since H1 2005.

At the same time, the share of anonymous electronic trading jumped unexpectedly to 25% from 19.8% a year ago. This came at the expense of domestic business (down to 26.1% from 29.7% a year ago) and less significantly at the expense of cross-border transactions within the euro area (down to 18% from 18.9% a year ago). The survey suggested that ECB's funding sources are the driver behind these trends in relation to domestic repos.

Summary table:

Net conclusion: things are not running smoothly in the funding markets, some five years since the crisis trough.

Full report here:

Wednesday, January 22, 2014

22/1/2014: Another 'Doing Business' Scorecard... Another Cloud of Fog...

Remember Forbes 'Best Places to Do Business' scorecard with no methodology but lots of claims to using data from other 'Best' rankings, some with overlapping data sources and some with clearly contradictory (to Forbes' results) assessments?

Reminder of that one is here: and on contradictory inputs, here:

Well, now not to be out-shined by 'The Capitalist Tool', Bloomberg decided to labour out its own list... glorious details of which are here:

Ireland ranks 20th, which is better than last year's 22nd.

And Portugal ranks 17th...

So, wait a second here. Apparently Portugal beats Ireland in:

  • Business Start-up Cost 
  • Labour/Material Cost
  • Transport Cost
Let's take the first one: Business Start-up Cost. 

Per Doing Business Rankings from the World Bank, 2014, Ireland ranks 12th in this category. This is based on 4 procedures required to start a business here, 10 days average time, 0.3% of income per capita as a cost, and zero paid-in minimum capital. Total cost = EUR80-130 depending on specifics of memorandum and articles filed.

For Portugal, World Bank rankings produce rank of 32nd in terms of Starting Business. This is based on 3 procedures required to start a business here, 2.5 days average time, 2.4% of income per capita as a cost, and zero paid-in minimum capital. Total cost = EUR300-360.

I am not sure things are that much 'easier' in Portugal than they are in Ireland, when it comes to registering business.

Now to labour costs (Eurostat): 
  • Nominal Unit Labour Costs (2005=100) in Ireland = 101.3 in 2012 against 103.2 in Portugal.
  • Real Unit Labour Costs (2005=100) in Ireland = 102.8 in 2013 against 93.5 in Portugal
  • ECBs Harmonised Competitiveness Indictors based on Unit Labour Costs: Q3 2013 latest: Ireland = 103.6 against Portugal = 101.1 (source:
So in nominal terms we rank better than Portugal, in real terms we rank lower, but ultimately, the gap is rather smallish at 2.5 points, with standard deviation of massive 22 points across all EEA countries.

But what about 'material cost'? Not sure what it all means, but the overall cost basis in the economy can be gauged by referencing the very same Harmonised Competitiveness Indicators cited above, except based on GDP deflator.
  • Ireland = 101.4 vs Portugal = 102.8 for Q3 2013, as before.
  • Eurostat supplies producer prices in industry, but Portugal does not report either quarterly or monthly data here, while Ireland does. So no Bloomberg-like comparative for us.
  • For domestic market, producer prices in industry are: Ireland = 111.60 in October 2013 against Portugal = 109.00. For non-domestic markets: Ireland = 100.30 against Portugal = not reported. Which suggests that the end comparative can be a small advantage to Ireland (swing across domestic and non-domestic prices is large for Ireland). Note: Spain has 104.73 and Spain is ranked by Bloomberg well ahead of Portugal.
  • Portugal does not report services producer prices data, unlike Ireland. 
So I am not too convinced that Ireland is that much poorer than Portugal on costs basis either.

The point is that all of these rankings are a silly way of rounding up publicity and are hardly indicative of the true realities on the ground. But I am looking forward to seeing Department of Finance and/or NTMA and/or other quango or Government publishing division putting Bloomberg rankings on their 'Ireland is the Best' list, as they are currently doing with the Forbes ranking.

A side-note: it would be helpful if Bloomberg actually published the data behind their rankings calculations. But at least they do provide scant methodological notes, unlike Forbes.

