13/7/19: BRICS Current Account Surpluses: Its Russia and China Story

China and Russia dominate BRICS' current account dynamics and this is not about to change.

Both China and Russia have been posting strong current account figures in recent years, and this is not changing with the onset of the Russia sanctions in 2014 and the Trump Trade Wars in 2018. The two economies clearly dominate the emerging markets' current account dynamics in terms of both the sign of the balances (surpluses) and their magnitudes.

The caveat for Russia is that its current account gains are coming in at the time of relative weakness in its exports and net capital outflows:

Meanwhile, per latest data, U.S. trade deficit with China has widened once again as Chinese exports to the U.S. contracted by ca 7.8 percent y/y, while U.S. exports to China fell 31.4 percent. Which means the U.S. trade deficit with china is up 3 percent compared to June 2018.

It is a classic textbook example on how to lose 'bigly' from a trade war.

18/5/18: Euro area current accounts 1980-2017

What happened to the Euro area current accounts since the introduction of the Euro?

Periodically, I update my charts on the Euro effects on the external balances of the EA-12, the original economies of the Euro area. Here are the updates:

Considering first cumulated current account balances over 1980-2017 period, the chart below aggregates the EA12 into two sub-groups:

• The 'periphery' defined as a group composed of Italy, Greece, Spain and Portugal
• The 'core' group composed of the remaining EA12 countries

The chart shows several interesting facts

1. Current account deficits in the 'peripheral' states predate the introduction of the Euro
2. Since the introduction of the Euro through 2013 there was a consistent increase in the current account deficits amongst the 'periphery' states, with acceleration in deficits staring exactly at the point of the introduction of the Euro
3. Current account deficits in the Euro area 'peripheral' states were rapidly accelerating into 2009
4. Since 2014, current account deficits in the 'peripheral' states have been drawn down, at a moderate rate, as consistent with the internal deleveraging of these economies
5. Meanwhile, the introduction of the Euro accelerated accumulation of current account surpluses within the 'core' group of EA12
6. The rate of current account surpluses acceleration increased dramatically around 2004 and then again starting with 2009

In terms of external balances, the creation of the Euro area clearly resulted in compounding pre-Euro era existent structural imbalances in the EA12 economies.

Meanwhile, there is no discernible impact of the Euro on supporting growth in trade within the Euro area (here, we use changing countries composition of the Eurozone):

  As per above chart:

• From 2000 and prior to 2014, Eurozone performance in terms of growth rates in exports of goods and services largely underperformed other advanced economies (ex-G7) and was in line with G7 performance
• Before 2000, Eurozone was broadly in line with both the G7 and other advanced economies in terms of growth rates in exports of goods and services
• Lastly, starting with 2014, the Euro area has been outperforming both the G7 and other advanced economies in terms of growth in exports of goods and services - a development that is more consistent with the fallout from the twin Global Financial Crisis (2007-2009) and the Euro Area Sovereign Debt Crisis (2011-2013), as the process of internal devaluation forced a number of Eurozone countries into more aggressive exporting

On the net, there remains no current account-linked evidence to support an argument that the creation of the Euro has been a net positive for the Eurozone member states in terms of improving their external balances and exports flows. On the other hand, there is little evidence that the Euro has hindered trade flows growth rates, whilst there is strong evidence to claim that the Euro has exacerbated current account imbalances between the 'core' and the 'periphery' states.

13/12/15: Irish National Accounts 3Q: Post 6: Exports and MNCs

In the previous 6 posts, I covered:

1. Irish National Accounts 3Q: Sectoral Growth results;
2. Irish year-on-year growth rates in GDP and GNP;
3. Quarterly growth rates in Irish GDP and GNP; 
4. Irish Domestic Demand (Household Consumption, Government Spending and Public and Private Investment)
5. Irish external trade; and
6. Evolution of per-capita metrics and the dynamics of the crisis.

So let’s get down to the last post on the matter of Irish National Accounts for 3Q 2015: the subject of Irish economy’s dependency on MNCs… err… exports that is.

