20/9/2012: 'Flat growth' and the shrinking Irish economy

Ok, folks... the latest batch of news from CSO and the official 'Green Jerseys' reaction to same would have made a fine candiate for a Nobel literature prize, were they published in a single tome with a heading Literature of Absurd on it...

We have our routine 'Housing market has bottomed out' shrills from the property pushers in the media - despite the fact that property prices continue to fall. We also have the metronome-like 'Unemployment has stabilized' tale, a chapter of gargantuan efforts to avoid mentioning the fact that fewer and fewer people actually work in Ireland, earning living and paying taxes.

Today we have a new pearl: 'Irish economy is growing once again, albeit slowly'.

Complete porkies, if you ask me. Here's the plain and simple reality of what's going on:

In constant market prices terms, Irish GDP based on constant factor cost (in other words, the real activity in the economy carried out by MNCs and domestic enterprises, net of taxes, gross of subsidies) grew 2.3% (+€819 mln) q/q in Q2 2012. Alas, as usual, q/q growth is... err... mostly meaningless. Instead, y/y comparative shows this metric shrinking €300mln (-0.8%).

What's the dynamic here? Oh, not good, either. In Q2 2011, y/y real GDP (constant factor basis) grew 3.21% y/y. In this quarter it shrunk 0.8% y/y... a negative growth swing of 4 percentage points!

Now, adding taxes (net of subsidies) to the above figure produces official real GDP (GDP expressed in constant prices terms). This stood at €40.327 billion in Q2 2012 up €744 mln on Q1 2012 (+1.9% q/q) but down 1.1% (-€442mln) y/y. Now, wait, folks... so official GDP is down y/y. Not up.

What's the dynamics of this change? Oh, well, in Q2 2011 official real GDP was up 2.86% on same period in 2010, so Irish economic growth has overall deteriorated in Q2 2012 compared to same period a year ago by a whooping 3.9 percentage points.

Next step is for us to subtract from our real GDP outflows of payments abroad (net of inflows of income from abroad) - the so-called Net Factor Income From the Rest of the World adjustment. Bear with me here. It is important.

In Q2 2012 we, as economy, have managed to send out €7.219 billion in factor payments abroad, net of what we received from abroad. Sounds a lot? Not really - this is down on €8.397bn in Q1 2012 (which added €1,178mln to our GNP) and it is down €1,385 mln on Q2 2011 (which adds same amount to our GNP compared to Q2 2011 levels).

What the above means? Here's the punchline to reality: as the result of €744mln increase in our GDP and a €1,178mln decrease in our payments abroad, our GNP officially expanded by €1.922bn in Q2 2012 q/q. Meanwhile, due to a contraction in real GDP of €442mln offset by reduction in outflows of income abroad of €1,385mln, our GNP rose €943mln (+2.9%) y/y in Q2 2012.

Thus, real economic activity in Ireland fell, y/y in Q2 2012, but because the MNCs have decided to expatriate less income out of Ireland in Q2 2012, our GNP actually rose.

Why would MNCs decide not to expatriate much of profits? For a number of reasons:

1. Lack of capital investment around the world means corporates have no incentive to move profits out of Ireland outside the immediate objective of boosting reported profits at home;
2. Booming equity markets in the US mean that there is no immediate pressure for US MNCs operating here to ship retained profits out of Ireland's tax heaven;
3. Fall-off in pharma exports from Ireland also took a bite out of the retained profits here.

Any of these have any tangible effect on our real economy? Not really. Actually - none whatsoever. 

In real economic terms, Irish economy shrunk in Q2 2012 by 1.1% (real GDP terms) y/y and that is it, folks. 