22/1/2014: Tale of Two Italian Earthquakes: Long-Term Effects of Institutional Capital

A very interesting paper from Banca d'Italia on the two divergent outcomes of similar earthquakes in two Italian regions.

The paper, titled "Natural disasters, growth and institutions: a tale of two earthquakes" by by Guglielmo Barone and Sauro Mocetti (Number 949 - January 2014: is worth reading.

Here is a summary of findings:

"We examine the impact of natural disasters on GDP per capita by applying the
synthetic control approach. Our analysis encompasses two major earthquakes that occurred in two different Italian regions in 1976 and 1980."

Regions covered: Friuli (1976 quake) and Irpinia (1980 earthquake).

"We compare the observed GDP per capita after the quake (which is an exogenous and largely unanticipated shock by definition) in each area with that which would have been observed in the absence of the natural disaster. We carry out this comparative analysis using a rigorous counterfactual approach, the synthetic control method, proposed by Abadie and Gardeazabal (2003) and Abadie et al. (2010)."

"According to our findings there are no significant effects of the quake in the short term. However, this result can be largely attributed to the role of financial aid in the aftermath of the disaster. Using different assumptions regarding the magnitude of the fiscal multiplier, we estimate that the yearly GDP per capita growth rate in the five years after the quake, in the absence of financial aid, would have been approximately 0.5-0.9 percentage points lower in Friuli and between 1.3-2.2 points lower in Irpinia."

Note that the above suggests that even at lower levels of impact, fiscal transfers played less importance in Friuli than in Irpinia.

This, however, is not what happens in the long run. While financial aid was effective in reducing impact of the earthquakes in their short-term aftermath, the same aid was not sufficient to counter longer term adverse effects. "In the long term, we find two opposite results: the quakes yielded a positive effect in Friuli and a negative one in Irpinia. In the former, 20 years after the quake, the GDP per capita growth was 23 percent higher than in the synthetic control, while in the latter, the GDP
per capita experienced a 12 percent drop."

What drove these divergent effects? "After showing that in both cases, the dynamics of the GDP per capita largely mirrors that of the TFP, we provide evidence that the institutional quality shapes these patterns. In the bad-outcome case (Irpinia), in the years after the quake fraudulent behaviors flourished, the fraction of politicians involved in scandals increased, and the civic capital deteriorated. Almost entirely opposite effects were observed in Friuli. Since in Irpinia the pre-quake institutional quality was ‘low’ (with respect to the national average) while in Friuli it was ‘high’, we argue that the preexisting local economic and social milieu is likely to play a crucial role in the sign of the economic effect of a natural disaster. Consequently, our results also suggest that disasters may exacerbate differences in economic and social development."

See these the map highlighting the quality of institutions differences:

Or in more succinct terms: "Consistently with these findings, we offer further evidence suggesting that an earthquake and related financial aid can increase technical efficiency via a disruptive creation mechanism or else reduce it by stimulating corruption, distorting the markets and deteriorating social capital. Finally, we show that the bad outcome is more likely to occur in areas with lower pre-quake institutional quality. As a result, our evidence suggests that natural disasters are likely to exacerbate differences in economic and social development."

22/1/2014: Russia and the Middle-Income Trap

Is Russia exhausting sources for economic growth?

A very important article from Andres Aslund

The idea of the 'middle income trap' is covered here:

The original research (revised to January 2013) is here: and non-technical exposition: and here:

22/1/2014: 2013 - A Kinder Year for Peripheral CDS...

2013 was a kind year for Irish CDS... but it was an even kinder one for CDS of the countries from which, allegedly, Ireland decoupled, e.g. Italy and Spain...

Oddly enough (for those claiming Ireland's 'uniqueness' in terms of positive performance) the year was even kinder for Slovenia - a country that is only starting to move into a crisis mode:

And even lots-of-pain-for-little-gain Greece and Cyprus managed to pick up some positive momentum:

So the entire thesis for the 2013 CDS markets in euro area 'periphery' is really about global chase for yield squeezing more and more funds into 'peripheral' bonds and bidding down risk valuations of the said paper. This re-assessment of risks has little to do with underlying reforms or fundamentals on the ground in the countries and more to do with the exuberance of investors pushing cheaper funds into every corner of financial universe.