Real Exports as a share of Irish real GDP stood at 120.1% in 3Q 2015, the second highest proportion on record, down from 123.0% in 2Q 2015 which was record-breaking level. Similarly, Nominal Exports as a share of nominal GDP fell from 127.2% in 2Q 2015 (highest on record) to 122.7% (second highest).

This is a remarkable set of numbers, driven predominantly by the activities of MNCs in Irish economy, and a number that is a signifier of all that is wrong with our National Accounts. Unlike countries that serve as a basis for production, Ireland serves as a basis for both some production of goods and services, but also as a platform for large scale tax optimisation. Vast majority of our exports are accounted for by MNCs trading from here, with large share of activity not taking place here, but being booked into Ireland from abroad. This distorts actual levels and value of production, but it also distorts the metrics of this economy’s openness to trade.

As the result on much of the MNCs activities, profits derived in Ireland by MNCs can go four ways:

1. They can be booked into tax havens (in which case they register as outflows from Ireland or Irish imports);
2. They can be booked in Ireland as profits and retained here (in which case they accrue to our National Accounts);
3. They can be registered here and then repatriated abroad (in which case they register as outflows of factor income); and
4. They can be booked into here and then expatriated, but remain on our books, as long as the MNCs is domiciled here (e.g. company created as an Irish entity via inversion).

We have zero ability to tell how much exactly do MNCs derive in profit from activities here and tax optimisation through here. But we do have a number that partially captures (3) above. This is provided by Net Factor Income Outflows to the Rest of the World and here is the chart showing how it evolved over time relative to Exports:

Do note that over 2011 - present period, average net outflow of factor payments abroad has fallen as a share of Exports from 17.5% in the period of 1Q 2002 - 4Q 2010 to 15.1%, the lowest period average on record. In other words, during the last 4 and 3/4 years MNCs operating from Ireland have been expatriating fewer profits abroad than in other periods in history. Question is: what happens to these retained profits over time? Obviously, these MNCs have absolutely no interest in re-investing these profits in Ireland (there is neither the scale for such reinvestment, nor the need). This suggests that either these profits are being parked until such a time as when they can be expatriated for the purpose of funding MNCs investments around the world, or the MNCs overall switched to declaring lower profits as a share of their exports.

Truth is - we do not know what is going on, though we do know that something is afoot.

Overall, however, Irish economic miracle’s dependence on MNCs-driven exports growth is growing, whilst transparency of MNCs operations here (at least as far as the National Accounts go) is declining. Happy FDI days are upon us… as long as the U.S., OECD, EU, and the rest of the host of states and organisations hell-bent on ending the free for all tax optimisation by corporates aren’t looking…

12/12/15: Irish National Accounts 3Q: Post 5: External Trade

In the first post of the series, I covered Irish National Accounts 3Q: Sectoral Growth results. The second post covered year-on-year growth rates in GDP and GNP, while the third post covered quarterly growth rates in GDP and GNP. The fourth post covered Domestic Demand.

Now, consider external trade side of the National Accounts.

Irish Exports of Goods & Services stood at EUR62.52 billion in 3Q 2015, a rise of 12.4% y/y, after posting growth of 13.5% y/y in 2Q 2015 and 15.5% growth in 3Q 2014. Over the last four quarters, Irish Exports of Goods & Services grew, on average, at a rate of 13.4%, implying doubling of exports by value roughly every 5.5 years. If you believe this value to be reflective of a volume of real economic activity taking place in a country with roughly 1.983 million people in employment, you have to be on Amsterdam brownies. Over the 12 months through 3Q 2015, Irish economy has managed to export EUR235.67 billion worth of stuff, or a whooping EUR27.828 billion more than over the same period a year before. That’s EUR118,845 per person working at home or at work in Ireland.

Now, moving beyond the total, Exports of Goods stood at EUR34.062 billion in 3Q 2015, up 16.07% y/y - a doubling rate of 4.5 years. Exports of goods were up 16.03% y/y in 2Q 2015 and 16.9% in 3Q 2014, so over the last 12 months, average rate of growth in Exports of Goods was 18.01%. In other words, Irish Exports of Goods (physical stuff apparently manufactured here) are running at a rate of increase consistent with doubling of exports every 4 years.