One more note. In seasonally adjusted, constant prices terms:

• Personal Consumption of Goods & Services has hit absolute record low in Q2 2012 of €19,598mln for any quarter since Q1 2007.
• Net Expenditure by Central and Local Government on Current Goods and Services has hit an absolute low of €5,934mln in Q2 2012 for the entire period since Q1 2007.
• Gross Domestic Fixed Capital Formation has hit a record low of €3,427mln
• Exports of Goods and Services have posted a contraction on Q1 2012 but are up €1 billion on Q2 2011
• Imports of Goods and Services have posted a q/q contraction of €1.7bn and are now at a historical low for any Q2 period of 2007-present period
• Total domestic demand is now at the absolute lowest point for any quarter since Q1 2007 and is down €1.6bn on Q1 2012 and €1.9 billion on Q2 2011.

This is not flat growth, folks. This is shrinking real economy.

Note: I will post updated charts later tonight. Stay tuned.

26/3/2012: QNA Q4 2011 - Part 4

In the first post on QNA results for 2011 I covered data for annual GDP and GNP in constant prices terms. The second post focused on GDP/GNP gap and the cost of the ongoing Great Recession on the potential GDP and GNP. The third post focused on quarterly sectoral decomposition of GDP and GNP in constant prices terms. And a short digression from QNA results here showed how difficult it is, really, to reach any consensus on some of Ireland's economic performance parameters.

In this post, let's consider the decomposition of the GDP and GNP on the basis of expenditure lines, as measured in current market prices.

Headline numbers:

• In Q4 2011 personal consumption of goods and services rose 0.9% qoq to €20,319mln, but declined 0.8% yoy. Compared with the same period of 2007 personal consumption is now dow 15.3%. YOY -0.8% contraction in Q4 2011 followed on 2.96% contraction in Q3 2011. In Q4 2011 personal consumption accounted for 52.45% of quarterly GDP, this is actually higher than the share of GDPit took in Q4 2007 (49.89%) - so much for 'unsustainable consumption binge' back at the peak of the Celtic Tiger period.
• Q4 2011 net expenditure by central and local government stood at €5,991mln which was 5.1% down qoq and down 8.1% yoy. This follows on 2.32% contraction in yoy terms in Q3 2011. Relative to Q4 2007 net expenditure by central and local government now stands at -17.1%. However, the share of net government expenditure in overall GDP rose from 15.04% in Q4 2007 to 15.46% in Q4 2011.
• Gross domestic capital formation at Q4 2011 stood at €3,923mln which was up 12.7% qoq, but down 1.9% yoy and the annual decline in Q4 2011 came in after an 18.3% contraction in Q3 2011. Fixed capital formation was down 66.8% in Q4 2011 compared to Q4 2007. In Q4 2007 gross fixed capital formation accounted for 24.56% of GDP, while inQ4 2011 this share fell to 10.13%.

Chart below illustrates the above changes

• Exports of goods and services hit another historic record at €41,766mln in Q4 2011 - a rise of 0.4% qoq and 6.2% yoy. In Q3 2011 exports rose 1.7% yoy. Q4 2011 exports were 8.3% ahead of Q4 2007 and if in 2007 exports accounted for 80.24% of our GDP, in Q4 2011 this share was 107.8% of quarterly GDP. This is a remarkable performance.
• Imports rose 0.4% in qoq terms to €332,904mln in Q4 2011. Q4 2011 imports are up also 0.4% yoy and this follows on a 0.35% contraction in Q3 2011. Relative to Q4 2007 imports are down 5.2%. Back in Q4 2007 imports stood at the level of 72.23% of quarterly GDP. In Q4 2011 this share was 84.93%.
• Net trade surplus hit a record of €8,862mln - third consecutive quarterly record and third consecutive quarter with trade surpluses in excess of €8 billion. Trade surplus was up 0.3% qoq and 34.8% up yoy inQ4 2011, which comes on foot of a 10.60% yoy increase inQ3 2011. Stellar performance. In Q4 2011 trade surplus was 22.88% of GDP and this is up from 8.01% of Q4 2007 GDP. Compared to Q4 2007 trade surplus in Q4 2011 rose massive 130.2%.
• Once again, trade figures confirm the simple reality that exports-led growth is not capable of sustaining economic recovery. Average quarterly trade surplus in 2007 stood at €4,295mln and 2005-2007 average quarterly trade surplus was €4,467mln. In 2009 average quarterly trade surplus rose to €6,234mln, followed by €7,467mln in 2010 and €8,408mln in 2011. In other words, Ireland experienced a massive exports boom for the last 3 years in a row, and yet we are continuing to remain in a recession.