The good news is - this has a positive effect of lowering longer-term borrowing costs. The bad news is - this presents a threat of reforms fatigue. But we know this much already. After all, the sovereigns are not immune from the effects of QE...

Tuesday, January 21, 2014

21/1/2014: Davos: Outdated Irrelevance of Banality?

If you do need to know exactly why the World Economic Forum at Davos is a vacuous undertaking, go no further than this:

The top 5 risks the #WEF survey delivers to us as a break-through insight into the future from all this 'intellectual' elite gathering in Swiss Alps this week are so... how should I put it mildly... banal? well-rehearsed? predictable? all of the above?

If we already know what Davos is just setting 'ahead' for the discussion, what on earth can be the point of following this global navel gazing ego fest?..

More to the point: Water crisis, Climate change, High unemployment, and Fiscal crises all have been at the core of Davos discussions in previous years. Apparently, the Greats of this World still can't resolve any of them. Time to fuel up that Learjet, cause pressing 'risks' are upon us...

21/1/2014: No Special ICT Services Tax, but Double-Irish is Back in the News

Fresh instalment of 'Non-tax Haven' double-Irish news:

To track back numerous links on the topic, follow this link:

21/1/2014: Four Reasons to Worry About Income Inequality

Not being a fan of 'relative poverty' concept for a number of economic reasons, here's my real concern:

Source for both charts:

The core concerns I have are that

  • Extreme disparities of wealth and income distributions can lead to inequality of opportunity and, as the result, to non-meritocratic distribution of wealth and income over generations. 
  • Extreme divergence in wealth and income distributions can lead to the decline of democratic participation and thus to a rise in political extremism.
  • Extreme differentials in income inequality the wake of a major economic crisis compound long-term effects of the crisis and reduce the rate of recovery, including structural recovery.
  • In the current crisis, the core cost of the crisis befell the highly indebted households, primarily from middle and upper-middle classes, plus lower-skilled unemployed. Exit from the crisis, therefore, requires repairing their balancesheets more robustly than the balancesheets of the top 1% earners. The fact that we are witnessing the opposite effect tells me that the underlying causes of the crisis have not been addressed. We have wasted trillions in scarce economic resources and achieved preciously little for it.

Sunday, January 19, 2014

19/1/2014: McKinsey Study of European Education System

McKinsey published this week a large study on the jobs markets outcomes of higher education.

The basic conclusion is that from employment point of view, European education is - on 'average' - not exactly fit for purpose.

I know, this is bordering on soliciting nasty responses from Irish academic establishment. Last time I dared criticise some of the practices witnessed in our higher education, I had triumphant academics denouncing myself across their blogs, as if the louder the chorus, the closer to truth the arguments get. Still, caveats on McKinsey research aside, the paper does present worrying conclusions and some evidence.

Read it for yourselves here:
- Global study:
- European study:

Note that Ireland is not explicitly covered in the study, so any analysis would have to be on the foot of comparatives to other systems. I am not going to provide this here.

In the nutshell, McKinsey suggests that educated Europeans are lacking basic work skills and that European education system is suffering from poor access, high cost, poor career planning and development, and lack of applied skills focus.

Evidence:  "The conventional wisdom, of course, is that the financial crisis and slow growth are the reason so many are finding it difficult to find stable, full-time work of the kind that will allow them to raise families and evolve into productive adulthood. This is true, of course, but it is not the whole truth."

"Youth unemployment was at a high level in many countries long before the financial crisis began to bite. Compared to unemployment in the general population, youth unemployment is stubbornly high in Europe... For the EU as a whole, the youth unemployment rate has not dropped below 17 percent at any point this century." In other words: "… economic conditions are not to blame for the frustration of employers as they evaluate the skills of young applicants."

Per McKinsey survey: "Only four in ten employers surveyed, in widely different countries and industries, reported that they were confident they could find enough skilled graduates to fill entry-level positions."