Exports of Services are still ‘lagging’ behind, standing at EUR28.458 billion in 3Q 2015, up 8.2% y/y in 3Q 2015, having previously risen 10.5% in 2Q 2015. Both rates of growth are below 13.9% heroic rate of expansion achieved in 3Q 2014. Over the last four quarters, average rate of growth in Irish Exports of Services was 8.6%, to EUR107.29 billion.

However, in order to produce all these marvels of exports (and indeed to sustain living and consumption), Ireland does import truck loads of stuff and services. Thus, Imports of Goods and Services overall rose to EUR52.788 billion in 3Q 2015, up 18.9% y/y and beating 16.5% growth in 2Q 2015 and even 18.75% growth in 3Q 2014. Over the last four quarters average rate of growth in Imports of Goods and Services was impressive 17.6%.

Some of this growth was down to increased consumer demand. Imports of Goods alone rose 5.1% y/y in Q3 2015, compared to 8.1% in 2Q 2015 and 16.7% in 3Q 2014 (over the last four quarters, average growth rate was 10.1%). Imports of Services, however, jumped big time: up 27.9% y/y in 3Q 2015, having previously grown 21.8% in 2Q 2015 and 20.2% in 3Q 2014 (average for the last four quarters is 22.6%). Of course, imports of services include imports of IP by the web-based and ICT and IFSC firms, while imports of goods include pharma inputs, transport inputs (e.g. aircraft leased by another strand of MNCs and domestic tax optimisers) and so on.

Both, exports and imports changes are also partially driven by changes in the exchange rates, which are virtually impossible to track, since contracts for shipments within MNCs are neither transparent, more disclosed to us, mere mortals, and can have virtually no connection to real world exchange rates.

All of which means that just as in the case of our GDP and GNP and even Domestic Demand, Irish figures for external trade are pretty much meaningless: we really have no idea how much of all this activity sustains in wages & salaries, business income and employment and even taxes that is anchored to this country.

But, given everyone’s obsession with official accounts, we shall plough on and look at trade balance next.

Ireland’s Trade Balance in Goods hit the absolute historical record high in 3Q 2015 at EUR15.602 billion, up 32.4% y/y and exceeding growth rate in 2Q 2015 (+27.5%) and 3Q 2014 (+17.2%). Meanwhile, Trade Balance in Services posted the largest deficit in history at EUR5.87 billion, up almost ten-fold on same period in 2014, having previously grown by 154% in 2Q 2015.

Thus, overall Trade Balance for Goods and Services fell 13.4% y/y in 3Q 2015 to EUR9.732 billion, having posted second consecutive quarter of y/y growth (it shrunk 0.51% y/y in 2Q 2015).

As chart above shows, overall Trade Balance dynamics have been poor for Ireland despite the record-busting exports and all the headlines about huge contribution of external trade to the economy. On average basis, period average for 1Q 2013-present shows growth rate averaging not-too-shabby 5.1% y/y. However, this corresponds to the lowest average growth rate for any other period on record, including the disaster years of 1Q 2008 - 4Q 2012 (average growth rate of 24.3% y/y).

21/10/15: By Current Account Fetish Theory, Russia is Doing Quite Fine...

In charts we live... and in charts we delight.

Here is a neat summary of global current account balances (horizontal axis) against the rate of change in the current account over 12 months through 2Q 2015.

Source: @NickatFP 

6th largest surplus: Russia. Fastest growth in surplus: Russia.  So that petrodollar economy, then... like, say Saudi Arabia?..

Now, think of the favourite theory of 'sustainability' advanced by the likes of the Euro-centric Bruegel and its followers. The said theory rests on sustainability being equivalent to medium-term or long-term external balances... either that theory (underpinning most of the official EU economic mantra) off the rocker or... take a look at the chart again.

No comment beyond.

16/2/15: Current Account, Growth and 'Exports-led Recovery': 1999-2014

There is one European economic policy/theory fetishism that stresses the importance of external balance in 'underpinning sustainable' growth. The theory works the following way: countries with external imbalances (e.g. current account deficits) need to enact 'reforms' that would put their economies onto a path of external surpluses. More commonly, this is known as achieving an 'exports-led recovery'.