• GDP at current market prices stood at €38,743 in Q4 2011 which is 0.9 below Q3 2011, marking the second consecutive qoq decline, which is consistent with Ireland officially entering a new recession. 
• GDP actually rose in yoy terms by 3.4% inQ4 2011 which comes on foot of a 0.79% contraction in Q3 2011. relative to Q4 2007, GDP in current market prices is now down 19.4%.
• Net factor income from the rest of the world rose 10.8% qoq to -€9,017mln, which marks the first quarter since Q1 2010 when outflows of payments abroad exceeded trade surplus. This attests to the extreme levels of transfer pricing deployed by the MNCs in the Irish economy. Net factor income losses in Irish economy in Q4 2011 were up65.3% year on year, following a 19.5% rise in yoy terms in Q3 2011. Transfer payments abroad rose 28.3 on Q4 2007. Overall, an equivalent of some 23.27% of Irish GDP was paid out in factor payments to foreigners in Q4 2011 which is up from 14.62% in Q4 2007.
• As the result, GNP fell to €30,051mln in Q4 2011 down 2.8% qoq marking the fifth consecutive quarter of qoq declines. Yoy, GNP in current market prices was down a massive 5.4% in Q4 2011 which comes on foot of an equally large 5.16% contraction in Q3 2011. These figures reflect deep recession continuing to ravage the Irish economy. It is incorrect to attribute the entire GNP to solely domestic activity as it includes net exports (trade balance) activity that is not expatriated abroad.
• Overall, Irish GNP in current market price in Q4 2011 stood at 26.5% below the levels attained in Q4 2007. This means that more than 1/4 of the overall domestic and non-transfer pricing MNCs' activity has been wiped off the Irish national accounts during the current crisis.

The chart below highlights the evolution of transfers abroad relative to GDP, GNP and to trade balance. Transfers of income to the rest of the world from ireland has hit 101.75% of the trade surplus in Q4 2011 - rising above 100% for the first times since Q1 2010 when it stood at 101.80%. We are still well behind the levels of 2005-2009 when it averaged 138.74%. Which, given the negative sign with which transfers of income abroad enter the national accounts means that we have loads of room more for reductions in GNP on the back of 'exports recovery'.

25/3/2012: QNA Q4 2011 - Part 3

In part 1 of the QNA analysis we covered annual results for annual GDP and GNP in constant prices terms. Part 2 analysis focused on GDP/GNP gap and losses in national income compared to pre-crisis trend. Here, we cover some quarterly trends for GDP and GNP based on constant prices data.

Let's consider changes by sector:

• Agriculture, forestry and fishing sector output fell 5.1% yoy in Q4 2011 following a 9.34% rise yoy in Q3 2011. In Q4 2011 the sector accounted for just 1.26% of the total quarterly GDP. Compared to Q4 2007 the sector output is now down 6.0%.
• Industry output rose 2.3% yoy in Q4 2011 after rising 6.25% in Q3 2011. The sector is now accounting for 28.34% of the quarterly domestic output. Sector output is now down 3.3% when compared against Q4 2007.
• Building & Construction sub-sector of Industry sector posted yoy decline of 6.7% inQ4 2011 that follows on 39.32% drop in Q3 2011. The sub-sector is now accounting for just 2.62% of total output and is down 55.0% on Q4 2007.
• Distribution transport and communications sector shrunk 0.6% yoy in Q4 2011 which follows 4.99% drop in Q3 2011. The sector accounts for 13.23% of total output and is down 17.3% on Q4 2007.
• Public administration and defence sector shrunk 3.8% yoy in Q4 2011 which follows on a 6.53% contraction in Q3 2011. The sector now accounts for 3.58% of the domestic output and is down 6.5% on Q4 2007.
• Other services including rents output contracted 3.1% yoy in Q4 2011 following on a 5.14% contraction in Q3 2011. The sector accounts for 42.37% of the economy and is down 12.5% on Q4 2007.
• As the result of this, GDPat constant factor cost expanded in Q4 2011 by 1.1% yoy and this follows on a rise of 0.88% in Q3 2011. This metric of domestic output is now dow 10.6% on Q4 2007.
• Taxes net of subsidies are down 2.3% yoy in Q4 2011 and this follows a 2.76% drop in Q3 2011. This accounts for 9.70% of GDP and the category is now down 30.0% compared to Q4 2007.
• Headline GDP at constant market prices rose 0.7% yoy after expanding 0.52% in Q3 2011. The GDP at constant prices in Q4 2011 was 12.8 below that in Q4 2007.
• Net factor income from the rest of the world (aka largely transfer pricing net of receipts by Irish corporates and individuals on their foreign investments) grew 59.9% yoy in Q4 2011 which follows on 7.41% growth in Q3 2007. These transfers now account for 18.51% of our GDP and were running 10.0% ahead of the levels recorded in Q4 2007.
• Headline GNP in constant prices in Q4 2011 fell 7.1% yoy following a 1.18% contraction in Q3 2011. National income in constant prices is now 16.6% below that attained in Q4 2007.
• GDP/GNP gap stood at 18.51% in Q4 2011 slightly down on 20.18% in Q3 2011.

Charts:

More sectoral analysis to follow in the next post.

24/3/2012: QNA 2011 - Part 2

In the previous post (here) we considered 2011 results for NationalAccounts in relation to sectoral composition of GDP and GNP in constant prices terms.

Recall that the headline results are:

• Annual growth in GDP of +0.71% yoy in 2011, with GDP still 9.51% below its pre-crisis peak in constant prices (controlling for inflation)
• Annual contraction in GNP of -2.53% with GNP now down 14.33% on its pre-crisis peak.
• Net factor income outflows to the rest of the world have hit historical peak at €31,801mln outflowing to foreign investors and MNCs net of whatever might have been paid in dividends and other revenues to Irish investors. This figure is now up 16.39% on 2010 and 18.62% on the pre-crisis levels.

As the result of the above, Irish GDP/GNP gap - the measure by which our Government and international agencies overestimate the true size of our real economy - has gone up from 20.61% in 2010 to 24.61% in 2011, marking absolute historical record.

The above chart shows an interesting dynamic. Remember that there are claims being floated about that  there are many so-called uber-rich walking the streets of Ireland. Alas, here's a sticky point. People who are rich in Ireland today clearly do not hold Irish property in any significant proportion of their protfolia, since the can't remain rich with property values down by more than 50% in the country. They are also not holding Irish equities - because these are still substantially down on their pre-peak valuations and because absent banks, there is really not much you could have invested in in terms of Irish shares before the crisis to begin with. This, in turn, implies that to be filthy rich, these individuals must own assets outside Ireland. Assets outside of Ireland pay dividends and some realised capital gains. Which, were they remitted to Ireland, would count as inflows into Ireland and compensate for MNCs and foreign investors expatriations out of Ireland. In other words, either there is no glut of the Irish rich or their assets and profits from these assets are not being on-shored into Ireland. Take your pick, but either way, good luck imposing a wealth tax on the so-called super rich.

The destruction of our national income as opposed to gross domestic product has been spectacular in recent years. As charts below illustrate, we are now well beyond much of hope of ever regaining the pre-crisis trend income levels.