Why? "In Germany, …32 percent of employers surveyed said that lack of skills is a common reason for leaving entry level positions vacant, because the labour market is tight; only 8 percent of youth are unemployed". On the opposite side of the youth unemployment spectrum: in Greece "…more than 55 percent of youth are unemployed. Even so, our survey found that 33 percent of employers regularly leave vacancies open because they cannot find the skills they need."

McKinsey concludes that "…a lack of job-readiness skills— even in countries with slack labour markets—is hindering employment for young people. In effect, many employers choose not to hire, rather than take a risk on spending time and money training them."

"The shortage of skills is also holding back employers. In each one of the countries surveyed except the United Kingdom, more than a quarter of employers said that lack of skills has caused significant problems for their business. It is particularly interesting to note that in the countries with the highest youth unemployment, such as Greece, the proportion of employers reporting lack of skills as a problem was generally higher."

When you read McKinsey reports, the core problems with education-based skills development are striking.

"The most important barrier to enrolling in post-secondary education is cost. Although university tuition fees are generally highly subsidised in Europe, many students find the cost of living while studying still too high to sustain."

Applied skills? " a number of countries, vocational courses are not subsidised and can therefore be prohibitively expensive."

"A second barrier is a lack of information. Except in Germany, fewer than 25 percent of students in Europe said they received sufficient information on post-secondary courses and careers. In Europe, where many young people make a decision between vocational and academic paths at around age 15, such information is crucial."

Obviously, why would academic institutions bother with career advice when education is not about achieving any employment / career/ economic / business outcomes, as such outcomes pollute the pristine world of academia? Remember, we have academics who are proudly denouncing the pressures for skills and aptitude from the economy.

Not surprisingly, with the above attitudes, learning real trades and skills is a 'dirty' thing. "A third is stigma. Most of those surveyed said they perceived a social bias against vocational education even though they viewed it as more helpful to finding a job than an academic path. Fewer than half of those who wanted to undertake a vocational course actually did so."

On basic skills shortages: "...building the right skills, too many students are not mastering the basics, with businesses reporting a particular shortage of “soft” skills such as spoken communications and also problems with work ethic."

Now, really, folks... spoken communications and work ethic... obviously outrageously neo-con demands...

"Furthermore, too many young people are taking courses that lead to qualifications for which there is reduced demand. In Spain, for example, the number of people employed in construction has dropped 62 percent since 2008, but the number of students graduating in architecture and building increased 174 percent since 2005."

There are serious issues with 'chasing demand' view of education, issues arising due to long lags to completion of education, changes in trends in demand for skills etc. But there are also real problems here - lack of serious career guidance and development not only in the last year of education, but also in the first year, and before entering the third level institution.

Ok, you hear the shouting going on in academia, "we are no slaves to business" and "employers would say so"… but the problem is that even students themselves are noticing. Chart below illustrates:

There's loads more to read in the reports, so I encourage you do that... Valerian drops can be purchased in your local (to the University or IT school you are teaching at) pharmacy...

Saturday, January 18, 2014

18/1/2014: WLASze: Mathematics of Birds, Internet of Robots, Architecture on the edge, & Hannah Höch Retrospective

This is WLASze: Weekend Links on Arts, Sciences and zero economics.

A very well-written essay on natural optimisation, the case of migrating birds:

Favourite quote: "It may be that birds have sensory abilities we weren’t previously aware of. It might also be that ibises, and possibly other birds, have an innate ability to do the required mathematics, quite literally, on the fly: judging the distance to the next bird and counting wingbeat cycles as they go." Good luck solving that optimisation problem in your head, folks…

And while on the topic of mathematics for birds, here's another bit, on distribution of territorial rights amongst sea birds:

What's the PISA score for birds mathematical abilities, anyone?

Mathematics is language, and language is about communications. Pair together cold logic of simple dynamic systems (linear learning) and complex mechanics (robotics) and you have an untapped demand pool for communications between robots… Which begs a question: why not create an 'internet for things'?.. Why not, indeed, when one can easily be conceived as a cloud-based system...
Skynet it is not. At least it is not yet. But as more humanity decamps for Mars in the future, who knows, may be the planet of Earth will succumb to an apocalyptic vision of robots-dominated machines-led Skynet?.. I personally prefer mathematics for birds to internet for robots… kind-of less menacing and more beautiful at the same time...