Set aside the Cartesian logic suggesting that if someone runs a current account surplus, someone else must run a current account deficit. Or in other words, if someone achieves 'sustainable' growth, someone else must be running an 'unsustainable' one.

Look at the actual historical relationship between current account position and growth in income per capita, measured in real (inflation-adjusted terms).

Take the sample of all advanced economies (34 in total, excluding those that we do not have full data for: San Marino and Malta). Take total growth achieved in GDP per capita from the end of 1999 through 2014. And set this against the average current account surplus/deficit achieved over the same period of time.

Chart below illustrates:

Note: there is no point, given the sample size, to deal with non-linear relationship here.

Per chart above, there is, statistically-speaking no relationship between two metrics. Multi-annual growth GDP per capita (in real terms) has basically zero (+0.019) correlation with multi-annual average current account balance. The coefficient of determination is a miserly 0.00036.

Now, cut off the 'outliers' - four countries with lowest GDP per capita: Estonia, Latvia, Slovak Republic and Slovenia. Chart below shows new relationship:

Per chart above, there is a very tenuous relationship between multi-annual growth GDP per capita (in real terms) and multi-annual average current account balance, highlighted by a rather weak, but positive correlation of +0.41 between two metrics. The coefficient of determination is around 0.17, which is relatively low for the longer-term averages relationship across the periods that capture both - a slowdown in growth in the 2002, a boom-time performance for both the advanced economies and the global economy during the 2000s and the global crises since 2008.

I tested the same relationship for GDP per capita adjusted for Purchasing Power Parity and the results were exactly identical. Furthermore, removing the three Asia-Pacific growth centres: Taiwan, Korea and Singapore from the sample leads to a complete breakdown of the stronger relationship attained by excluding the Eastern European outliers, with coefficient of determination falling to ca 0.05. Removing these three economies from the sample with Eastern European outliers present results in a negative (but statistically insignificant) relationship between the current account dynamics and growth.

Lastly, it is worth noting that the sample is most likely biased due to policy direction: during economic slowdowns and in poorer performing European economies in general, there is a strong policy bias to actively pursue exports-led growth strategies, while in non-euro area economies this is further reinforced by the pressure to devalue domestic currencies. Which, of course, suggests that the above correlation links are over-stating the true extent of the current account links to growth.

The conclusion from this exercise is simple: there is only a weak evidence to support the idea that for highly advanced economies, rebalancing their economic growth over the longer term toward persistent current account surpluses is associated with sustainable economic growth. And if we are to consider a simple fact that many euro area 'peripheral' economies (e.g. Greece, Cyprus, Portugal and Spain, as well as Slovenia) require higher upfront investments in physical and human capital to deliver future growth, the proposition of desirability of an 'exports-led' recovery model comes into serious questioning.

1/10/2014: IMF's out of Ideas, but still full of Analysis: WEO Chapter 4

IMF WEO October update is steadily creeping toward its main denouement, the release of the database update at the very end of the process that normally starts with releases of analytical chapters of the WEO - bigger thematic pieces dealing with the core topics relating to the global economy.

This week, IMF released its Chapter 4, covering the issue of current accounts imbalances across the world.

Per IMF, "Global current account (“flow”) imbalances have narrowed significantly since their peak in 2006, and their configuration has changed markedly in the process. The imbalances that used to be the main concern—the large deficit in the United States and surpluses in China and Japan—have more than halved. But some surpluses, especially those in some European economies and oil exporters, remain large, and those in some advanced commodity exporters and major emerging market economies have since moved to deficit."

You don't need to say. Just see this post from earlier today: http://trueeconomics.blogspot.ie/2014/10/1102014-that-exports-led-recovery-in.html

But IMF shows some pretty interesting data on composition and levels of imbalances across the globe. Chart below details these:

The IMF argues that "the reduction of large flow imbalances has diminished systemic risks to the global economy." Sounds happy-all-around.

But as usual, there is a kicker, or rather two:
"First, the nature of the flow adjustment—mostly driven by demand compression in deficit economies or growth differentials related to the faster recovery of emerging market economies and commodity exporters after the Great Recession—has meant that in many economies, narrower external imbalances have come at the cost of increased internal imbalances (high unemployment and large output gaps).