Between 2008 and 2011, Ireland has lost €93.95bn in cumulative GDP (€20,514 per capita) and €75.49bn in terms of GNP (€16,482 per capita) once inflation is factored in. 

The losses accumulated in GNP compared to GDP have been more severe and this means that in 2011 overall, the burden of taxation has risen, not fallen, in the Irish economy when measured against GNP:

Keep in mind that the above chart shows taxes net of subsidies as a share of overall economy, which, of course, is an underestimate of real dynamics as subsidies have risen during the bust. 

In the following post we will deal with some quarterly comparatives and results.

24/3/2012: QNA 2011 - Part 1

With some delay, the next few posts will deal with the latest release of QNA data - Q4 2011 and annual data for national accounts 2011.

This first post in the series will deal with annual aggregates in constant prices terms.

There are overall two headlines to consider in the constant prices (real) data. The first one is that annual data shows continuation of the trend underlying weakness in the GDP in 2010-2011 and the second on is the precipitous contraction in GNP in 2011.

Let us start with Sector of Origin data (Table 1 in CSO release):

• Agriculture, Forestry and Fishing sector output rose from €3,081mln in 2010 to €3,092mln in 2011 a rise of 1.98%. This follows sector expansion of 0.7% in 2010. The sector is now 21.78% below its peak output attained in 2005. There was contraction in the sector real output of 2.84% back in 2009, so overall growth has accelerated in 2011, compared to both 2010 and to every year since 2007. Alas, in absolute terms, the sector is comparatively small and levels of activity increases have been underwhelming. Sector output remains well below 2007 and even below 2008 levels.
• Industry, including construction, activity rose to €45,639mln from €44,420 in 2010 - a gain of 2.74%. Back in 2010, the sector grew by 5.17% yoy, an that growth marked a reversal from a contraction of 4.03% in 2009. The sector activity in real terms remains 2.68% below its peak attained in 2004 when Industry (including Construction) yielded output of €46,895mln.
• Building &Construction component of Industry output continued uninterrupted contraction for the fourth year in a row. 2011 output in the sub-sector stood at €3,753mln, down 13.51% on €4,339mln in 2010, which follows contraction of 30.08% in 2010 and 27.49% fall in 2009. Relative to peak attained in 2004, Building and Construction activity is now down 72.46%. Assuming 8% amortization & depreciation in the stock of capital, current rate of Building and Construction activity barely covers 60% of the O&M expenditure required to maintain the stock of capital accumulated in 2003-2010.
• Distribution Transport and Communications sector activity fell in 2011 to €20,932mln - a decline of 1.58% yoy, that follows on a 2.04% drop in 2010 and 9.81% contraction in 2009. Relative to peak in 2007, the sector is now turning out 16.63% less output on an annual basis.
• Public Administration and Defence sector posted a decline of 3.30% yoy in 2011 to €5,602mln, marking the third year of declines. Relative to peak, attained in 2008 at €6,199mln, the sector ctivity is now down 5.67%.
• Other services (including rents) sector posted a sizable 2.15% contraction in 2011 to €67,578mln marking the 4th year of uninterrupted declines, with 2010 yoy decline of 2.29% and 2009 decline of  2.34%. The sector activity in 2011 was 7.89% below its peak attained in 2007.

Few charts:

Overall, not a single sector has managed so far to regain pre-crisis peaks after 4 years of the crisis. Only two sectors - Agriculture and Industry - posted growth in 2011, and the combined rate of expansion for these two sectors was shallower in 2011 (+2.7%) than in 2010 (+4.9%). In other words, if 2011 was a 'recovery' year as the Government is claiming, the rate of recovery in sectoral activity was shallower, implying that by the same Government 'metric' we had a boom in 2010.