Earlier this month, AIA, American Institute of Architects named best projects of the year its Honor Awards:
My favourite is, as usual, residential project (I love the challenge of site/scale/space/aesthetic that residential and small-scale public buildings provide):

Here's more on that project:

It seems I can't escape birds themed posts today, so here's the one that flips fly fishing upside-down… or at the very least adds some serious challenge to it:
Those of you who know about fly fishing would appreciate the sheer challenge of replicating this with a fly rod… weight 18 won't cast out a fly to simulate a bird… no way… we need some more serious gear for that…

St Petersburg in the news - the city got a Faberge museum, courtesy of Viktor Vekselberg:

Meanwhile, Sundance Festival gets Russian treats…

A new retrospective in London that is beyond 'worth visiting' - it is a must-see… "In the 1910s, German artist and feminist Hannah Höch was the lone woman among Berlin’s avant-garde Dada movement, the raucous group responsible for naming a men’s urinal Fountain and turning it into one of the most influential artworks of the last century. Though she hung out with art stars like Piet Mondrian, they never quite saw her as an equal--artist Hans Richter once smugly dismissed her as “the girl who procured sandwiches, beer, and coffee, on a limited budget.”"

Time lapsing to today, Höch is now recognised as one of the most important Dadists in the history of art, and yet rarely profiled in solo shows. This makes a major new exhibition at London’s Whitechapel Gallery that showcases over 100 works by Höch from the 1910s until her death at age 88 in the 1970s. Run to


18/1/2014: Portugal 'doin Dublin' or going for broke?

A very interesting interview with David Slanic, CEO of Tortus Capital Management LLC on Portugal's sovereign debt sustainability and the need for further debt restructuring.

Is Portugal really that close to restructuring as to pre-borrow reserves forward? Or is it pre-borrowing to do what Dublin did and exit in H2 2014 with no precautionary line of credit?..

Signals from the CDS markets? No evidence of serious markets concerns so far...

18/1/2014: Ireland's Credit Upgrade: Some Background

Moody's upgraded Irish sovereign debt ratings last night. My analysis is here:

Couple additional of points in relation to the upgrade.

Here's the current Western Europe league table in the Euromoney Country Risk Survey, placing Ireland at the top of the peripherals:

This is a consensus view across ECR group of economists and analysts and the core downward risk source for the ratings is Economic Assessment. Ratings upgrade will most likely translate into a higher score on Credit Rating, pushing us closer to France into the 2nd tier.

The upgrade was predictable and overdue. Two weeks ago I run the analysis of CDS spreads over 2012-2013 period (here: and the core conclusion relevant to today's news is in the last bullet point of the post.
  • Irish CDS since the beginning of 2012 are carrying heavier weighting on probability of default estimates: in the last two charts, our CPD is priced along the mid envelope of (CDS, CPD) quotes, while Greece implies underpricing of the probability of default (along the lower envelope). Our probability of default is slightly over-estimated compared to Portugal and Spain, but is in line with Italy. This potentially relates to the point raised above in relation to speed of our CPD declines over 2013: we might be experiencing an over-due repricing (very slight) in the relationship between the CDS levels and implied estimates of the probability of default.
In other words, the CDS pricing was signalling lower probability of default for Ireland. And it was predictable on the basis of core fundamentals as well. Here's from the post back in March 2013: "my view is that we are due an upgrade, but a single notch one, to reflect economic decoupling from the peripherals".

So to reiterate: the upgrade was

  1. Overdue
  2. Expected
  3. About right on the side of the change in the rating
  4. A good net positive on expected markets impact, and
  5. Enhancing stability of our debt, with medium-term expectation for lower borrowing costs (this will not play out right away, as Ireland's debt maturity profile is long-dated).
Meanwhile, this week's Euromoney ECR note on FY2013 credit risks shows continued drag on ratings in the euro area:

The full analysis (restricted access) is here. My quote on the above is about the general sense of complacency at the euro area 'leadership' level:

My full comment given to ECR on the 2013 results is here:

Euro area:

Euro area remained the weakest economic region globally, over the entire 2013, with a number of countries struggling with high unemployment, recessionary macroeconomic conditions, extremely low and near-deflationary price pressures and operating in the monetary environment still characterised by anaemic growth in money supply and tight credit markets. Based on the latest data, euro area is the only region world wide that is expected to post negative real GDP growth in 2013. 