This straight into the teeth of the EU, where 'internal devaluations' (beggar thy own consumers and households) policies are all the rage. But it is also a warning to the emerging markets, where the latest stage of economic growth is translating into falling commodities prices, threatening to unravel their own economic 'recoveries' based on beggar-thy-trading-partners economic environment of elevated commodities prices in the past.

"The contraction in these external imbalances is expected to last as the decrease in output due to lowered demand has likely been matched by a decrease in potential output." Which means a Big Boom! Potential output is the stuff economies supposed to produce once the effects of the business cycle (recession-to-expansion) is netted out. In other words, the stuff that is somewhat long-term 'sustainable'. And the above statement says it is down.

"However, there is some uncertainty about the latter, and there is the risk that flow imbalances will
widen again." Which means 'choose your poison' - either risks are materialising in structural growth slowdown or risk will be materialising in current account imbalances returning once again. Rock. Hard place. The world stuck in-between.

"Second, since flow imbalances have shrunk but not reversed, net creditor and debtor positions (“stock imbalances”) have widened further. In addition, weak growth has contributed to increases in the ratio of net external liabilities to GDP in some debtor economies.These two factors make some of these economies more vulnerable to changes in market sentiment. To mitigate these risks, debtor economies
will ultimately need to improve their current account balances and strengthen growth performance."

And here we have the usual bangers-n-mash dish from the IMF. What it says is that debt overhang is not getting better, but might be getting worse. And with that, the IMF runs out of any solutions other than go back to 'internal devaluations'. Which, of course, gets us back to the first kick in teeth. Bigger rock. And an even harder place. And Euro area is now wedged in-between.

"Stronger external demand and more expenditure switching (from foreign to domestic goods and services) would help on both accounts," says IMF. And this is the statement of surrender. Basically IMF says that if more people were to buy stuff from the countries with weak external balances and loads of debt, things will improve. No sh*t Sherlocks. And if money was growing on trees in Sahara Desert, things would improve even more.

IMF's out of idea. But IMF is still full of analysis. QED.

13/7/2014: Up, Down the Current Account Ladder

For quite some years now, Irish Governments have been keen promoting Ireland's 'unique' external balances performance that, allegedly, made us so distinct from other 'peripheral' countries. Our external balances were booming, we were told by the Government. Ireland's external surpluses are its unique strength, said the boffins at the Brussels think tanks. We are not like Portugal or Greece or Spain when it comes to the 'real' 'competitive' economy.

The hiccup of course, is that this rhetoric was ignoring few little pesky facts, such as the source of our external trade 'competitiveness' or the shifting composition of our trade. Nonetheless, it had some teeth: we started with a much higher base of exports in the economy and stronger external balances than other 'peripheral' states.

Still, in the world of crisis-related 'adjustments', the rate of change matters as much as the starting levels. And judging by IMF data, our rate of improvement in external balances is not that unique:

Per chart above, trade-attributed current account adjustments (the pink bar) for Ireland are higher than for any other peripheral economy. But net adjustments (accounting for income and transfers) are only third highest. This, in part, is due to the fact that vast majority of our exports are supplied by companies that increasingly ship more profits out of Ireland (and this is even worse if we are to account for profits temporarily retained in Ireland by the MNCs).

Still, good news: our trade balance is doing well. Better than any other 'peripheral' in the sample...

4/5/2014: Ireland's Fabled External Balance Performance: 1990-2013

Ireland's external balance performance has always been a major point for departure in analysis of our economic growth, sustainability of our debt and overall consideration of our economic infrastructure quality. As a Small Open economy, Ireland is trade-intensive. As an MNCs-led economy, Ireland is even more trade-dependent, in so far as we need larger external surplus to deliver same jobs creation as other European economies with smaller MNCs-induced GDP/GNP gap.

Since the start of the crisis, Irish current account performance was invariably brought forward as evidence of significant improvements in the underlying economy's competitiveness. And our gains were pretty strong - judging by this metric:

• In the 1990s, Ireland averaged current account surpluses of 1.85% of GDP annually
• In the 20002, we run current account deficits averaging -2.29% GDP per annnum
• Since 2010 through 2013 we have been running current account surpluses averaging 3.35% per annum
• The swing - from the deficit to surplus is 5.43% of GDP for Ireland - seemingly strong stuff.