Headline numbers for GDP & GNP are exceptionally weak:

• GDPat constant factor costs - the metric that reflects real value added in the economy - rose from €144.51bn in 2010 to €145.95bn in 2011 - an increase of 1.0% yoy that followed on the contraction of 0.07% in 2010 and a fall of 5.41% in 2009. This marked the first year of expanding factor cost-based activity since 2008. However, overall activity is down 6.21% on its peak attained in 2007.
• Taxes net of subsidies fell to €15,082mln down 2.05% yoy compared to 2010. In 2010 these declined 3.71% and in 2009 they were down 19.80% on 2008. Overall, taxes net of subsidies are now down 33.26% on the peak attained in 2007 (see chart above).
• Headline GDP in constant prices is now at €161,034mln or 0.71% ahead of 2010 levels. This follows on a contraction of 0.43% in 2010 and 6.99% decline in 2009. Relative to the peak of €177,963mln attained in 2007, our GDP in constant market prices terms is down 9.51%, standing just over €1bn ahead of 2004 levels. In effect, in real GDP terms, assuming long-term growth rate potential of 2% pa, Ireland has lost 16% of its output by the end of 2011. If Irish economy continued to grow at 2% pa in real terms through 2011, our GDP would have stood at €192.6bn instead of €161bn today.
• Net factor income from the rest of the world (effectively payments received from abroad less payments paid out to foreigners) have reached -€31,801mln in 2011 - up a massive 16.39% yoy, following a contraction of 3.67% in 2010 and an expansion of 10.38% in 2009. These, of course, reflect massive transfer activity ramp-up in exports sectors (to be discussed in subsequent post). Transfers abroad are now at a record high, running 18.62% ahead of pre-crisis levels in 2007. The boom town has arrived for MNCs.
• As the result of accelerated transfers of profits out of Ireland, our GNP in constant market prices terms has shrunk 2.53% to €129,232mln. This is the real income of the Irish economy and the contraction of 2.53% is the real masure of our 'recovery'. 2011 yoy fall-off follows on growth of 0.27% attained in 2010.The Government claim that in 2011 Irish economy has finally posted a recovery is wholly bogus. In fact, according to real metric of Irish economic activity, our economy grew in 2010 and contracted in 2011. Irish GNP is now 14.33% below its pre-crisis peak of €150.86bn attained in 2007.

To conclude, let's plot the relative importance of each sector in overall economic activity:

 Chart above clearly shows that

• Agriculture retained relatively modest increase in its output share, rising from 2.3% of total economic output in 2010 to 2.4% in 2011. Agriculture contribution to overall economic activity is still below its pre-crisis 2003-2005 levels.
• Industry, including Construction share of total output rose to 35.3% in 2011 from 33.5% in 2010 and is now more important to the economy than in any other year since 2003.
• Building and Construction used to account for 9.9% of overall economic activity in the country back in 2004 and now accounts for just 2.9%
• Distribution Transport and Communications sector share of overall activity remained within 16.5-15.5 percent range of 2003-2011 period at 16.2% in 2011.
• Public Administration and Defence, despite all the austerity is still running slightly ahead of 2003-2007 average. In 2003-2007 the sector accounted, on average for 4% of economic activity in the country. In 2011 this share was 4.3%. In 2007 - last year before crisis - the share was 3.9%. So austerity years to-date average is 4.4% while pre-crisis is 3.996%. Drastic cut-backs?
• Other services are running at 52.3% of economic activity in 2011, compared to 52.1% in 2010 and 53.5% in 2009. Back in 2003-2007 these averaged 47%

In the following post we will look at evolution of GDP/GNP gap and the overall share of the economy shipped out in form of profits by the MNCs.

Economics 28/06/2010: Watch out for VIX

Short-term VIX options and VIX itself are starting this week on the upside... is risk contagion spreading from sovereign bonds to corporate?
An interesting view here.

Let's put this on record - I think we are now in 50:50 chance of a new recession - Euro area, UK and US, plus Japan. Time horizon - 6 months.