The fact that this abysmal performance comes alongside relatively benign output gap, compared to other regions, and amidst overall improved global economic outlook, signals structural nature of the Great Recession in the euro area. In addition to the weak macroeconomic performance, euro area continued to suffer from acute leadership deficit - a fact that did not go unnoticed by the analysts. 

In 2013, eurozone's leadership effectively shifted from the risk-management mode that underpinned relatively rapid and robust rhetorical responses to the crisis in 2012, to a navel-gazing mode. Few of the policy proposals tabled over 2012 in response to the sovereign debt and banking sector crises were implemented or fully structured in 2013. The monetary policy, while remaining  relatively accommodative, continued to deploy the very same measures used in previous years, with little improvement in the credit supply conditions on the ground, at the level of the real economy. Thus, monetary growth was subdued and retail interest rates margins over the policy rate continued to rise, making credit to euro area enterprises and households both less available and more expensive.


The focal point of the euro area adverse news flow over 2013 has shifted from the so-called PIIGS to the relative newcomers to the crisis-stricken periphery: Cyprus and Slovenia. With Cyprus' depositors bail-ins setting a new benchmark for private sector burden sharing that will serve as a template for the euro area future crisis resolution measures, Slovenia has been desperately attempting to avoid a formal Troika bailout of its weak banking system. As the result, the country saw significant deterioration in macroeconomic environment over 2013. 

In the second half of 2013, with growth starting to return to core euro area economies, the centre of gravity in the Great Recession moved to economically weak Italy and France and away from the recovery-bound Ireland and Spain. In fact, 2013 macroeconomic and fiscal performance by the former warrants significant improvements in its credit scores, while the latter is starting to gain ground in terms of stabilising external trading conditions, while lagging on fiscal side. The expectation, therefore, is for continued decoupling of Ireland from the weaker peripherals sub-group as signalled by the CDS spreads and bond yields to-date.

Overall, Italy remains the weakest large euro area economy, member of the Big 4 countries of the eurozone, with virtually no growth and no reforms compounded by the risk of renewed political instability. Current expectation is for the real GDP contraction of 1.8% in 2013 following a 2.37% decline in 2012. Italy is also the only large euro area economy that is expected to post a fall in overall exports of goods and services in 2013 and, along side Spain, reduction in levels of employment across the economy. As the result of its poor growth performance, Italy is likely to post the only increase in the net government deficit for 2013 of all big euro area states, leading to an increase in the country debt/GDP ratio to 132.3%. The key to the country deteriorating credit risk scores, however, rests with the general markets perception that Italian political leadership remains incapable to deliver any meaningful structural reforms. 

Meanwhile, France is showing all the signs of deepening deterioration in manufacturing and core services activity since the onset of Q4 2013. French economy is currently once again on the edge of another recessionary dip and unemployment is poised to post further increases in Q4 2013-Q1 2014. At the same time, like Italy, French leadership appears to be stuck in 'neutral' when it comes to fiscal and structural reforms - a situation that is likely to spillover into a twin crisis of anaemic growth conditions and renewed industrial unrest in early 2014 (in 2013, French unemployment rate exceeded that recorded in Italy in 2012). With nearly zero structural adjustment underway, France's current account remains in deficit (-1.6% of GDP in 2013), while general government gross debt is now at around 93.5% of GDP, up on 90.2% in 2012, and heading higher in 2014. France also has second largest primary deficit of all larger euro area economies, as well as overall Government deficit that is in excess of that recorded in Italy. With public and household finances in tatters, France is likely to finish 2013 with lowest end-of-year inflation of all big euro area economies, pushing the country closer to deflation.