The question is, of course, are the above numbers really strong, as in exceptionally strong or very strong as judged by comparison with other similar economies?

Let's consider EEA24 - 24 advanced economies of EEA community (excluding those economies of EEA that are not making it into 'advanced economies' club).

• In 1990-1999 Ireland's performance was strong in terms of the current account, but it was not exceptions - we ranked 5th in the EEA24 in the size of average current account surplus, behind Belgium (4.67% of GDP), Luxembourg (10.52% of GDP), the Netherlands (4.16% of GDP), and Switzerland (6.93% of GDP).
• In 2000-2009 we ranked 14th (no need to list the countries we were behind in this metric during this period - we were doing badly).
• In 2010-2013 we ranked 7th - behind Denmark (6.09%), Germany (7.05%), Luxembourg (6.91%), the Netherlands (9.17%), Sweden (6.08%) and Switzerland (10.74%).

Here's a chart illustrating this performance - for legibility, I only left in the chart Small Open Economies.

But what about the overall period of the crisis, you might ask? 

Instead of decades-averages, let's take a look at the average current account balances over 2008-2013 period. Here we rank 8th in the EEA24 with our current account surplus averaging 5.4% of GDP.

The key point here is that Ireland's current account performance has been strong, but it has not been exceptional. Certainly not exceptional given the need of this economy for deleveraging (and associated requirement for higher current account surpluses). 

The good news is that at 5.4% of GDP, our current account surpluses since 2008 are above those in the deleveraging period of 1992-1997 when these averaged 3.13% of GDP.

The bad news is that we are still to undo the aggressive current account leveraging accumulated during the 2000s. In the decade of 2000s, Ireland's cumulated current account deficit amounted to USD52.42 billion. During the 1990s our cumulated surplus was USD12.49billion and in 2010-2013 our cumulated surplus was USD28.88 billion. In other words, from 1990 through 2013 we are still in a deficit of USD11.04 billion and if we take 2000 as the starting point, our cumulated deficit is USD23.54 billion.

For comparison, Switzerland's cumulated 2000-2013 surplus is USD644.86 billion, Sweden's USD377.99 billion, Denmark's 149.18 billion. 

In fact, non-euro EEA24 members are in a vastly stronger current account position than their euro area counterparts, but that is probably a matter best covered separately, although it does probably explain why euro area needs ESM and other means for borrowing externally.

Lastly, however, let's come back to that 'swing' in our current account from deficits in the 2000s to surplus in 2010-2013. Remember, the swing was a sizeable 5.64% of GDP. But it only ranks us as 5th economy in the EEA24 in terms of the magnitude of improvement in our competitiveness. Not exactly an 'exceptional case' either.

15/7/2013: Irish Travel & Tourism Sector Impact on External Balance

Some interesting figures on Tourism and Travel contributions to the Current Account in Ireland over 1998-2012 period show that, at least year-and-a-half into State subsidisation of the sector under the current Government, there was little change on the sector exporting activity to show for the subsidies.

The numbers below clearly highlight the low impact of the core indigenous sector and subsidies allocated to it on the external balance in the Irish economy. Please keep in mind - I am only considering impact of the sector on external balance here, not on other economic performance parameters.

Let's crunch through some numbers:

• In 2012, Tourism & Travel (T&T) sector contributed EUR3,022 million to the credit side of the Current Account in Ireland - an improvement of just EUR12 million over 2011 and still EUR84 million below 2010 level. Excluding the absolute low (so far) of 2011, 2012 was the lowest reading since 2000 (remember - these are nominal figures). In real terms, this was lower than 2011 reading and the lowest year on record (since 1998).
• Because debit side of the sector (imports of T&T services and inputs) dropped over 2011-2012 from EUR4,817 million to EUR4,609 million, overall negative balance in the sector has shrunk from EUR1,807 million in 2011 to EUR1,587 million in 2012.
• But don't credit Government subsidies for the above. Increases on credit side were most likely driven by the net outward emigration and return visits by new emigrants. That is, given how low overall increase on the credit side was.
• Incidentally, the last time Irish T&T sector yielded a surplus on the balance side of the Current Account was back in 2000 and even then the surplus was puny at EUR100 million. Now, et's recall - in 2012, surplus on Transport sector side was EUR2,934 million, on Insurance side EUR2,650 million, on Financial Services side EUR2,465 million, on ICT services side EUR35,332 million and there were deficits of EUR28,867 on Royalties and Licenses side and EUR462 million on Communications side. All of which makes T&T sector, sort of not exactly a massively significant contributor to the current account. Which is not to say anything about it's contributions to other parts of the economy, of course.
• But in terms of credit side of the Current Account alone (the target of Irish Government's subsidies/supports in T&T sector case), we have: T&T contribution in 2012 at EUR3,022 million, against EUR4,609 million contribution by Transport sector, EUR8,910 million contribution by Insurance sector, EUR7,073 million contribution by Financial Services sector, EUR35,681 million contribution for ICT services, and EUR3,888 million contribution from the Royalties and Licenses line of credit. Only Communications sector - with credit contribution of EUR627 million was below the Tourism and Travel when it comes to gross credit to the Current Account.

Two charts:

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 dot.com 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.

18/8/2012: What the IDA forecasts don't tell us?

I waited for several days before posting about the latest mystery of Irish statistics. 

This presentation from IDA contains the following chart:

Now, IDA is correct in highlighting the Current Account as a key to our recovery 'policies'. For a number of reasons:

1. In virtually all debt overhang recessions in the past, return to positive surpluses on current account were required as a necessary, albeit not always sufficient, condition to restore economy to a stable path
2. In Ireland, we have witnessed some significant improvements in the Current Account so far during the Great Recession

Alas, the above chart is a mystery to me. Let me explain.

Firstly, it cites CSO as the source of the chart. I have contacted CSO about their 'forecasts' for 2012-2017 period for the Current Account and their reply was: 

"Having consulted with my colleagues they assure me that they do not produce forecasts, let alone five year forecasts. Furthermore, my colleague suggested that the figures might be derived from a paper published by the Dept. of Finance (page 9): http://budget.gov.ie/budgets/2012/Documents/Economic%20and%20Fiscal%20Outlook.pdf It should be stressed, however, that these figures are the department's and not the CSO's."

Now, here are two forecasts for Ireland's Current Account known to me, sourced from the updated IMF database (July 2012 update to WEO database) and the above link from the Department of Finance:

Clearly, no source, bar IMF projects anything beyond 2015. Also, clearly, even the IMF projections appear (one can't really properly read IDA chart) to be as 'upbeat' as IDA's chart in 2013-2017 projections range. 

But wait, recall that IMF is providing a forecast, based on their central tendency scenario. They also provide useful assumptions and data that went into their scenarios assessments which allow us to compute historical confidence intervals for their own forecast. And, ahem, it turns out the IMF 'central' tendency forecast - illustrated above - firmly falls outside the reasonable 90% single tail confidence interval (adjusting for sample size, but caveating this). In other words, it is improbable, were historical Irish performance on current account balance to be out guide. The same applies to the stress-testing metric on current accounts used by the IMF - the primary current account balances (current account ex-interest payments).

So the IMF forecasts above assume massive change in Irish current account performance relative to history, the change that - may be IDA can expand on this - is supposed to come in the environment of adverse global trading conditions, pharma cliff hitting Irish exports, and re-orientation of trade flows worldwide away from North-South shipments of higher value added goods and services toward South-South flows.

But wait, things are actually worse than that. DofF forecasts deviate from the average for the above sources ex-DofF by a cumulative 1.7% of GDP and from those by the IMF by a cumulative of 2.5% of GDP for the period 2011-2015, which means that DofF forecasts are even less probabilistically likely to materialise than those for the IMF.

Even were the IMF to materialise, Ireland's current account surplus in 2012-2017 will be 2.78% of GDP on average - an impressive swing from a recent historical performance, yet contrasted by the economy with ca 120% debt/GDP metric on Government side alone! Anyone out there really thinking this is going to be a silver bullet for our economy?

So things are a bit less rosy than the IDA seems willing to admit to the prospective Foreign Direct Investors and the media.